Form S-1/A SkyWater Technology,

Table of Contents

As filed with the Securities and Exchange Commission on April 12, 2021

Registration No. 333-254580

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SkyWater Technology, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		3674		37-1839853
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

 

2401 East 86th Street

Bloomington, Minnesota 55425

(952) 851-5200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Thomas Sonderman

President and Chief Executive Officer

SkyWater Technology, Inc.

2401 East 86th Street

Bloomington, Minnesota 55425

(952) 851-5200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Kevin K. Greenslade William J. Curtin Hogan Lovells US LLP 555 Thirteenth Street, N.W. Washington, D.C. 20004 (703) 610-6189		Steve Manko Chief Financial Officer SkyWater Technology, Inc. 2401 East 86th Street Bloomington, Minnesota 55425 (952) 876-8504		Heidi E. Mayon Julia R. White Goodwin Procter LLP 601 Marshall Street Redwood City, California 94063 (650) 752-3100

 

 

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If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an 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 filer		☐		Smaller reporting company		☒
				Emerging growth company		☒

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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED		AMOUNT TO BE REGISTERED (1)		PROPOSED MAXIMUM OFFERING PRICE PER SHARE (2)		PROPOSED MAXIMUM AGGREGATE OFFERING PRICE (1)(2)		AMOUNT OF REGISTRATION FEE (3)
Common stock, par value $0.01 per share		6,670,000		$14.00		$93,380,000		$10,188

 

(1)

Estimated pursuant to Rule 457(a) under the Securities Act. Includes the additional shares which the underwriters have the option to purchase to cover over-allotments of shares, if any.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.

(3)

The registrant previously paid $8,183 of the registration fee in connection with the initial filing of this registration statement. In accordance with Rule 457(a) under the Securities Act, an additional registration fee of $2,005 is being paid with this amendment to the registration statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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EXPLANATORY NOTE

Prior to the effectiveness of this registration statement, CMI Acquisition, LLC, a Delaware limited liability company, will convert into a Delaware corporation and change its name to SkyWater Technology, Inc., which we refer to as the Corporate Conversion. As a result of the Corporate Conversion, the members of CMI Acquisition, LLC will become holders of shares of common stock of SkyWater Technology, Inc. Except as otherwise disclosed in the accompanying prospectus, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of CMI Acquisition, LLC and its subsidiaries and do not give effect to the Corporate Conversion. Shares of common stock of SkyWater Technology, Inc. are being offered by the prospectus that forms a part of this registration statement.

 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated April 12, 2021

5,800,000 Shares

 

Common Stock

This is our initial public offering. We are offering 5,800,000 shares of our common stock.

We expect that the public offering price will be between $12.00 and $14.00 per share. No public market currently exists for the shares. We have applied to list our common stock on the Nasdaq Capital Market under the trading symbol “SKYT.”

Following this offering, Oxbow Industries, LLC and its affiliates will own approximately 76.0% of our outstanding common stock (or approximately 74.2% if the underwriters exercise their over-allotment option in full), and will therefore control more than a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” for purposes of the marketplace rules of the Nasdaq Capital Market.

We are an “emerging growth company” under the federal securities laws and are eligible to comply with reduced disclosure requirements for this prospectus and our public company filings.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

 

 

 

PRICE TO PUBLIC

UNDERWRITING DISCOUNTS AND COMMISSIONS (1)

PROCEEDS TO SKYWATER TECHNOLOGY, INC.

Per Share

$

$

$

Total

$

$

$

 

 

(1)

See “Underwriting” on page 120 for additional information regarding underwriting compensation.

The underwriters have an option to purchase a maximum of 870,000 additional shares of common stock from us solely to cover over-allotments of shares.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock will be made on or about                     , 2021.

 

Jefferies				Cowen
		Piper Sandler

The date of this prospectus is                     , 2021.

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		PAGE
PROSPECTUS SUMMARY			1
RISK FACTORS			14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			36
USE OF PROCEEDS			38
DIVIDEND POLICY			39
CORPORATE CONVERSION			40
CAPITALIZATION			41
DILUTION			43
SELECTED CONSOLIDATED FINANCIAL DATA			45
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION			47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			51
BUSINESS			63
MANAGEMENT			83
EXECUTIVE AND DIRECTOR COMPENSATION			90
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			105
PRINCIPAL STOCKHOLDERS			107
DESCRIPTION OF OUR CAPITAL STOCK			109
SHARES ELIGIBLE FOR FUTURE SALE			114
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK			116
UNDERWRITING			120
LEGAL MATTERS			124
EXPERTS			124
WHERE YOU CAN FIND MORE INFORMATION			125
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1

 

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus or any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States, neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside the United States.

Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “SkyWater,” “we,” “us,” “our” and similar references refer, prior to the Corporate Conversion discussed elsewhere in this prospectus, to CMI Acquisition, LLC, a Delaware limited liability company, and its subsidiaries, taken as a whole, and after the Corporate Conversion, to SkyWater Technology, Inc., a Delaware corporation, and its subsidiaries, taken as a whole. We own various unregistered trademarks and servicemarks, including our corporate logo. The name “SkyWater Technology,” the SkyWater Technology logos and the other trade names, trademarks or service marks of SkyWater Technology appearing in this prospectus are the property of SkyWater Technology. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ^® and ^™ symbols, but such references should not be construed as any indicator that the owner of such trademarks and trade names will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various third-party sources, including reports from Gartner, Inc., or Gartner, Infiniti Research, AMA Research & Media LLP, or AMA, IC Insights, Inc., or IC Insights, Databeans, Inc., or Databeans, the U.S. Department of Defense, or DoD, Mind Commerce, Yole Développement SA, or Yole Développement, MarketsandMarkets Research Private Ltd., or MarketsandMarkets, Statista, Inc., or Statistica, and Semiconductor Equipment and Materials International, or SEMI, on assumptions we have made based on such data and other similar sources and on our knowledge of the markets for our solution. Industry surveys, publications and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We believe the data from such third-party sources to be reliable. While we are not aware of any misstatements regarding the market or industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

The Gartner content described herein, “Semiconductor Forecast Database, Worldwide, 2Q20 Update,” Ben Lee, et al., 30 June 2020 (the Gartner Content), represents research opinions or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. The Gartner Content speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Content are subject to change without notice.

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks described below, together with all of the other information in this prospectus, including our consolidated financial statements and the related notes thereto and the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to purchase shares of our common stock. The following risks could materially and adversely affect our business, financial condition, results of operation or cash flows. In any such case, the trading price of shares of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Relating to Our Business and Our Industry

If our sole semiconductor foundry is damaged or becomes inoperable, we will be unable to develop or produce wafers in a timely manner, if at all, and our business would be materially adversely affected.

We currently perform all of our manufacturing services and most of our design services at our foundry in Bloomington, Minnesota. Our foundry operation and the equipment we use to manufacture wafers would be costly to replace and could require substantial lead time to repair or replace. Our foundry may be harmed or rendered inoperable by physical damage from fire, floods, tornadoes, power loss, telecommunications failures, break-ins and similar events, which may render it difficult or impossible for us to produce or test products for a considerable period of time. If any of the foregoing events occur, we may incur significant additional costs including, among other things, loss of profits due to unplanned temporary or permanent shutdowns of our foundry, cleanup costs, liability for damages or injuries, legal expenses and reconstruction expenses, which would harm our results of operations and financial condition. In addition, because any substitute facility must hold any required licensures or certifications, we may be limited in our ability to rely on a third-party to perform interim design and manufacturing services or testing processes. We cannot assure you that we would be able to find another semiconductor foundry that is capable or willing to design and produce wafers in compliance with applicable specifications, or that such a substitute foundry would be willing to produce wafers for us on commercially reasonable terms. A substitute foundry may not have rights to intellectual property of others that is necessary to design, manufacture, and test products for us, and we may not be permitted to extend our license rights to a substitute foundry. Any unexpected constraints on our foundry’s ability to design, manufacture or test products could result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future, all of which would materially adversely affect our business.

Our industry has experienced rapid technological changes, and new technologies may prove difficult to commercialize or may not gain market acceptance by our customers, which may have a material adverse effect on demand for our products and service offerings.

The industry in which we operate is subject to constant technological change, industry standards and technological obsolescence. Our future success will depend on our ability to appropriately respond to changing technologies, including significant developments in wafer production, and changes in function of products and quality in a timely and cost-effective basis. If we adopt products and technologies that are not attractive to customers, we may not be successful in capturing or retaining our share of the market. If we fail to adopt enhanced technologies or processes, we could experience product obsolescence, loss of competitiveness of our products, decreased revenue and a loss of market share to competitors. In addition, some new technologies are relatively untested and unperfected and may not perform as expected or as desired, in which event our adoption of such products or technologies may cause us to lose money.

Defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products.

Although our products are tested to meet our stringent quality requirements, they may contain undetected errors or defects, especially when first introduced or when new generations are released. Errors, defects or poor performance can arise due to design flaws, defects in raw materials or components or manufacturing errors or difficulties, which can affect both the quality and the yield of the product. Any actual or perceived errors, defects or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products,

 

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damage to our reputation, lost revenue, diversion of our engineering personnel from our product development efforts and increases in customer service and support costs, all of which could have a material adverse effect on our business, financial condition and results of operations. We typically provide a one year warranty on the operability of the products we design and manufacture. Defective components may give rise to warranty, indemnity or product liability claims against us that exceed any revenue or profit we receive from the affected products.

If we do not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.

The fabrication of wafers is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. Our foundry could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials could result in lower than anticipated production yields or unacceptable performance of our wafers. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time-consuming and expensive to correct. We also may experience manufacturing problems in achieving acceptable yields as a result of, among other things, transferring production to other facilities, upgrading or expanding existing facilities or changing our process technologies. Poor production or defects, integration issues or other performance problems in our solutions could significantly harm our customer relationships and financial results and give rise to financial or other damages to our customers.

Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand accurately, we may incur supply shortages or lose revenue.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build our products in advance of orders, relying on an imperfect demand forecast to optimize use of our manufacturing capacity.

Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess manufacturing capacity. Either underestimating or overestimating demand could lead to insufficient, excess or obsolete inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

A material decrease in demand for products that contain semiconductors may decrease the demand for our services and products, and a decrease in the selling prices of our customers’ products may significantly affect our business, financial results and financial position.

Our customers generally use the semiconductors produced in our fab in a wide variety of applications. Any significant decrease in the demand for end-market devices or products may decrease the demand for our services and products. In addition, if the average selling prices of key end-market devices or products decline significantly, we may be pressured to reduce our selling prices, which may reduce our revenues and margins significantly. As demonstrated in the past by downturns in demand for high technology products, market conditions can change rapidly, without warning or advance notice. In such instances, our customers may experience inventory buildup or difficulties in selling their products and, in turn, may reduce or cancel orders for wafers from us, which may harm our business and profitability. The timing, severity and recovery of these downturns cannot be predicted. In order for demand for our wafer fabrication services to increase, the markets for the end products utilizing the integrated circuits that we manufacture must develop and expand. Because our services may be used in many new applications, it is difficult to forecast demand. If demand is lower than expected, we may have excess capacity and our revenue may not be sufficient to cover all our costs and serve all our debt, which may adversely affect our financial results and financial position.

We have a finite amount of production capacity, and to the extent customer demand exceeds our capacity we may lose customers and potential revenues.

In periods during which demand for our foundry services exceeds our capacity and manufacturing capabilities, we may be unable to (1) fulfill customer demand in whole or in part, in a timely manner or at all, (2) assure production of customers’ next-generation products or (3) provide additional capacity through transfer of process technologies, or ensure successful implementation. However, we could lose one or more of our current or potential customers, which may adversely affect our revenues, profitability and business.

 

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We have a limited operating history as a standalone company, and we may have difficulty accurately predicting our future revenues for the purpose of appropriately budgeting and adjusting our expenses.

We were divested from Cypress in 2017. Our limited operating experience as a standalone company, the dynamic and rapidly evolving market in which we sell our products, our dependence on a limited number of customers, as well as numerous other factors beyond our control, may impede our ability to forecast quarterly and annual revenues accurately. As a result, we could experience budgeting and cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which could make it difficult for us to gain and maintain profitability and could increase the volatility of the market price of our common stock.

A significant portion of our sales comes from five customers, the loss of which would adversely affect our financial results.

Cypress, which was acquired in April 2020 by Infineon Technologies AG, accounted for approximately 29% and 48% of our revenue for the fiscal years ended January 3, 2021 and December 29, 2019, respectively. Four of our non-Cypress customers accounted for 30%, 20%, 19% and 18% of our outstanding accounts receivable as of January 3, 2021, and two of our non-Cypress customers represent 16% and 14% of our revenues for the year ended January 3, 2021. If we were to lose these key customers or experience a significant decrease in volume or sales prices, our financial results would be adversely affected. We currently sell to a relatively small number of customers in total, and we expect our operating results will likely continue to depend on sales to a relatively small number of customers for the foreseeable future. We cannot be certain that these customers will generate significant revenue for us in the future or if these customer relationships will continue to develop. If our relationships with our other customers do not continue to develop, we may not be able to expand our customer base or maintain or increase our revenue. In addition, the loss or reduction in volume or sales price, whether due to their insolvency, or their unwillingness or inability to perform their obligations under their respective relationships with us, or if we are unable to renew or engagements with them in commercially reasonable terms, or attract new customers to replace such lost business, may materially negatively impact our overall business. This is exacerbated by our current manufacturing constraints which limit our ability to sell to other customers. In addition, our business is affected by competition in the market for the end products that our customers sell, and any decline in their business could harm our business and cause our revenue to decline.

We may not be able to successfully diversify our customer base and penetrate new markets which would negatively impact our growth strategy.

Our growth strategy depends on our ability to diversify our customer base and penetrate new markets. Our ability to add new customers to our Advanced Technology Services and Wafer Services businesses is subject to various elements outside of our control, such as fluctuations in demand for discrete components in both commodity and differentiated categories. If we are unable to attract new customers our customer revenue could remain highly concentrated. In addition, even if we add new customers, they may not require high levels of production, negatively impacting our growth strategy. Our growth strategy may also be adversely affected if we are unable to enter new markets, such as rad-hard electronic markets. Because we face competition from companies with substantially greater production and marketing resources than we have, we may not be able to penetrate these new markets successfully.

Our expansion strategy carries inherent risks.

Our growth strategy includes, among other matters, diversifying our customer base, growing our presence in existing markets, expanding into new end markets, and seeking acquisition opportunities to drive growth. Although management believes that pursuing our growth strategy is in our best interests, such strategy involves substantial expenditures and risks. For example, business acquisitions or strategic partnerships pursued in connection with our growth strategy may not be completed successfully or, if completed, may not yield the expected benefits to us. In addition, such business acquisitions or strategic partnerships may materially and adversely affect our business, financial condition or results of operations. The pursuit of expansion opportunities through business acquisitions, joint ventures, stockholder agreements, government contracts or otherwise could result in operating losses and the write down of goodwill, which would increase our losses or reduce or eliminate our earnings, if any.

 

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We depend on successful parts and materials procurement for our foundry and a shortage, or an increase in the price, of these raw materials could interrupt our operations and result in a decline in revenues.

The raw materials used to manufacture our products are subject to availability constraints and price volatility caused by weather, supply conditions, government regulations, general economic conditions and other unpredictable factors. In the event that the raw materials we acquire from third parties increase in price, we will be required to increase the prices we charge our customers, which could result in decreased sales, or we may not be permitted under our customer agreements to increase the cost to our customers, which could result in a loss or in decreased profits. Customers also may seek alternative sources of raw materials for comparable products. In the event we are unable to procure the necessary raw materials, we may not be able to operate our foundry at capacity or at all. If either of these events were to occur, our business and operations may be materially harmed.

Our dependence on a limited number of third-party suppliers for key components and capital equipment used in our manufacturing process could prevent us from delivering our products to our customers within required timeframes, which could result in order cancellations and loss of market share.

We manufacture our products using components and capital equipment procured from a limited number of third-party suppliers. In some instances, the capital equipment we use has been developed and made specifically for us or for a customer, is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If we fail to develop or maintain our relationships with these or our other suppliers, we may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay, which could prevent us from delivering our products to our customers within required timeframes and we may experience order cancellation and loss of market share. To the extent the designs or processes that our suppliers use to manufacture components and capital equipment are proprietary, we may be unable to obtain comparable components or capital equipment from alternative suppliers. The failure of a supplier to supply components or capital equipment in a timely manner, or to supply components or capital equipment that meets our quality, quantity and cost requirements, could impair our ability to manufacture our products or decrease their costs, particularly if we are unable to obtain substitute sources of these components or capital equipment on a timely basis or on terms acceptable to us.

The costs incurred by us to provide development services and manufacture our wafers may be higher than anticipated which could hurt our ability to earn a profit.

We may incur substantial cost overruns in our Advanced Technology Services and Wafer Services businesses. In particular, pricing for wafer services is typically based on a fixed price per wafer which accounts for electrical yield and mechanical scrap, in addition to all of the associated manufacturing and overhead costs. If, despite our process controls currently in place, the wafer fabrication process shifts, it may cause electrical or performance yield loss. Wafer fabrication is also especially susceptible to interruptions caused by process tooling errors or facility support interruptions such as power loss, leading to the potential for scrap. In our Advanced Technology Services business, many customers contract with us on a consumption basis, but some contract with us on a firm-fixed prices basis where milestone attainment is required for payment. If the milestone scope is unexpectedly difficult, we may be required to continue expending effort and funds to achieve the milestone, which may delay revenue and increase costs. Unanticipated costs may force us to obtain additional capital or financing from other sources and would hinder our ability to earn a profit. If we incur cost overruns, there is no assurance that we could obtain the financing or capital to cover them.

A breach of our security systems or a cyber-attack that disrupts our operations or results in the breach of confidential information about us, our technology or our customers could harm our business and expose us to costly regulatory enforcement and other liability.

Our security systems are designed to maintain the physical security of our facilities and protect the confidential information and trade secrets of our customers, suppliers and employees. The risk of a security breach or disruption, particularly through cyberattacks, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, our accreditation as a Trusted Foundry by the DMEA, our publicly-announced DARPA programs, our rad-hard program with the DoD, and other U.S. Government, or USG, and defense-related programs may make us a specific target for such attacks or industrial or nation-state espionage. A failure to comply with cybersecurity requirements imposed by those entities may result in fines or a disruption of our ability to acquire certain contracts. Criminal or other threat actors may seek to penetrate our network security and misappropriate or

 

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compromise our confidential information, systems or trade secrets, or that of our customers, create system disruptions or cause shutdowns. While we have not experienced any such material system failure or security breach to our knowledge to date, if such an event were to be discovered or cause interruptions in our operations, it could result in a material reduction in the value of our trade secrets or disruption of our development and production programs, and our business operations, including, without limitation, the cancellation or delay of our sales of wafers. The costs to address the foregoing security problems and any security vulnerabilities identified before or after a cyber incident could be significant. Remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or potential customers that may impede our sales or other critical functions. Breaches of our security measures and the unapproved dissemination of proprietary information, such as trade secrets, or sensitive or confidential data about us or our customers could expose us, our customers or other affected third parties to a risk of loss or misuse of this information, result in regulatory enforcement, litigation and potential liability for us and damage our brand and reputation or otherwise harm our business. Our security program includes controls intended to mitigate risks to our systems, data, personnel and facilities. The program includes logical and physical controls designed to protect the confidentiality, integrity and availability of our resources. Performance of these controls is accomplished by both internal and trusted third parties. Possible security problems and security vulnerabilities of those third-party cybersecurity or other vendors may have similar effects on us.

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns that may negatively impact our results of operations.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change and price erosion, wide fluctuations in product supply and demand, evolving technical standards, and short product life cycles for semiconductors and the end-user products in which they are used. In addition, changes in general economic conditions also can cause significant upturns and downturns in the semiconductor industry. During previous periods of downturns in the semiconductor industry, we have experienced diminished demand for end-user products and underutilization of manufacturing capacity, among other effects. We may experience renewed, and possibly more severe and prolonged, industry downturns in the future as a result of such cyclical changes. We base our planned operating expenses in part on our expectations of future revenue, and a significant portion of our expenses is relatively fixed in the short term. If an industry downturn or other unforeseen event causes revenue for a particular quarter to be lower than we initially expected, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results.

Because the markets in which we compete are highly competitive and many of our competitors have greater resources than us, we may not be able to compete successfully, and we may lose or be unable to gain market share.

We compete with a large number of competitors in the semiconductor market, including Taiwan Semiconductor Manufacturing Company Limited, or Taiwan Semiconductor, United Microelectronics Corporation, or United Microelectronics, Vanguard International Semiconductor Corporation, or Vanguard Semiconductor, Tower Semiconductor Ltd., or Tower Semiconductor, X-FAB Silicon Foundries SE, or X-FAB Silicon Foundries, ON Semiconductor Corporation, or ONSemi, Tower Semiconductor Ltd., or Tower-Jazz, GlobalFoundries Inc., or Globalfoundries, MIT Lincoln Labs and Intel Corporation. We expect to face increased competition in the future. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we can. Our business relies on sales of our products and our competitors with more diversified product offerings may be better positioned to withstand a decline in the demand for semiconductor products. Some of our competitors have longer term relationships with polysilicon providers which could result in them being able to obtain raw materials on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.

Existing or future customers could eventually transition their business to a competitor with a higher production capacity or lower-cost means of production.

As a result of our smaller manufacturing footprint, we target opportunities that larger competitors are unable to fulfill efficiently. These contracts are typically lower volume but require higher levels of customization and engineering

 

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expertise. Rapid growth in demand for a customer’s products could outpace our capacity, causing that customer to supplement or fully transition production to a higher volume foundry. In addition, as a customer’s product matures, demand for customization and engineering expertise may decrease, causing downward pricing pressure or forcing the customer to seek lower-cost means of production than are economically feasible for us. Although we are seeking to increase our customer and production mixes, the loss of one or more significant customers as a result of any such customer developments could have a material adverse impact on our financial results. In addition, our Advanced Technology Services customers may choose to implement their wafer production with other foundry providers, which could limit our Wafer Services revenue growth.

Planned efficiency and cost-savings initiatives could disrupt our operations or adversely affect our results of operations and financial condition, and we may not realize some or all of the anticipated benefits of such initiatives in the anticipated time frame or at all.

We are currently pursuing several efforts to improve profitability of our operations, including, but not limited to, efficiency improvements, cost reductions, supplier pricing negotiation and workforce reductions. These efforts, if implemented successfully, are planned to have an impact on our short-term and long-term financial results. The implementation of these efficiency and cost-savings initiatives, including the impact of any workforce reductions, could impair our ability to invest in developing, marketing and selling new and existing products, be disruptive to our operations, make it difficult to attract or retain employees, result in higher than anticipated charges, divert the attention of management, result in a loss of accumulated knowledge, impact our customer and supplier relationships and otherwise adversely affect our results of operations and financial condition. In addition, our ability to complete our efficiency and cost-savings initiatives and achieve the anticipated benefits within the expected time frame is subject to estimates and assumptions and may vary materially from our expectations, including as a result of factors that are beyond our control. Furthermore, our efforts to grow our business could be delayed or jeopardized through planned or inadvertent results of cost-savings initiatives.

If we are unable to attract, train and retain highly qualified personnel, the quality of our services may decline, and we may not successfully execute our internal growth strategies.

Our success depends in large part upon our ability to continue to attract, train, motivate and retain highly skilled and experienced employees, including technical personnel. Qualified technical employees periodically are in great demand and may be unavailable on the timing required to satisfy our customers’ requirements. While we currently have available technical expertise sufficient for the requirements of our business, expansion of our business could require us to employ additional highly skilled technical personnel. We expect competition for such personnel to increase as the market for our products expands. We cannot guarantee that we will be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates of compensation could impair our ability to secure and complete customer engagements and could harm our business.

We may face litigation in the future, including potential product liability claims.

As a manufacturer and seller of goods, we are exposed to the risk of litigation for a variety of reasons, including product liability lawsuits, employee lawsuits, commercial contract disputes, government enforcement actions and other legal proceedings. Any future litigation in which we may become involved may have a material adverse effect on our financial condition, operating results, business performance and business reputation. If one of our products were to cause injury to someone or cause property damage, including as a result of product malfunctions, defects or improper installation, then we could be exposed to product liability claims. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. Further, any product liability claim we face could be expensive to defend and could divert management’s attention. The successful assertion of a product liability claim against us could result in potentially significant monetary damages, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position, and adversely affect sales of our products. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the wafer industry or related industries could lead to unfavorable market conditions for the industry as a whole, and may have an adverse effect on our ability to attract new customers, both of which would harm our growth and financial performance.

We are exposed to various possible claims and hazards relating to our business, and our insurance may not fully protect us.

Although we maintain modest business disruption, theft, casualty, liability and property insurance coverage, along with worker’s compensation and related insurance, we may incur uninsured liabilities and losses as a result of the

 

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conduct of our business. In particular, we may incur liability if one or more of our products is deemed to have caused a personal injury or if we experience damage to our facilities or disruptions in our business, whether or not such disruptions result from damage at our facilities. Should uninsured losses occur, they could have a material adverse effect on our operating results, financial condition and business performance. Further, we cannot be sure that any such insurance will be sufficient to cover any actual losses or that such insurance will continue to be available to us on acceptable terms, or at all.

Changes in trade policies, including the imposition of tariffs, could negatively impact our business, financial condition and results of operations.

The current U.S. administration has signaled support for, and in some instances has taken action with respect to, major changes to certain trade policies, such as the imposition of tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement. For example, the United States has increased tariffs on certain imports such as steel and aluminum products imported from various countries. We procure certain materials, tools and maintenance parts which are essential in the manufacturing of our products directly or indirectly from outside of the United States. The imposition of tariffs and other potential changes in U.S. trade policy could increase the cost or limit the availability of these essential materials, tools and maintenance parts, which could hurt our competitive position and adversely impact our business, financial condition and results of operations in several ways. For example, the increase in costs and risk of supply chain interruption could drive some of our foreign customers to overseas foundries. In addition, availability concerns with respect to some of our essential materials, tools and maintenance parts could also prompt a lengthy and expensive search for alternative sources which would necessitate requalification cycles and production delays.

We are exposed to risks associated with a potential financial crisis and weaker global economy.

The tightening of monetary policy in the United States, potential turmoil in the financial markets and a potentially weakened global economy would contribute to slowdowns in the semiconductor industry. The market for the installation of wafers depends largely on commercial, customer and government capital spending. Economic uncertainty exacerbates negative trends in these areas of spending, and may cause our customers to delay, cancel or refrain from placing orders, which may reduce our sales. Difficulties in obtaining capital and deteriorating market conditions may also lead to the inability of some customers to obtain affordable financing. Further, these conditions and uncertainty about future economic conditions may make it challenging for us to obtain equity and debt financing to meet our working capital requirements to support our business, forecast our operating results, make business decisions and identify the risks that may affect our business, financial condition and results of operations. If we are unable to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition and results of operations may be materially and adversely affected.

The market data and forecasts included in this prospectus may prove to be inaccurate, and you should not unduly rely on such market data and forecasts.

The market data and forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Such reports speak as of their respective publication dates and the opinions expressed in such reports are subject to change, including as a result of the impact of COVID-19 on the global economy. Accordingly, potential investors in our common stock are urged not to put undue reliance on such forecasts and market data.

Our credit facility contains restrictive covenants that may impair our ability to conduct business.

Our credit facility contains a number of customary affirmative and negative covenants that, among other things, will limit or restrict our ability to: incur additional indebtedness (including guaranty obligations); incur liens; engage in mergers, consolidations, liquidations and dissolutions (other than pursuant to transactions approved by the lender); sell assets; pay dividends and make other payments in respect of capital stock; make acquisitions, investments, loans and advances; pay and modify the terms of certain indebtedness; engage in certain transactions with affiliates; enter into negative pledge clauses and clauses restricting subsidiary distributions; and change our line of business, in each case, subject to certain limited exceptions. As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our credit facility and may impair our ability to conduct business. We may not be able to maintain

 

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compliance with these covenants in the future and, if we fail to do so, we may not be able to obtain waivers from the lenders or amend the covenants, which may adversely affect our financial condition.

We may need to raise additional capital or financing after this offering to continue to execute and expand our business.

We may need to raise additional capital after this offering to expand or if positive cash flow is not achieved and maintained. As of January 3, 2021, our available cash balance, not including cash held by a variable interest entity that we consolidate, was $6.6 million. We may be required to pursue sources of additional capital through various means, including joint venture projects, sale and leasing arrangements, and debt or equity financings. Any new securities that we may issue in future transactions to raise capital may be more favorable for our new investors than this offering. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. Newly-issued securities may include preferences, superior voting rights and the issuance of warrants or other convertible securities that will have additional dilutive effects. We cannot assure you that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. Further, we may incur substantial costs in pursuing future capital or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We also may be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and results of operations. Our ability to obtain needed financing may be impaired by such factors as the weakness of capital markets, and the fact that we have not been profitable, which could impact the availability and cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, we may have to reduce our operations accordingly.

Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize our high-margin wafers.

We may require additional capital to finance capital expenditures and operating expenses over the next several years as we launch our high-margin, front-end design engineering services and expand our infrastructure, commercial operations and research and development activities. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our existing securities. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also include restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely affect our ability to conduct our business. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our products or market development programs, which could lower the economic value of those programs to us.

Our sales cycles are long and unpredictable, and our sales efforts require considerable time and expense, which could adversely affect our results of operations.

Sales of our products usually require lengthy sales cycles. Sales to our customers can be complex and require us to educate our clients about our technical capabilities and the use and benefits of our services. Customers typically undertake a significant evaluation and acceptance process, and their decisions frequently are influenced by budgetary constraints, technology evaluations, multiple approvals and unplanned administrative, processing and other delays. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will generate long-term contracts. If we do not realize the sales we expect from potential clients, our revenue and results of operations could be adversely affected.

Our purchase orders often are cancellable until shortly before the start of production, and our lack of significant backlog makes it difficult for us to forecast our revenues and margins in future periods and may cause actual revenue and results to fall short of expectations.

Our purchase orders often are cancellable until shortly before the start of production, and we do not typically operate with any significant backlog, which makes it difficult for us to forecast our revenues in future periods. In addition,

 

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since our expense levels are based in part on our expectations of future revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls caused by cancellations, rescheduling of orders or lower actual orders than quantities forecasted. Rescheduling may relate to quantities or delivery dates, and sometimes relates to the specifications of the products we are shipping. Consequently, we cannot be certain that orders on backlog will be shipped when expected or at all.

While customers will typically provide twelve-month rolling forecasts, we expect that, in the future, our revenues in any quarter will continue to be substantially dependent upon cancellable purchase orders received in the immediately preceding quarter or two. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. For these reasons, our backlog at any given date may not be a reliable indicator of our future revenues and, as a result, revenue and margin forecasts, targets and guidance that we provide from time to time may fall short of expectations.

We may manufacture wafers based on forecasted demand, and if our forecasted demand exceeds actual demand, we may accumulate obsolete inventory, which may have a negative impact on our financial results.

We target manufacturing wafers in an amount matching each customer’s specific purchase order. On occasion, we may produce wafers in excess of a customer’s orders based on forecasted customer demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped or sold at a significant discount. Significant amounts of obsolete inventory may have a negative impact on our financial results.

The effects of the COVID-19 pandemic could adversely affect our business, results of operations and financial condition.

The COVID-19 pandemic has led to significant disruption of normal business operations globally, as businesses, including SkyWater, have needed to implement modifications to employee travel and employee work locations, as required in some instances by federal, state and local authorities, which has had a negative impact on our employee productivity and has given rise to significant volatility in the global capital markets and financial system. As a result of COVID-19, one customer has reduced its planned research and development expenditures with us, and a second customer experienced facility shutdowns which resulted in delays in project milestones, in each case negatively affecting our revenues.

Additional effects of the public health crisis caused by the COVID-19 outbreak and the measures being taken to limit COVID-19’s spread remain uncertain and difficult to predict, but may include:

 

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a decrease in short-term or long-term demand or pricing for our products, and a global economic recession or depression that could further reduce demand or pricing for our products, resulting from actions taken by governments, businesses or the general public in an effort to limit exposure to and the spreading of COVID-19, such as travel restrictions, quarantines and business shutdowns or slowdowns;

 

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reductions in production levels, product development, technology transitions, yield enhancement activities connected to wafer production and qualification activities with our customers, resulting from our efforts to mitigate the impact of COVID-19 through social-distancing measures we have enacted in an effort to protect our employees’ and contractors’ health and well-being, including working from home, limiting the number of meeting attendees, reducing the number of people in our facilities at any one time, quarantining of team members, contractors or vendors who are at risk of contracting, or have contracted, COVID-19, and suspending employee travel, or social distancing measures;

 

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increased costs resulting from our efforts to mitigate the impact of COVID-19 through social distancing measures, working from home, enhanced cleaning measures and the increased use of personal protective equipment at our facilities;

 

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increased costs for, or unavailability of, transportation, raw materials or other inputs necessary for the operation of our business;

 

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reductions in or cessation of operations at our facilities resulting from government restrictions on movement or business operations or our failure to prevent or adequately mitigate the spread of COVID-19 at our facilities;

 

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our inability to continue or resume projects due to delays in obtaining materials, equipment, labor, engineering services, government permits or any other essential aspect of projects, which could impact our ability to introduce new technologies, reduce costs or meet customer demand;

 

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deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in a higher rate of losses on our accounts receivables due to credit defaults; and

 

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disruptions to our supply chain in connection with the sourcing and transportation of materials, equipment and engineering support, and services from or in geographic areas that have been impacted by COVID-19 and by efforts to contain the spread of COVID-19.

The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our team members, contractors, suppliers, third-party service providers, customers or distributors.

These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure or financial condition. A sustained, prolonged or recurring outbreak could exacerbate the adverse impact of such measures.

Earthquakes, fires, power outages, floods, terrorist attacks, public health issues, such as COVID-19, and other catastrophic events could disrupt our business and ability to serve our customers and could have a material adverse effect on our business, results of operations or financial condition.

A significant natural disaster, such as an earthquake, a fire, a flood or a significant power outage, or a widespread public health issue, such as the COVID-19 pandemic, could have a material adverse effect on our business, results of operations or financial condition. Although our foundry operation center is designed to be redundant and to offer seamless backup support in an emergency, we rely on two onsite data centers in addition to public cloud providers to sustain our operations. Losing any one of these three infrastructure sources could severely impact our operations. In addition, our ability to deliver our solutions as agreed with our customers depends on the ability of our supply chain, manufacturing vendors or logistics providers to deliver products or perform services we have procured from them. If any natural disaster, including a pandemic such as COVID-19, impairs the ability of our vendors or service providers to support us on a timely basis, our ability to perform our customer engagements may suffer. Disruptions from COVID-19 or a similar pandemic or public health issue could include, and have included, restrictions on the ability of our employees or the employees of our customers, vendors or suppliers to travel, or closures of our facilities or the facilities of these third parties. Such restrictions or closures could affect our ability to sell our solutions, develop and maintain customer relationships or render services, such as our consulting services, could adversely affect our ability to generate revenues or could lead to inadvertent breaches of contract by us or by our customers, vendors or suppliers. Acts of terrorism or other geopolitical unrest also could cause disruptions in our business or the business of our supply chain, manufacturing vendors or logistics providers. The adverse impacts of these risks may increase if the disaster recovery plans for us and our suppliers prove to be inadequate.

Risks Relating to Government Regulation

We are a party to several significant USG contracts, which are subject to unique risks.

The funding of USG programs is subject to annual U.S. congressional appropriations. Many of the USG programs in which we or our customers participate may extend for several years. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods are not made. In addition, the USG may modify, curtail or terminate its contracts and subcontracts without prior notice at its convenience upon payment for work done and commitments made at the time of termination. The termination of funding for a USG program, or any modification or curtailment of one of our major USG programs or contracts, would result in a loss of anticipated future revenue attributable to that program, which could have an adverse effect on our operations, financial condition or demand for our products and services.

Our government contracts are primarily fixed-price contracts where we bear a significant portion of the risk of cost overruns. These types of government contracts are priced, in part, on cost and scheduling estimates that are based on assumptions including prices and availability of experienced labor, equipment and materials as well as

 

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productivity, performance and future economic conditions. If these estimates prove inaccurate, if there are errors or ambiguities as to contract specifications, or if circumstances change due to, among other reasons, unanticipated technical problems, poor project execution, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of equipment and materials or our suppliers’ or subcontractors’ inability to perform, then cost overruns may occur. Our failure to accurately estimate the resources and time required for fixed-price contracts or our failure to complete our contractual obligations within a specified time frame or cost estimate could result in reduced profits or, in certain cases, a loss for that contract. If the contract is significant, or we encounter issues that impact multiple contracts, cost overruns could have a material adverse effect on our business, financial condition and results of operations.

Our government contract activities are subject to audits by USG agencies, including agency Inspectors General. If any audit, inquiry or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, suspension of payments, fines, and suspension or debarment from doing business with the USG. In addition, we rely on certain third party business strategy consultants to assist us in procuring new opportunities to compete for and receive USG contracts. If these contractors were to engage in any improper or illegal activities, our USG contracts could be terminated and we could be prohibited from obtaining government contract in the future, regardless of whether we had involvement or knowledge of any such activities. We also could suffer reputational harm if allegations of impropriety were made against us, even if such allegations are later determined to be false. We have not been audited in the past by the USG but expect that we may be audited in the future.

We are sometimes subject to potential USG review of our business and security practices due to our participation in government contracts. Any such inquiry or investigation could potentially result in a material adverse effect on our results of operations and financial condition. Our USG business also is subject to specific procurement regulations and other requirements. These requirements, although customary in USG contracts, increase our performance and compliance costs. For example, we are required to comply with the DMEA Trust Accreditation process, the U.S. International Traffic in Arms Regulations, or ITAR, the U.S. Export Administration Regulations, or EAR, as well as labor requirements, pricing justifications, cybersecurity requirements and other federal contractor requirements imposed by the Federal Acquisition Regulation, or FAR, and the Defense FAR Supplement. In addition, we are subject to certain registration requirements, including registration with the Directorate of Defense Trade Controls and consortium registration or membership requirements. These compliance costs might further increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from USG contracting or subcontracting for a period of time and could have a material adverse effect on our reputation and ability to secure future USG contracts.

Some of our subsidiaries hold USG-issued facility security clearances and certain of our employees have qualified for and hold USG-issued personnel security clearances necessary to qualify for and ultimately perform certain USG contracts. Obtaining and maintaining security clearances for employees involves lengthy processes, and it is difficult to identify, recruit and retain employees who already hold security clearances. If these employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us and we are unable to find replacements with equivalent security clearances, we may be unable to perform our obligations to customers whose work requires cleared employees, or such customers could terminate their contracts or decide not to renew them upon their expiration. The USG could also “invalidate” our facility security clearances for several reasons including unmitigated foreign ownership, control or influence, mishandling of classified materials, or failure to properly report required activities. An inability to obtain or retain our facility security clearances or engage employees with the required personnel security clearances for a particular contract could disqualify us from bidding for and winning new contracts with security requirements as well as result in the termination of any existing contracts requiring such security clearances.

Changes to DoD business practices could have a material effect on the DoD’s procurement process and adversely impact our current programs and potential new awards.

The defense industry has experienced, and we expect will continue to experience, significant changes to business practices resulting from an increased focus by the DoD on affordability, efficiencies, business systems, recovery of costs and a reprioritization of available defense funds to key areas for future defense spending. The DoD continues to

 

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adjust its procurement practices, requirements criteria and source selection methodology in an ongoing effort to reduce costs, gain efficiencies and enhance program management and control. We expect the DoD’s focus on business practices to impact the contracting environment in which we operate as we and others in the industry adjust our practices to address the DoD’s initiatives and the reduced level of spending by the DoD. Depending on how these initiatives are implemented, they could have an impact on our current programs, as well as new business opportunities with the DoD.

Our international sales and domestic operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect its operations.

Due to our international sales and domestic operations, we must comply with all applicable international trade, customs, export controls and economic sanctions laws and regulations of the United States and other countries.

Conducting our operations subjects us to risks that include:

 

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the burdens of complying with a wide variety of U.S. and international laws, regulations and legal standards, including local data privacy laws, local consumer protection laws that could regulate permitted pricing and promotion practices, and restrictions on the use, import or export of certain technologies;

 

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the restrictions imposed on our business, operations, and additional security requirements required for compliance with United States export regulations, including ITAR and the EAR, including “deemed export” compliance which precludes foreign national access to restricted data, and export restrictions on materials and technology;

 

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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

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fluctuations in currency exchange rates;

 

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tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our solutions in some international markets;

 

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difficulties in managing and staffing international operations;

 

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compliance with U.S. laws that apply to our operations, including the Foreign Corrupt Practices Act, the Trading with the Enemy Act and regulations of the Office of Foreign Assets Control;

 

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changes in trade sanctions laws may restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications to compliance programs;

 

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potentially adverse tax consequences and compliance costs resulting from the complexities of international tax systems and overlap of different tax regimes;

 

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reduced or varied protection of intellectual property rights in some countries that could expose us to increased risk of infringement of our patents and other intellectual property;

 

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global disruptions in custom spending patterns or our ability to provide service to our customers as a result of any widespread public health issues, including a pandemic such as COVID-19; and

 

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political, social and economic instability, terrorist attacks and security concerns in general.

The occurrence of any of these risks could negatively affect our international business and, consequently, our overall business, results of operations and financial condition.

Risks Relating to Intellectual Property

We depend on intellectual property to succeed in our business, and any failure or inability to obtain, preserve, enforce, defend and protect our technologies or intellectual property rights could harm our business and financial condition.

Our business relies in part on trade secrets and other non-patent intellectual property rights, all of which offer only limited protection to our products and services (including technologies and processes used in our business). Although we regularly enter into non-disclosure and confidentiality agreements with employees, vendors, customers and other third parties, these agreements may be breached or otherwise fail to prevent disclosure or use of trade secrets, know-how, and other proprietary or confidential information effectively or fail to provide an adequate remedy in the event of such unauthorized disclosure or use. Our ability to police misappropriation or infringement of our

 

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trade secrets and other non-patent intellectual property rights is uncertain, particularly in other countries. In addition, the existence of our own proprietary and confidential information, including trade secrets and know-how, does not protect against independent discovery or development of such intellectual property by other persons. If our proprietary or confidential information is misappropriated, is no longer confidential, or is not protectable as a trade secret, we may no longer be able to protect that information from further disclosure or use by others.

We currently do not own any patents. Patents can provide a competitive advantage to the patent holder because they may give the patent holder the ability to prevent competitors or other parties from practicing the inventions covered by the patents during the patent term, or they may give the patent holder the right to collect royalties from those parties, even if those parties arrived at the covered inventions independently of the patent holder. Without patent protection on our products and services, we will not have this competitive advantage. In addition, if we do not obtain patent protection for our products and services, we would not have patents to assert in response against a competitor or other party that asserts its patents against us or our customers, and we may be at a disadvantage in any patent dispute with such a party. We may in the future seek to obtain patent protection for some of our products and services, but we may not be successful. The process of applying for patents to obtain patent protection may take a long time and can be expensive. We cannot assure you that patents will be issued from applications we may submit or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.

We have sought, and may in the future seek, trademark registrations for certain trademarks used in our business, but we may not be successful. Registered trademarks can provide advantages to the trademark owner in the jurisdictions covered by the registrations. The process of applying for trademark registrations may take a long time and can be expensive. We cannot assure you that trademark registrations will be granted from applications we have submitted or may submit or that, if trademark registrations are granted, they will not be challenged, invalidated or circumvented or that the rights granted under the trademark registrations will provide us with meaningful protection or any commercial advantage.

Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. In addition, other countries in which we market our products and services may not respect our intellectual property rights to the same extent as the United States. Effective intellectual property enforcement may be unavailable or limited in some countries. We cannot assure you that we will, at all times, enforce our intellectual property rights, and it may be difficult for us to protect our technologies and intellectual property rights from misuse or infringement by others. Further, courts may not uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary and confidential information, which may reduce our opportunities to generate revenues. In the event that we are unable to enforce our intellectual property rights, our business and financial condition may be harmed.

We depend on intellectual property licensed from third parties to succeed in our business, and any failure or inability to obtain or preserve rights under third-party licenses could harm our business and financial condition.

We use technologies and intellectual property rights that we license from third parties and that are material to our business. As one example, we received a license to certain technology and intellectual property rights in connection with our divestiture from Cypress. This license remains in effect and is critical to our business, and it may be terminated in the case of specified breaches or other events.

Parties with which we currently have license agreements, or with which we may enter into license agreements in the future, may elect not to renew those agreements or may have the right to terminate those agreements for our material breach, for convenience, or upon the occurrence of a change of control or other events or circumstances at any time, which could affect our ability to make use of material technologies or intellectual property rights.

We are required to pay ongoing royalties under some of these licenses, we may undertake obligations to pay royalties in the future, and these royalty obligations do or would impose costs on our business.

Our suppliers of technologies and intellectual property rights may suffer delays, quality issues, or other problems affecting their supply to us, or a supplier’s technologies and intellectual property rights may no longer be available to us, for example if the supplier discontinues a line of business or all of its business, or liquidates, merges, or is

 

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acquired by another company. Changes in our business from time to time may require us to negotiate new licenses or modifications to existing licenses, which may not be possible. As an alternative to the above, we might be required to develop non-infringing technology, which could require significant effort and expense and ultimately might not be successful.

If third party licenses terminate or are not renewed, or if third party technologies or intellectual property rights are no longer available to us, our business and financial condition could be harmed.

Our collaboration with others regarding the development of technologies and intellectual property may require that we restrict use of certain technologies and intellectual property and may result in disputes regarding ownership of or rights to use or enforce intellectual property rights, which could harm our business and financial condition.

Our business involves collaboration, including customization and other development of technologies and intellectual property, with and for our customers, vendors and other third parties. We frequently enter into agreements with customers, vendors and others that involve customization and other development of technologies and intellectual property. Some of these agreements contain terms that allocate ownership of, and rights to use and enforce, technologies and intellectual property rights. As a result of these agreements, we may be required to limit use of, or refrain from using, certain technologies and intellectual property rights in parts of our business. Determining inventorship and ownership of technologies and intellectual property rights resulting from development activities can be difficult and uncertain. Disputes may arise with customers, vendors and other third parties regarding ownership of and rights to use and enforce these technologies and intellectual property rights or regarding interpretation of our agreements with these third parties, and these disputes may result in claims against us or claims that intellectual property rights are not owned by us, are not enforceable, or are invalid. The cost and effort to resolve these types of disputes, or the loss of rights in technologies in intellectual property rights if we lose these types of disputes, could harm our business and financial condition.

Claims by others that we infringe their proprietary rights could harm our business and financial condition.

Third parties could claim that we, or our products or services (including technologies and processes used in our business) infringe, misappropriate, or otherwise violate their intellectual property rights. The communications, technology, and other industries in which we operate are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation, including by non-practicing entities, based on allegations of infringement, misappropriation or other violations of intellectual property rights, and we expect that such claims may increase as competition in the markets we serve continues to intensify, as we introduce new products and services (including in geographic areas where we currently do not operate) and as business-model or product or service overlaps between our competitors and us occur.

To the extent that we achieve greater prominence and market exposure as a public company, we may face a higher risk of being the target of intellectual property claims (including infringement claims).

From time to time, we may receive notices alleging that we have infringed, misappropriated or otherwise violated other parties’ intellectual property rights. There may be third-party intellectual property rights, including patents and pending patent applications, that cover significant aspects of our products and services.

If our employees, consultants or contractors use technology or know-how, including proprietary or confidential information, such as trade secrets, owned by third parties in their work for us, disputes may arise between us and those third parties.

Any claims of infringement, misappropriation, or other violation by a third party, even claims without merit, could cause us to incur substantial defense costs and could distract our management and technical personnel from our business, and there can be no assurance that we or our products or services will be able to withstand such claims. Competitors may have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them than we do. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages, which potentially could include treble damages if we are found to have willfully infringed patents. A judgment also could include an injunction or other court order that could prevent us from using our technologies, offering our products or services, or otherwise conducting our business. In addition, we might be required to enter into a cross license or otherwise seek a license or enter into royalty arrangements for the use of the infringed intellectual property rights, which may not be available

 

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on commercially reasonable terms or at all. We may also be required to re-engineer our products or services, incur additional costs, discontinue the distribution or provision of certain products or services or the availability of certain features or capabilities of our products or services, or take other remedial actions. Any one or more of these events or circumstances, or the failure to obtain a license or the costs associated with any license, could harm our business and financial condition.

Third parties also may assert intellectual property claims against our customers relating to our products or services. Any of these claims might require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because under specified conditions we agree to defend and indemnify our customers from claims of infringement, misappropriation, or other violation of intellectual property or other rights of third parties. We may be required to incur costs of the defense of these claims, we may be required to pay settlements of these claims, and if any of these claims were to succeed, we might be forced to pay damages on behalf of our customers, which could harm our business and our reputation in the industry.

We use open source software and other technology, which could negatively affect our business and subject us to litigation or other actions.

We use software and other technology in our business that is licensed under open source license terms, and we may use more open source technology in the future. We do not currently distribute technology that includes open source, but we may do so in the future, either ourselves or through a partner. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize products that include open source. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source technology or claiming breach of open source licenses. Litigation could be costly for us to defend, harm our business and financial condition, or require us to devote additional research and development resources to change our products or services. In addition, if we were to combine our proprietary source code or other technology with open source technology in a certain manner, we could, under certain of the open source licenses, be required to release our source code or other proprietary technology to the public. This would allow our competitors to create similar products with less development effort and time. If we inappropriately use open source technology, or if the license terms for open source technology that we use change, we may be required to re-engineer our products or services, incur additional costs, discontinue the distribution of certain products or services or the availability of certain features or capabilities of our products or services, or take other remedial actions.

In addition to risks related to license requirements, usage of open source software or other technology can lead to greater risks than use of third-party commercial technology, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the technology. In addition, many of the risks associated with usage of open source, such as the lack of warranties or assurances of title, cannot be eliminated, and could, if not properly addressed, harm our business and financial condition. We have established processes to help alleviate these risks, but we cannot be sure that all of our use of open source is in a manner that is consistent with our current policies and procedures, or will not subject us to liability.

Risks Relating to this Offering and Ownership of our Common Stock

Investors in the offering will suffer immediate and substantial dilution as well as potential future dilution if we issue additional shares of our stock or other equity securities.

The initial public offering price per share of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock after giving effect to this offering. Based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $11.37 per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price.

We are authorized to issue up to 200,000,000 shares of common stock, par value $0.01 per share, and 80,000,000 shares of preferred stock, par value $0.01 per share, having such rights, preferences and privileges as are determined by our board of directors in their discretion. We have the right to raise additional capital or incur borrowings from third parties to finance our business, which we may choose to do depending on market conditions,

 

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strategic considerations and operational requirements. Our board of directors has the authority, without the consent of any of the stockholders, to cause us to issue more shares of our common stock and preferred stock. We may also issue net profits interests in specified assets or incur off balance sheet obligations. Future issuances of additional shares of capital stock, other equity securities or net profits interests by us would dilute our stockholders’ ownership.

We will incur increased costs and expenses as a result of operating as a public company and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, and particularly after we cease to be an “emerging growth company,” we will incur greater legal, accounting, and other expenses than we incurred as a private company. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the rules and regulations of the Nasdaq Capital Market, which impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. These requirements will increase our legal, accounting, and financial compliance costs and will make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems and resources. For example, we expect these rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage.

We are evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

After we are no longer an “emerging growth company,” we will need to comply with auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, as we prepare for such compliance, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

As a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by our management on, among other matters, the effectiveness of our internal control over financial reporting for the first full fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an emerging growth company. We will be required to disclose significant changes made in our internal control procedures on a quarterly basis.

We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. Although we currently perform regulatory audits, we may need to hire additional accounting and financial staff with public company experience and technical accounting knowledge necessary to perform the evaluation needed to comply with Section 404.

We have concluded that we have material weaknesses in our internal controls due to our limited accounting and finance resources and processes related to the recording of revenue which resulted in inappropriate preparation, review and maintenance of documentation critical to the design and consistent execution of internal controls. Due to limited staffing, it can be challenging to properly prepare, review and maintain appropriate documentation critical to

 

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the process. If we fail to comply with the rules under the Sarbanes-Oxley Act related to disclosure controls and procedures in the future, or, if we continue to have material weaknesses and other deficiencies in our internal control and accounting procedures and disclosure controls and procedures, our stock price could decline significantly and raising capital could be more difficult. If additional material weaknesses or significant deficiencies are discovered or if we otherwise fail to address the adequacy of our internal control and disclosure controls and procedures, our business may be harmed. Effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

Our operating results may prove unpredictable which could negatively affect our profit.

Our operating results may fluctuate in the future due to a variety of factors, many of which we have no control over. Factors that may cause our operating results to fluctuate significantly include: our inability to generate enough working capital from sales; the level of commercial acceptance by clients of our products; fluctuations in the demand for our service; the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; the timing and recognition of revenue and related expenses; adverse litigation judgment, settlements or other litigation-related costs; our ability to increase sales to existing customers and to renew contracts with our customers; our ability to attract new customers; changes in our pricing policies or those of our competitors and general economic conditions. If realized, any of these risks could have a material adverse effect on our business, financial condition and operating results.

An active, liquid and orderly trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on the Nasdaq Capital Market, an active trading market for our shares may never develop or be sustained following this offering. While the initial public offering price for our common stock will be determined through arms-length negotiations with the underwriters, the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, it may be difficult for you to sell shares you purchase in this offering at a favorable price or at all. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

The trading price of shares of our common stock following this offering is likely to be volatile. The stock market in general and the market for smaller technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay for your shares, which depends on many factors, some of which we cannot control. These factors include:

 

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announcements of new products, services or technologies, commercial relationships or other events by us or our competitors;

 

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regulatory or legal developments in the United States and other countries in which we operate;

 

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developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

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the recruitment or departure of key personnel;

 

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the level of expenses related to any of our wafers or development programs;

 

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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

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operating results that fail to meet expectations of securities analysts that cover our company;

 

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variations in our financial results or those of companies that are perceived to be similar to us;

 

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general economic and political factors, including market conditions in our industry or the industries of our customers;

 

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major catastrophic events;

 

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price and volume fluctuations in the overall stock market from time to time;

 

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significant volatility in the market price and trading volume of smaller technology companies in general and of companies in the semiconductor, microelectronics and quantum computing industries in particular;

 

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sales of large blocks of our common stock;

 

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litigation involving us, our industry, or both, including disputes or other developments relating to our ability to patent our processes and technologies and protect our other proprietary rights;

 

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fluctuations in the trading volume of our shares or the size of the trading market for our shares held by non-affiliates; and

 

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the other factors described in this “Risk Factors” section.

If the market for smaller technology company stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The market price of our common stock may also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Litigation of this nature, if instituted against us, could cause us to incur substantial costs and divert our management’s attention and resources from our business.

Future sales, or the perception of future sales, of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

Shares of our common stock that we have issued directly or that have been or may be acquired upon exercise of warrants or stock options may be covered by registration statements which permit the public sale of stock. Other holders of shares of common stock that we have issued may be entitled to dispose of their shares pursuant to (1) the applicable holding period, volume and other restrictions of Rule 144 of the Securities Act of 1933, or the Securities Act, or (2) another exemption from registration under the Securities Act. The lock-up agreements, which our officers, directors and certain stockholders are expected to enter into with the representatives of the underwriters, will provide that such persons will not offer, sell or contract to sell, directly or indirectly, any shares of our common stock, or engage in other specified transactions in our equity securities without the prior written consent of Jefferies LLC, on behalf of the underwriters, during the period ending 180 days after the date of this prospectus, subject to certain exemptions. Upon the expiration of those lock-up agreements, the outstanding shares of common stock subject to their restrictions become eligible for resale in the open market (subject to Rule 144 volume limitations applicable to affiliates), resulting in more shares eligible for sale and potentially causing selling in the market to increase and our stock price to decline.

Additional sales of a substantial number of our shares of our common stock in the public market, or the perception that sales could occur, could have an adverse effect on the price of our common stock, which could make it more difficult for you to sell your shares of our common stock at a time and price that you consider appropriate, and could impair our ability to raise equity capital or use our common stock as consideration for acquisitions of other businesses, investments or other corporate purposes. If substantial amounts of our common stock become available for resale under Rule 144 once a market has developed for our common stock, the then-prevailing market prices for our common stock may be reduced. Any substantial sales of our common stock pursuant to Rule 144 may have an adverse effect on the market price of our securities.

Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price of our common stock to decline. If there are more shares of common stock offered for sale than buyers are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing to purchase the offered shares of common stock and sellers remain willing to sell the shares.

We do not intend to pay dividends in the future and any return on investment may be limited to the value of our common stock.

We do not anticipate paying cash dividends in the foreseeable future. Any future payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and contributing to our growth. Prospective investors seeking or needing dividend income or liquidity should therefore not purchase shares of our common stock. In addition, the

 

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terms of any future debt agreements we may enter into may preclude us from paying dividends. If we do not pay dividends, our common stock may be less valuable because a return on investment will only occur if our stock price appreciates.

We are a holding company and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company and we conduct substantially all activities through our subsidiaries. As a result, satisfying any future payment obligations we may have, and our ability to pay dividends to our stockholders if we desire to do so in the future, may be largely dependent upon cash dividends and distributions and other transfers from our subsidiaries. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividend distributions or other transfers to us. In particular, our subsidiary SkyWater Technology Foundry is limited in its ability to declare dividends or make any payment on equity to, directly or indirectly, fund a dividend or other distribution to us. Consequently, substantially all of the net assets of our subsidiaries are restricted. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

We have elected to take advantage of the controlled company exemption from certain corporate governance requirements, which could make our common stock less attractive to some investors or otherwise adversely affect its trading price.

Following this offering, Oxbow and its affiliates will own approximately 76.0% of our outstanding common stock (or approximately 74.2% if the underwriters exercise their over-allotment option in full), and will therefore control more than a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” for purposes of the marketplace rules of the Nasdaq Capital Market. As a “controlled company” under the rules of the Nasdaq Capital Market, we are eligible to rely on certain exemptions from corporate governance requirements that would otherwise apply to us, including:

 

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a board of directors having a majority of independent directors;

 

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a nominating committee composed entirely of independent directors that will nominate candidates for election to the board of directors, or recommend such candidates for nomination by the board of directors; and

 

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a compensation committee composed entirely of independent directors that will approve the compensation payable to the company’s chief executive officer and other executive officers.

In light of our status as a controlled company, at the time of this offering, we do not have a majority independent board, and our compensation committee and nominating and corporate governance committee are not composed entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules of the Nasdaq Capital Market. Our status as a controlled company could make our common stock less attractive to some investors or otherwise adversely affect its trading price. See “Management—Director Independence” for additional information.

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

After this offering, Oxbow and our directors and executive officers will beneficially own approximately 81.4% of our outstanding common stock. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors, adopting new compensation plans and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering.

We are an “emerging growth company” and our election to comply with the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging

 

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growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved.

We may take advantage of these provisions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (3) the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year ending after the fifth anniversary of this offering.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to opt in to the extended transition period for complying with new or revised accounting standards. Our financial statements therefore may not be comparable to those of companies that comply with such new or revised accounting standards.

As a result, the information that we provide our security holders may be different than the information you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Provisions in our certificate of incorporation and bylaws and in Delaware law could discourage takeover attempts even if our stockholders might benefit from a change in control of our company.

Provisions in our certificate of incorporation and bylaws, each of which will be in effect prior to the completion of this offering, and in Delaware law may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may favor, including transactions in which stockholders might receive a premium for their shares of common stock. These provisions also could make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you support, including removing or replacing our current management. The certificate of incorporation and bylaw provisions:

 

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limit the number of directors constituting the entire board of directors to a maximum of eleven directors, subject to the rights of the holders of any outstanding series of preferred stock, and provide that the authorized number of directors at any time will be fixed exclusively by a resolution adopted by the affirmative vote of the authorized number of directors (without regard to vacancies);

 

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establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to present any other business for consideration at any annual or special stockholder meeting;

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require that any action to be taken by our stockholders must be affected at a duly called annual or special meeting of stockholders and not be taken by written consent; and

 

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provide authority for the board of directors without stockholder approval to provide for the issuance of up to 80,000,000 shares of preferred stock, in one or more series, with terms and conditions, and having rights, privileges and preferences, to be determined by the board of directors.

In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware, or the Delaware General Corporation Law. This statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder (generally a person who, together with its affiliates, owns 15% or more of our voting stock) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the manner prescribed by this statute.

 

 

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Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or with our directors, our officers or our other employees.

Our certificate of incorporation that will be in effect prior to the completion of this offering provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for:

 

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any derivative action or proceeding brought on our behalf;

 

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any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers or other employees, or stockholders to us or our stockholders;

 

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any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware;

 

 

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any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or the bylaws (including any right, obligation or remedy thereunder); and

 

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any action asserting a claim governed by the internal affairs doctrine or any other “internal corporate claim” as such term is defined in Section 115 of the Delaware General Corporation Law, in each case subject to such court’s having personal jurisdiction over the indispensable parties named as defendants.

Our certificate of incorporation also provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.

Any person purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or with our directors, our officers or other employees, or our other stockholders, which may discourage such lawsuits against us and such other persons. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations and financial condition.

Our choice of forum provision is intended to apply to the fullest extent permitted by law to the above-specified types of actions and proceedings, including, to the extent permitted by the federal securities laws, to lawsuits asserting both the above-specified claims and claims under the federal securities laws. Application of the choice of forum provision may be limited in some instances by applicable law. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the choice of forum provision will not apply to actions arising under the Exchange Act or the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, subject to a limited exception for certain “covered class actions.” Accordingly, although this provision will apply to claims arising under the Securities Act, there is uncertainty as to whether a court would enforce the provision in connection with such claims. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. Our stockholders cannot waive claims arising under the federal securities laws and the rules and regulations thereunder.

 

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If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our common stock could be impacted negatively. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our results of operations fail to meet the expectations of analysts, our stock price would likely decline. If one or more of such analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause a decline in our stock price or trading volume.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements, which are statements that relate to future, rather than past, events and outcomes. Forward-looking statements generally address our expectations regarding our business, results of operations, financial condition and prospects and often contain words such as “may,” “expect,” “anticipate,” “intend,” “plan,” “target,” “seek,” “potential,” “believe,” “will,” “could,” “should,” “would” and “project” and similar words or expressions that convey the uncertainty of future events or outcomes.

The forward-looking statements in this prospectus include, but are not limited to, our statements concerning the following matters:

 

∎

our goals and strategies;

 

∎

our future business development, financial condition and results of operations;

 

∎

our ability to continue operating our semiconductor foundry at full capacity;

 

∎

our ability to appropriately respond to changing technologies on a timely and cost-effective basis;

 

∎

our customer relationships and our ability to retain and expand our customer relationships;

 

∎

our ability to accurately predict our future revenues for the purpose of appropriately budgeting and adjusting our expenses;

 

∎

our expectations regarding dependence on our largest customer;

 

∎

our ability to diversify our customer base and develop relationships in new markets;

 

∎

the performance and reliability of our third-party suppliers and manufacturers;

 

∎

our ability to control costs, including our operating and capital expenses;

 

∎

the size and growth potential of the markets for our solutions, and our ability to serve and expand our presence in those markets;

 

∎

the level of demand in our customers’ end markets;

 

∎

our ability to attract, train and retain key qualified personnel;

 

∎

adverse litigation judgments, settlements or other litigation-related costs;

 

∎

changes in trade policies, including the imposition of tariffs;

 

∎

our ability to raise additional capital or financing after this offering;

 

∎

our ability to accurately forecast demand;

 

∎

the impact of the COVID-19 pandemic on our business, results of operations and financial condition;

 

∎

the impact of the COVID-19 pandemic on the global economy;

 

∎

our ability to maintain compliance with certain USG contracting requirements;

 

∎

regulatory developments in the United States and foreign countries;

 

∎

our ability to protect our intellectual property rights; and

 

∎

costs we expect to incur as a public company, including transitional costs to establish our own standalone corporate functions.

Our forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, our 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 prospectus may not occur and our actual results could differ materially and adversely from those expressed or implied in our forward-looking statements. No forward-looking statement is a guarantee of future performance.

 

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You should not rely on forward-looking statements as predictions of future events or outcomes. Although we believe 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 prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, we undertake no obligation to update publicly any forward-looking statements after the date of this prospectus to conform such statements to changes in our expectations or to our actual results, or for any other reason, except as required by law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that our net proceeds from our issuance and sale of 5,800,000 shares of our common stock in this offering will be approximately $66.2 million, or approximately $76.7 million if the underwriters exercise their over-allotment option in full, taking into account an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions, as well as estimated offering expenses of $3.9 million payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $5.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We also may increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $12.1 million if the assumed initial public offering price remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change by these amounts in the assumed initial public offering price or the number of shares we are offering would have a material effect on our uses of the proceeds from this offering, although a reduction in expected net proceeds could accelerate the time at which we would need to seek additional capital.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. Although we have not yet determined with certainty the manner in which we will allocate the net proceeds of this offering, we currently intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth and funding capital expenditures. We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in businesses or technologies, although we do not currently have any plans or commitments for any such acquisitions or investments.

Our expected uses of the net proceeds from this offering represent our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses specified above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.

The timing and amount of our actual application of the net proceeds will be based on many factors, including our cash flows from operations and the actual and anticipated growth of our business. Pending the uses described above, we intend to invest the net proceeds of this offering in a variety of investments, including short- and intermediate-term, interest-bearing, investment-grade securities and government securities. You will not have an opportunity to evaluate the economic, financial or other information on which we base our decisions regarding the use of these proceeds.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently expect to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future. As a result, you will likely need to sell your shares of common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on our financial condition, results of operations, any applicable contractual restrictions, capital requirements, business prospects, the requirements of applicable law, and other factors our board of directors may consider relevant.

 

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CORPORATE CONVERSION

We currently operate as a Delaware limited liability company under the name CMI Acquisition, LLC. Prior to the effectiveness of the registration statement of which this prospectus is a part, we intend to change our form of business organization by converting to a Delaware corporation pursuant to a statutory conversion and to change our name to SkyWater Technology, Inc. In this prospectus, we refer to all of the transactions related to our conversion into a corporation as the Corporate Conversion.

The purpose of the Corporate Conversion is to reorganize our corporate structure so that the entity that is offering shares of common stock to the public in this offering is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than limited liability interests in a limited liability company.

In conjunction with the Corporate Conversion, all of the outstanding limited liability company interests of CMI Acquisition, LLC, which we refer to as units and which are comprised of Class B preferred units and common units, will automatically be converted into shares of our common stock. In connection with the Corporate Conversion, each Class B preferred unit and common unit will convert into a number of shares of common stock determined by dividing (1) the amount that would have been distributed in respect of each such unit in accordance with CMI Acquisition, LLC’s operating agreement if all assets of CMI Acquisition, LLC had been sold for a cash amount equal to the pre-offering value of CMI Acquisition, LLC, as such value is determined by CMI Acquisition, LLC’s board of managers based on the fair value of each share of our common stock (net of any underwriting discounts, fees and expenses), by (2) such per share fair value. The amounts that would have been distributed for this purpose in respect of Class B preferred units and common units are determined by reference to the terms of CMI Acquisition, LLC’s operating agreement, with different values applicable to each series of units. Before any distributions are made on common units, distributions are to be made on each Class B preferred unit in an amount equal to the sum of an 8% “preferred return” on the deemed original equity value of each such Class B preferred unit (accrued daily since the date of issuance of each such Class B preferred unit) plus the amount of such original equity value. Only after those distributions have been made, the common units, together with the Class B preferred units, would share in the remainder of the distribution on a pro rata basis. For purposes of the Corporate Conversion, pre-offering “per share fair value” will be determined taking into account the assumed initial public offering price of our common stock.

Accordingly, and taking into account an assumed initial public offering price of $13.00 per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, our outstanding units will be converted as follows:

 

∎

holders of Class B preferred units will receive an aggregate of 27,995,374 shares of our common stock; and

 

∎

holders of our common units will receive an aggregate of 3,060,355 shares of our common stock.

In connection with the Corporate Conversion, SkyWater Technology, Inc. will succeed to all the property and assets of CMI Acquisition, LLC and will succeed to all of the debts and obligations of CMI Acquisition, LLC. SkyWater Technology, Inc. will be governed by a certificate of incorporation filed with the Secretary of State of the State of Delaware and our bylaws, the material provisions of which are described in the section of this prospectus entitled “Description of Our Capital Stock.” On the effective date of the Corporate Conversion, each of our directors and officers will be as described in the “Management” section of this prospectus.

Except as otherwise noted herein, the consolidated financial statements and related notes included elsewhere in this prospectus are those of CMI Acquisition, LLC and its consolidated operations. We do not expect that the Corporate Conversion will have an effect on the results of our operations.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and our capitalization as of January 3, 2021:

 

∎

on an actual basis;

 

∎

on a pro forma basis giving effect to the Corporate Conversion; and

 

∎

on a pro forma as adjusted basis giving effect to (1) the pro forma item described above and (2) the sale of 5,800,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma and pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the following information together with the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements and accompanying notes included elsewhere in this prospectus.

 

 

 

		AS OF JANUARY 3, 2021
		ACTUAL				PRO FORMA				PRO FORMA AS ADJUSTED (3)
		(in thousands, except unit and per unit amounts)
Cash and cash equivalents		$	7,436			$	7,436			$	73,658
Total debt
Paycheck Protection Program loan (1)		$	6,453			$	6,453			$	6,453
Financing			35,381				35,381				35,381
Revolver			30,766				30,766				30,766
Total debt (2)			72,600				72,600				72,600
Members’ equity (deficit)
Class A Preferred Units (2,000,000 Class A Preferred Units authorized; none issued and outstanding)			—				—				—
Class B Preferred Units (18,000,000 Class B Preferred Units authorized; 18,000,000 Units issued and outstanding, actual; none issued and outstanding, pro forma)			—				—				—
Common Units (5,000,000 Common Units authorized; 3,057,344 issued and 2,107,452 outstanding, actual; none issued and outstanding, pro forma)			3,767				—				—
Retained earnings (deficit)			(3,783	)			(3,783	)			(3,783	)
Total members’ equity (deficit) , CMI Acquisition, LLC			(16	)			(3,783	)			(3,783	)
Stockholders’ equity
Common stock (200,000,000 shares authorized; none issued and outstanding, actual; 31,055,729 shares issued and outstanding, pro forma; 36,855,729 shares and outstanding, pro forma as adjusted)			—				311				369
Preferred stock (80,000,000 shares authorized; none issued and outstanding)			—				—				—
Additional paid-in capital			—				3,456				69,620
Total stockholders’ equity, CMI Acquisition, LLC			—				3,767				69,989
Non-controlling interests			(1,568	)			(1,568	)			(1,568	)
Total equity (deficit)			(1,584	)			(1,584	)			64,638
Total capitalization		$	71,016			$	71,016			$	137,238

 

 

(1)

On April 18, 2020, we received proceeds of $6.5 million pursuant to a loan under the Paycheck Protection Program, or PPP, under the terms of the Coronavirus Aid, Relief and Economic Security Act. PPP loan recipients can apply for and be granted forgiveness for

 

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all or a portion of the loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. We expect to obtain forgiveness of the PPP loan.

(2)

Net of debt issuance costs of $4,995.

(3)

The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $5.4 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and other estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $12.1 million, assuming that the assumed initial offering price to the public remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information as of January 3, 2021 included in the table above excludes, after giving effect to the Corporate Conversion:

 

∎

5,000,000 shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective following the Corporate Conversion, including 1,899,774 shares of our common stock issuable pursuant to grants of restricted stock units and stock options to be made before the closing of this offering, based on the assumed initial public offering price of $13.00 per share;

 

∎

700,000 shares of our common stock reserved for issuance under our ESPP; and

 

∎

2,328,886 shares of our common stock reserved for issuance pursuant to outstanding restricted stock units held by certain of our employees.

In connection with this offering, we expect to grant restricted stock units with an aggregate fixed dollar value of $9.2 million and stock options with an exercise price equal to the initial public offering price and an aggregate fair value of $5.9 million. Based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we will grant 705,997 restricted stock units and options to purchase 1,193,777 shares of our common stock. A $1.00 decrease in the initial public offering price will increase the aggregate number of shares underlying the restricted stock units and stock options by 158,315 shares. A $1.00 increase in the initial public offering price will decrease the aggregate number of shares underlying the restricted stock units and stock options by 135,698 shares.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the assumed initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately upon the closing of this offering.

Our pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding, on a pro forma basis after giving effect to the Corporate Conversion. After giving effect to the Corporate Conversion, our pro forma net tangible book value as of January 3, 2021 was $(6.1) million, or $(0.20) per share of common stock based on 31,055,729 shares of common stock outstanding.

Our pro forma as adjusted net tangible book value represents our pro forma net tangible book value, after giving effect to the sale of 5,800,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated other offering expenses payable by us. Our pro forma as adjusted net tangible book value as of January 3, 2021 was $ 60.1 million, or $1.63 per share of common stock (assuming no exercise of the underwriters’ option to purchase addition shares of our common stock). This amount represents an immediate increase in pro forma net tangible book value of $1.83 per share to our existing stockholders and an immediate dilution of $11.37 per share to investors participating in this offering. We determine dilution per share to investors participating in this offering by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by investors participating in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

 

 

Assumed initial public offering price per share		$	13.00
Pro forma net tangible book value per share as of January 3, 2021		$	(0.20	)
Pro forma increase in net tangible book value per share attributable to new investors		$	1.83
Pro forma as adjusted net tangible book value per share after giving effect to this offering		$	1.63
Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering		$	11.37

 

 

The pro forma as adjusted dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share by $0.15 per share and the dilution per share to investors participating in this offering by $0.85 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and other estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase of 1.0 million in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $0.28 and decrease the dilution per share to investors participating in this offering by $0.28, assuming the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and other estimated offering expenses payable by us. Each decrease of $1.0 million in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $0.29 and increase the dilution per share to new investors participating in this offering by $0.29, assuming the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and other estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full to purchase additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value of our common stock would increase to $1.87 per

 

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share, representing an immediate increase in the pro forma net tangible book value per share to existing stockholders of $2.07 per share and an immediate dilution of $11.13 per share to investors participating in this offering.

The following table summarizes as of January 3, 2021, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and other estimated offering expenses payable by us.

 

 

 

		SHARES PURCHASED								TOTAL CONSIDERATION								AVERAGE PRICE PER SHARE
		NUMBER				PERCENT				AMOUNT				PERCENT
Existing stockholders			31,055,729				84.3	%		$	30,526				—	%		$	—
New investors			5,800,000				15.7				75,400,000				100.0				13.00
Total			36,855,729				100.0	%		$	75,430,526				100.0	%		$	13.00

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors by $5.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1.0 million shares in the number of shares offered by us in this offering would increase or decrease, as applicable, the total consideration paid by new investors in this offering by $12.1 million, assuming the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option to purchase additional shares in full, the percentage of shares of common stock held by existing stockholders will decrease to 82.3 percent, and the percentage of shares held by new investors will increase to 17.7 percent.

The outstanding share information as of April 12, 2021 used in the calculations above excludes, after giving effect to the Corporate Conversion:

 

∎

5,000,000 shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective following the Corporate Conversion, including 1,899,774 shares of our common stock issuable pursuant to grants of restricted stock units and stock options to be made before the closing of this offering, based on the assumed initial public offering price of $13.00 per share:

 

∎

700,000 shares of our common stock reserved for issuance under our ESPP; and

 

∎

2,328,886 shares of our common stock reserved for issuance pursuant to outstanding restricted stock units held by certain of our employees.

To the extent that outstanding options or warrants are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated statements of operations data for the fiscal years ended January 3, 2021 and December 29, 2019, and the selected consolidated balance sheet data as of January 3, 2021 and December 29, 2019, from our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data set forth below should be read together with the consolidated financial statements and the related notes included elsewhere in this prospectus, as well as the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated statements of operations for the years ended January 3, 2021 and December 29, 2019 contain 53 and 52 weeks, respectively.

 

 

(in thousands, except unit and per unit data)		YEAR ENDED JANUARY 3, 2021								YEAR ENDED DECEMBER 29, 2019
Consolidated Statement of Operations Data:
Net sales		$	140,438							$	136,725
Cost of sales			117,746								111,379
Gross profit			22,692								25,346
Selling and marketing expenses			7,778								4,326
Research and development			4,208								6,330
General and administrative expenses			17,254								14,390
Change in fair value of contingent consideration			2,094								9,271
Operating loss			(8,642	)							(8,971	)
Other income (expense):
Change in fair value of warrant liability			780								(4,460	)
Loss on debt modification and extinguishment			(1,434	)							—
Interest expense			(5,499	)							(6,547	)
Total other income (expense)			(6,153	)							(11,007	)
Loss before income taxes			(14,795	)							(19,978	)
Income tax expense (benefit)			4,919								(3,559	)
Net loss			(19,714	)							(16,419	)
Less: net income attributable to non-controlling interests			903								—
Net loss attributable to CMI Acquisition, LLC		$	(20,617	)						$	(16,419	)
Net loss per unit attributable to CMI Acquisition, LLC, basic and diluted (1)		$	(1.15	)						$	(0.91	)
Weighted average units used in computing net loss per unit, basic and diluted			18,000,000								18,000,000

 

(1)

Pro forma net loss per unit giving effect to the Corporate Conversion has not been presented as we believe such conversion will not result in a material reduction to net loss per unit.

 

 

(in thousands)		JANUARY 3, 2021								DECEMBER 29, 2019
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	7,436							$	4,605
Working capital (deficit) (1)		$	(9,755	)						$	37,946
Total assets		$	263,209							$	190,435
Long-term debt (2)		$	71,824							$	49,720
Total liabilities		$	264,793							$	166,268
Total members’ equity (deficit)		$	(1,584	)						$	24,167

 

(1)

Working capital (deficit) is defined as current assets minus current liabilities.

(2)

Long-term debt represents the long-term portion of the term loan (for 2019), line of credit (for 2019), amended and restated revolving credit agreement, financing agreement, paycheck protection loan and contingent consideration, inclusive of debt issuance costs.

 

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(in thousands)		YEAR ENDED JANUARY 3, 2021								YEAR ENDED DECEMBER 29, 2019
Non-GAAP Financial Data:
Adjusted EBITDA (1)		$	13,500							$	21,879

 

 

(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure” for the definition of adjusted EBITDA and reconciliation to the most directly comparable GAAP measure.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated statement of operations reflects adjustments to our historical consolidated statement of operations as reported under U.S. generally accepted accounting standards, or GAAP, giving effect, as of December 30, 2019, to our financing transaction that occurred on September 29, 2020, and to our new revolving credit agreement that we entered into on December 28, 2020. See Note 6, Debt, and Note 14, Related Party Transactions, to our audited consolidated financial statements included elsewhere in this prospectus for further information regarding these transactions.

The consolidated “as reported” column in the pro forma statement of operations reflects our historical consolidated statement of operations for the year ended January 3, 2021, and does not reflect any adjustments related to the financing transaction or the new revolving credit agreement prior to the actual inclusion of those transactions after the dates specified above. Assumptions and estimates underlying the pro forma adjustments column are described in the accompanying notes. The pro forma consolidated statement of operations has been prepared in accordance with the rules and regulations of Article 11 of Regulation S-X. The pro forma consolidated statement of operations does not purport to be indicative of the results of operations which would have resulted if the transactions actually occurred for the period presented or to project our results of operations for any future period. This financial information may not be predictive of our future results of operations, as our future results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

The pro forma consolidated statement of operations has been prepared based upon assumptions we deemed appropriate and is based upon information and assumptions currently available. The historical financial information has been adjusted to give pro forma effect to items that are (i) directly attributable to the transactions described above and (ii) factually supportable. In addition, the unaudited pro forma consolidated statement of operations only includes adjustments that are expected to have a continuing impact on the operating results. The following pro forma consolidated statement of operations should be read in conjunction with: (i) the accompanying notes to the pro forma consolidated statement of operations; and (ii) our audited consolidated financial statements, included elsewhere in this prospectus.

 

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		FOR THE YEAR ENDED
		AS REPORTED JANUARY 3, 2021				PROFORMA ADJUSTMENTS				PROFORMA JANUARY 3, 2021
Net sales		$	140,438			$	—			$	140,438
Cost of sales			117,746				—				117,746
Gross profit			22,692				—				22,692
Selling and marketing expenses			7,778				—				7,778
Research and development			4,208				—				4,208
General and administrative expenses			17,254				—				17,254
Change in fair value of contingent consideration			2,094				—				2,094
Operating loss			(8,642	)			—				(8,642	)
Other (expense) income:
Change in fair value of warrant liability			780				(780	) (1)			—
Loss on debt modification and extinguishment			(1,434	)			—				(1,434	)
Interest expense			(5,499	)			(3,828	) (2)			(3,462	)
							3,828	(2)
							2,037	(3)
Total other (expense) income			(6,153	)			1,257				(4,896	)
Loss before income taxes			(14,795	)			1,257				(13,538	)
Income tax expense (benefit)			4,919				(276	) (4)			4,643
Net income (loss)			(19,714	)			1,533				(18,181	)
Less: net income attributable to non-controlling interests			903				2,573	(5)			3,476
Net loss attributable to CMI Acquisition, LLC		$	(20,617	)		$	(1,040	)			(21,657	)
Net loss per unit, basic and diluted		$	(1.15	)		$	(0.05	)		$	(1.20	)
Weighted average units used in computing net loss per unit, basic and diluted			18,000,000				18,000,000				18,000,000

 

 

 

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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Basis of Presentation

On September 29, 2020, we entered into an agreement to sell the land and building representing our primary operating location in Bloomington, Minnesota to an entity, Oxbow Realty LLC, controlled by our principal owner, Oxbow, for $39 million, less applicable transaction costs of $1.5 million and transaction services fees paid to Oxbow Realty of $2.0 million, and paid a guarantee fee to our principal owner of $2.0 million. We subsequently entered into an agreement to lease the land and building from Oxbow Realty for initial payments of $0.4 million per month over 20 years. The monthly payments are subject to a 2% increase each year during the term of the lease. Due to our continuing involvement in the property, we are accounting for the transaction as a failed sale leaseback, which we refer to as the Oxbow Realty financing transaction. Under failed sale leaseback accounting, we are deemed the owner of the property, and will continue to recognize the land and building on our balance sheet, with the proceeds received recorded as a financial obligation.

In addition, we determined that Oxbow Realty meets the definition of a variable interest entity, or VIE, because it lacks sufficient equity to finance its activities. We concluded that we are the primary beneficiary of Oxbow Realty as we have the power to direct operation and maintenance decisions during the lease term, which would most significantly affect the VIE’s economic performance. As the primary beneficiary, we consolidate the financial results of Oxbow Realty and record a non-controlling interest for the economic interest in Oxbow Realty not owned by us. On September 30, 2020, Oxbow Realty entered into a loan agreement with a bank for $39 million. The loan is repayable in equal monthly installments of $0.2 million over 10 years, with the balance payable at the maturity date of October 6, 2030. The interest rate under the loan agreement is fixed at 3.44%.

On December 28, 2020, we entered into an amended and restated revolving credit agreement with Wells Fargo Bank, National Association, or the Revolver, of up to $65 million that replaced the prior revolving credit agreement, our Line of Credit, and our term loan agreement, dated October 23, 2018, or Term Loan. Under the agreement, the facility is available on a revolving basis, subject to availability under a borrowing base consisting of a percentage of eligible accounts receivable, inventory and owned equipment. The Revolver can be repaid and borrowed again at any time without penalty or premium until the maturity date of December 28, 2025. The Revolver is available for issuance of letters of credit to a specified limit of $10 million. In connection with the Revolver, we repurchased warrants held by the lender of our Term Loan for $14 million.

The following adjustments have been reflected in the pro forma consolidated statement of operations:

 

(1)

Represents the reversal of the fair value changes to the warrant liability recorded during the historical period due to the warrant extinguishment.

 

(2)

Represents the interest expense under our financing transaction with Oxbow Realty and the subsequent reversal of those amounts due to the inclusion of Oxbow Realty’s results in our consolidated financial statements as a VIE.

 

(3)

Represents: (a) the interest expense from Oxbow Realty’s loan of $39 million at an interest rate of 3.44% for the nine-month period in fiscal 2020 prior to consolidation, including the amortization of debt issuance costs of $2.0 million using the effective interest method, (b) a reduction of interest expense for the year due to the repayment of principal on the Term Loan and Line of Credit (an average monthly debt balance of $37.9 million at an approximate interest rate of 13.3%), (c) one year of debt issuance cost amortization for the Revolver ($2.0 million recognized over the 5 year life of the arrangement), and (d) a full year of interest expense and unused line fee from the Revolver at an approximate interest rate of 3%.

 

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		FOR THE YEAR ENDED JANUARY 3, 2021
Interest expense and amortization of debt issuance costs from Oxbow Realty’s loan		$	(1,255	)
Reduction of interest expense on Term Loan from extinguishment and Line of Credit from modification			5,044
Amortization of debt discount and debt issuance costs for Revolver			(396	)
Interest expense from Revolver			(1,356	)
		$	2,037

 

 

 

(4)

Represents the tax benefit of the pretax items noted above, excluding Oxbow Realty adjustments. Oxbow Realty is a pass-through entity for tax purposes. For purposes of these unaudited pro forma consolidated statements, the U.S. federal statutory rate of 21% has been used for our pro forma adjustments. This does not reflect our effective tax rate, which will include other tax items such as state tax as well as other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the consolidated company.

 

(5)

Represents the results of operations of Oxbow Realty we consolidated as a VIE that are not attributable to our unitholders (interest income from the lease with us, net of interest expense on the bank loan).

 

 

 

		FOR THE YEAR ENDED JANUARY 3, 2021
Interest income representing revenue to Oxbow Realty		$	3,828
Interest expense and amortization of debt issuance costs from Oxbow Realty’s loan			(1,255	)
		$	2,573

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes, included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those discussed or implied in our forward-looking statements due to a number of factors, including those described in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus.

Our fiscal year ends on the Sunday closest to the end of the calendar month. We refer to the fiscal years ended January 3, 2021 and December 29, 2019 as fiscal 2020 and fiscal 2019, respectively. Fiscal years 2020 and 2019 include 53 and 52 weeks, respectively. All percentage amounts and ratios presented in this management’s discussion and analysis were calculated using the underlying data in thousands. Unless otherwise indicated, all changes identified for the current year results represent comparisons to results for the prior corresponding year.

For purposes of this section, the terms “we,” “us,” “our,” and “CMI Acquisition” refer to CMI Acquisition, LLC and its subsidiaries as of the date of this prospectus.

Overview

We are a U.S. investor-owned, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from our fabrication facility, or fab, in Minnesota and advanced packaging services from our Florida facility. In our technology as a service model, we leverage a strong foundation of proprietary technology to co-develop process technology IP with our customers that enables disruptive concepts through our Advanced Technology Services for diverse microelectronics (integrated circuits, or ICs) and related micro- and nanotechnology applications. In addition to differentiated technology development services, we support customers with volume production of ICs for high-growth markets through our Wafer Services.

The combination of semiconductor development and manufacturing services we provide our customers is not available to them from a conventional fab. In addition, following this offering, our status as a publicly-traded, U.S.-based, U.S. investor-owned pure-play technology foundry with DMEA Category 1A accreditation from the U.S. Department of Defense, or DoD, is expected to position us well to provide distinct, competitive advantages to our customers. These advantages include the benefits of enhanced IP security and easy access to a U.S. domestic supply chain. In September 2019, we entered into a contract with the DoD to receive up to $170 million to expand and upgrade our manufacturing capabilities, specifically to build next-generation rad-hard wafer solutions for the aerospace and defense sector which will have significant benefits for other commercial markets. Our fab expansion supporting this project began operations in October 2020. In January 2021, we entered into an agreement with Osceola County, Florida to take over operation of the Center for NeoVation facility in Kissimmee, Florida to accelerate pure-play advanced packaging services for differentiated technologies.

We primarily focus on serving diversified, high-growth, end users in numerous vertical markets, including (1) advanced computation, (2) aerospace and defense, or A&D, (3) automotive and transportation, (4) bio-health, (5) consumer and (6) industrial/internet of things, or IoT. By housing both development and manufacturing in a single operation, we rapidly and efficiently transition newly-developed processes to high-yielding volume production, eliminating the time it would otherwise take to transfer production to a third-party fab. Through our Advanced Technology Services, we specialize in co-creating with our customers advanced solutions that directly serve our end markets, such as superconducting ICs for quantum computing, integrated photonics, carbon nanotube technologies, or CNTs, microelectromechanical systems, or MEMS, technologies for biomedical and imaging applications, and advanced packaging. Our Wafer Services include the manufacture of silicon-based analog and mixed-signal ICs for our end markets. Our focus on the differentiated analog and mixed-signal and CMOS markets supports long product life-cycles and requirements that value performance over cost-efficiencies, and leverages our portfolio IP. Our

 

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Advanced Technology Services and Wafer Services customers total 36 active accounts and include D-Wave, L3Harris, Leonardo DRS, Microsoft, MGI and Steifpower compared to 11 customers in 2014.

Before we began independent operations, our fab was owned and operated by Cypress Semiconductor Corporation, or Cypress, as a captive manufacturing facility for 20 years. We have leveraged the Cypress system, manufacturing technology and process development capabilities to advance our product offerings. We became an independent company in March 2017 when we were acquired by Oxbow Industries, LLC, or Oxbow, as part of a divestiture from Cypress. Our multi-year FSA with Cypress, which ended in June 2020, created a runway for us to operate the foundry at a high utilization rate while continuing to expand and diversify the customer base transferred by Cypress.

Factors and Trends Affecting our Business and Results of Operations

The following trends and uncertainties either affected our financial performance in fiscal 2020 or are likely to impact our results in the future.

 

∎

Macroeconomic and competitive conditions, including cyclicality and consolidation, affecting the semiconductor industry.

 

∎

The global economic climate, including the impact on the economy from geopolitical issues and the ongoing COVID-19 pandemic. Our business has been adversely affected by the effects of the 2020 outbreak of respiratory illness caused by a coronavirus. We implemented modifications to employee travel and employee work locations, as required in some cases by federal, state and local authorities, which has had a negative impact on our employee productivity. As a result of COVID-19, one customer reduced its research and development expenditures with us, and a second customer experienced facility shutdowns which resulted in delays in project milestones, in each case negatively affecting our revenues. Because we have a manufacturing facility, we may be vulnerable to an outbreak of a new coronavirus or other contagious diseases. The effects of such an outbreak could include the temporary shutdown of our facilities, disruptions or restrictions on the ability to ship our products to our customers, as well as disruptions that may affect our suppliers. Any disruption of our ability to manufacture or distribute our products or of the ability of our suppliers to delivery key components on a timely basis could have material adverse effect on our sales and operating results.

 

∎

On April 18, 2020, we received proceeds of $6.5 million pursuant to a loan under the Paycheck Protection Program, or PPP, under the terms of the Coronavirus Aid, Relief, and Economic Security Act. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. We expect to obtain forgiveness of the PPP loan. See “Risk Factors—The effects of the COVID-19 outbreak could adversely affect our business, results of operations, and financial condition” and our consolidated financial statements for further information regarding the effects of the COVID-19 pandemic on our business and regarding the PPP loan.

 

∎

The Creating Helpful Incentives to Produce Semiconductors for America Act, in which the United States has committed to a renewed focus on providing incentives and funding for onshore companies to develop and advance the latest semiconductor technologies, on supporting onshore manufacturing capabilities, and on strengthening key onshore supply chains.

 

∎

Our overall level of indebtedness from a revolving credit agreement for up to $65 million, which we refer to as the Revolver, and a $39 million financing agreement, which we refer to as the Financing, the corresponding interest rates charged to us by our lenders and our ability to access borrowings under the Revolver.

 

∎

Identification and pursuit of specific product and geographic market opportunities that we find attractive both within and outside the United States. We will continue to more effectively address these opportunities through research and development and additional sales and marketing resources.

 

∎

Material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials.

 

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∎

Revaluation of our warrant and contingent consideration liabilities, which arose in connection with our divestiture from Cypress. We repurchased the warrants in December 2020 with funds from the Revolver and extinguished our warrant liability.

Financial Performance Metrics

Our senior management team regularly reviews certain key financial performance metrics within our business, including:

 

∎

net sales and gross profit; and

 

∎

earnings before interest, taxes, depreciation and amortization, as adjusted, or adjusted EBITDA, which is a financial measure not prepared in accordance with GAAP that excludes certain items that may not be indicative of our core operating results, as well as items that can vary widely across different industries or among companies within the same industry. For information regarding our non-GAAP financial measure, see the section entitled “—Non-GAAP Financial Measure” below.

Results of Operations

Fiscal 2020 compared to Fiscal 2019

The following table summarizes certain financial information relating to our operating results for fiscal 2020 and fiscal 2019 (dollars in thousands).

 

 

 

		YEARS ENDED
(in thousands, except unit and per unit data)		JANUARY 3, 2021 (1)				DECEMBER 29, 2019 (1)				DOLLAR CHANGE				PERCENTAGE CHANGE
Consolidated Statement of Operations Data:
Net sales		$	140,438			$	136,725			$	3,713				2.7	%
Cost of sales			117,746				111,379				6,367				5.7	%
Gross profit			22,692				25,346				(2,654	)			-10.5	%
Selling and marketing expenses			7,778				4,326				3,452				79.8	%
Research and development			4,208				6,330				(2,122	)			-33.5	%
General and administrative expenses			17,254				14,390				2,864				19.9	%
Change in fair value of contingent consideration			2,094				9,271				(7,177	)			-77.4	%
Operating loss			(8,642	)			(8,971	)			329				-3.7	%
Other income (expense):
Change in fair value of warrant liability			780				(4,460	)			5,240				-117.5	%
Loss on debt modification and extinguishment			(1,434	)			—				(1,434	)			-100	%
Interest expense			(5,499	)			(6,547	)			1,048				-16.0	%
Total other income (expense)			(6,153	)			(11,007	)			4,854				-44.1	%
Loss before income taxes			(14,795	)			(19,978	)			5,183				-25.9	%
Income tax expense (benefit)			4,919				(3,559	)			8,478				-238.2	%
Net loss			(19,714	)			(16,419	)			(3,295	)			20.1	%
Less: net income attributable to non-controlling interests			903				—				903				100.0	%
Net loss attributable to CMI Acquisition, LLC		$	(20,617	)		$	(16,419	)		$	(4,198	)			25.6	%
Other financial data:
Adjusted EBITDA (2)		$	13,500			$	21,879			$	(8,379	)			-38.3	%

 

 

(1)

The consolidated statements of operations are for fiscal 2020 and fiscal 2019. Our fiscal year ends on the Sunday closest to the end of the calendar year. Fiscal 2020 and fiscal 2019 contained 53 and 52 weeks, respectively.

(2)

See “—Non-GAAP Financial Measure” for the definition of adjusted EBITDA and reconciliation to the most directly comparable GAAP measure.

 

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Net sales

Net sales increased to $140.4 million for fiscal 2020, from $136.7 million for fiscal 2019. The increase of $3.7 million, or 2.7%, was driven by growth from our Advanced Technology Services customers, specifically our superconducting and quantum computing customers, and the expansion of programs within our aerospace and defense customer base, partially offset by a decline in Wafer Services sales to Cypress.

Gross profit

Gross profit decreased to $22.7 million for fiscal 2020, from $25.4 million for fiscal 2019. The decrease of $2.7 million, or 10.5%, was due to increased labor and infrastructure costs, as we continue to scale our business to meet the increased demands of our customers.

Selling and marketing expenses

Selling and marketing expenses increased to $7.8 million for fiscal 2020, from $4.3 million for fiscal 2019. The increase of $3.5 million, or 79.8%, was a result of higher commission expenses due to increased net sales, increased license fees, and hiring supplementary sales team members in fiscal 2020.

Research and development

Research and development costs decreased to $4.2 million for fiscal 2020, from $6.3 million for fiscal 2019. The decrease of $2.1 million, or 33.5%, was attributable to investing in our technology porting services in order to transfer existing customer products to different technology platforms in 2019.

General and administrative expenses

General and administrative expenses increased to $17.3 million for fiscal 2020, from $14.4 million for fiscal 2019. The increase of $2.9 million, or 19.9%, was due to higher professional services consulting fees and information technology expenses in fiscal 2020.

Change in fair value of contingent consideration

Change in fair value of contingent consideration was $2.1 million for fiscal 2020, compared to the $9.3 million increase for fiscal 2019. The decrease of $7.2 million, or 77.4%, was due to the amount of revenue expected to be generated from our Advanced Technology Services customers. Projected revenue increased at a greater amount for fiscal 2019 compared to fiscal 2020 due to several large customer contracts in the prior period. The contingent consideration is based on estimated royalties owed on Advanced Technology Services revenues, with respect to which we pay a quarterly royalty. In connection with our acquisition of the business from Cypress, we recorded a contingent consideration liability for the future estimated earn-out/royalties owed on Advanced Technology Services revenues. For each reporting period thereafter, we revalue future estimated earn-out payments and record the changes in fair value of the liability in our consolidated statements of operations.

Change in fair value of warrant liability

Change in fair value of warrant liability increased to income of $0.8 million for fiscal 2020, from an expense of $4.5 million for fiscal 2019. The increase of $5.3 million was due to the repurchase of the warrants in December 2020 for an amount less than the liability recorded at the end of fiscal 2019.

Loss on debt modification and extinguishment

In fiscal 2020, we expensed $1.4 million of unamortized debt issuance costs and fees in connection with the extinguishment of our Term Loan in September and December 2020. There were no such charges in fiscal 2019.

Interest expense

Interest expense decreased to $5.5 million for fiscal 2020, from $6.5 million for fiscal 2019. The decrease of $1.0 million, or 16.0%, was a result of lower interest rates on the Line of Credit and Term Loan in fiscal 2020 compared to fiscal 2019, prior to the transactions which resulted in that indebtedness being replaced by the Financing and Revolver at a lower cost of capital.

Income tax expense (benefit)

Income taxes increased to an expense of $4.9 million for fiscal 2020 from a benefit of $3.6 million for fiscal 2019. The increase in income tax expense in fiscal 2020 was primarily due to the disallowed loss from the sale-leaseback transaction with Oxbow Realty and the valuation allowance on deferred tax assets, partially offset by an income tax benefit for excess tax benefits recorded for stock-based compensation vesting.

 

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Net income attributable to non-controlling interests

Net income attributable to non-controlling interests reflects the net income of the variable interest entity, or VIE, that we consolidate, representing the economic interest in the profits and losses of Oxbow Realty that the owners of our members’ equity do not legally have rights or obligations to.

Adjusted EBITDA

Adjusted EBITDA decreased $8.4 million, or 38.3%, to $13.5 million for fiscal 2020 from $21.9 million for fiscal 2019. The decrease in adjusted EBITDA primarily reflects decreased gross profit due to increased labor and infrastructure costs as we continue to scale our business to meet the increased demands of our customers, increased sales and marketing expenses as a result of higher commission expenses from increased sales, higher license fees, hiring of supplementary sales team members, and increased general and administrative expenses due to higher professional services consulting fees and information technology expenses, partially offset by a reduction in research and development expenses in fiscal 2020 compared to fiscal 2019. For a discussion of adjusted EBITDA as well as a reconciliation to the most directly comparable GAAP measure, see “—Non-GAAP Financial Measure.”

Liquidity and Capital Resources

General

We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our current working capital needs relate mainly to the expansion of our operations, payment of amounts due under our contingent consideration liability, debt service obligations and the normal operation of our business. Our ability to meet these working capital needs and grow our business will depend on many factors, including our future working capital needs, the evolution of our operating cash flows and our ability to secure additional sources of financing.

We had $6.6 million in cash and cash equivalents, not including cash held by a variable interest entity that we consolidate, and availability under our Revolver of $21.6 million as of January 3, 2021. We believe our operating cash flows, together with our cash on hand, and current availability under the Revolver will be sufficient to meet our working capital and capital expenditure requirements for a period of at least 12 months from the date of this prospectus. We may, however, need additional cash resources due to changed business conditions or other developments, including significant acquisitions and competitive pressures. We expect our capital expenditures and working capital requirements to continue to increase in the immediate future, as we seek to expand our business. To the extent that our current resources, including our ability to generate operating cash flows, are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new products and technologies, discontinue further expansion of our business, or scale back our existing operations, which could have an adverse impact on our business and financial prospects.

On September 29, 2020, we entered into an agreement to sell the land and building representing our primary operating location in Bloomington, Minnesota to an entity controlled by our principal owner for $39 million, less transaction costs of $5.4 million. We subsequently entered into an agreement to lease the land and building from the same entity for initial payments of $0.4 million per month (or $4.8 million per year) over 20 years with annual increases of 2%. See “—Indebtedness—Sale Leaseback Transaction.”

On December 28, 2020, we entered into an amended and restated revolving credit agreement, or Revolver, with Wells Fargo Bank, National Association, or Wells Fargo, of up to $65 million that replaced our previous Line of Credit and Term Loan. Under this Revolver, the facility is available on a revolving basis, subject to availability under a borrowing base consisting of a percentage of eligible accounts receivable, inventory and owned equipment. The Revolver can be repaid and borrowed again at any time without penalty or premium until the maturity date of December 28, 2025. The Revolver is available for issuance of letters of credit to a specified limit of $10 million. In connection with the Revolver, we repaid all outstanding amounts owed under our Term Loan totaling $28.2 million of principal, accrued interest and prepayment penalties. Amounts owed under our Line of Credit totaling $2.8 million of principal and accrued interest were rolled over into the Revolver and our Line of Credit was discontinued. See “—Indebtedness—Revolving Credit Agreement.”

 

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Capital Expenditures

For fiscal 2020, we spent approximately $89.9 million on capital expenditures, including purchases of property, equipment and software. We estimate we will spend between $6 million and $10 million on capital expenditures in our fiscal year ending January 2, 2022, or fiscal 2021. The majority of these capital expenditures relate to our foundry expansion in Minnesota, as discussed below, which has been funded primarily by our aerospace and defense customers, and the development of our advanced packaging capabilities at the Center for NeoVation in Florida. We anticipate our cash on hand, our new Revolver and future cash flows from operations will provide the funds needed to meet our customer demand and anticipated capital expenditures in fiscal 2021.

We have various contracts outstanding with third parties in connection with the completion of a building expansion project to increase manufacturing capacity at our Minnesota facility. We have $19.0 million of contractual commitments outstanding as of January 3, 2021 that are expected to be paid in fiscal 2021, through cash on hand and operating cash flows.

Contingent Consideration

For fiscal 2020, we made cash payments of $11.3 million related to our contingent consideration royalty liability. We estimate that we will pay between $11.0 and $12.0 million on contingent consideration related to this liability in the future. We anticipate our cash on hand and cash flows from operations will provide the funds necessary to settle the contingent consideration royalty liability.

Working Capital

Historically, we have depended on cash flows from operations, cash on hand, funds available under our Line of Credit and Term Loan, and funds from the sale of our land and building in Minnesota, and in the future may depend on other debt and equity financings, such as our Revolver, to finance our expansion strategy, working capital needs and capital expenditures. We believe that these sources of funds will be adequate to provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. However, we cannot assure you that we will be able to obtain future debt or equity financings adequate for our cash requirements on commercially reasonable terms or at all.

As of January 3, 2021, we had available aggregate undrawn borrowing capacity of approximately $21.6 million under our Revolver. For the periods presented, our use of cash was primarily driven by our investing activities, and specifically by our investments in capital expenditures.

The following table sets forth general information derived from our statement of cash flows for fiscal 2020 and fiscal 2019:

 

 

 

		YEAR ENDED JANUARY 3, 2021				YEAR ENDED DECEMBER 29, 2019
(in thousands)
Net cash provided by operating activities		$	96,195			$	10,923
Net cash used in investing activities		$	(88,177	)		$	(7,368	)
Net cash provided by (used in) financing activities		$	(5,187	)		$	552

 

 

Fiscal 2020 Compared to Fiscal 2019

Cash and Cash Equivalents

At January 3, 2021 and December 29, 2019, we had $7.4 million and $4.6 million of cash and cash equivalents, respectively, including cash of $0.8 million held by a variable interest entity that we consolidate.

Operating Activities

Net cash provided by operating activities was $96.2 million during fiscal 2020, an increase of $85.3 million from $10.9 million during fiscal 2019. The increase in cash provided by operating activities in fiscal 2020 was driven primarily by an increase in our working capital accounts, specifically accounts receivable and deferred revenue, from the impact of achieving additional milestones on existing customer contracts and cash collected from contracts with customers who are funding our building expansion.

Investing Activities

Capital expenditures are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us meet product demand and increase our manufacturing efficiencies

 

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and capacity. We had various contracts outstanding with third parties in connection with the construction of a building expansion project to increase manufacturing capacity at our Minnesota fab.

Net cash used in investing activities was $88.2 million during fiscal 2020, an increase of $80.8 million from $7.4 million in fiscal 2019. The increase in cash used in fiscal 2020 reflects increased capital spending of $77.3 million on property and equipment in connection with the building expansion project and $3.6 million of capital spending on software, offset slightly by an increase $0.1 million in proceeds from the sale of property and equipment.

Financing Activities

Net cash used in financing activities was $5.2 million during fiscal 2020, an increase of $5.7 million from net cash provided by financing activities of $0.5 million during fiscal 2019. The increase in fiscal 2020 primarily reflects changes to our capital structure, including debt facilities with lower interest rates and the repurchase of outstanding warrants and Common Units.

Indebtedness

Off-balance sheet arrangements

As of January 3, 2021, we had no material off-balance sheet arrangements.

Contractual Obligations

The table below presents our significant contractual obligations as of January 3, 2021, excluding the obligations of our consolidated VIE. Since January 3, 2021, there have been no material changes to our contractual obligations. We expect to fund these contractual obligations with cash generated from operating activities and our Revolver.

 

 

 

						PAYMENTS DUE BY PERIOD
(In thousands)		TOTAL				LESS THAN 1 YEAR				1-3 YEARS				3-5 YEARS				MORE THAN 5 YEARS
Long-term debt obligations, including interest		$	38,801			$	1,805			$	4,693			$	32,303				—
Lease obligations			114,022				4,741				9,768				10,163			$	89,350
Purchase obligations			19,019				19,019				—				—				—
Contractual commitments			8,645				8,645				—				—				—
Total		$	180,487			$	34,210			$	14,461			$	42,466			$	89,350

 

 

Sale Leaseback Transaction

On September 29, 2020, we entered into an agreement to sell the land and building representing our primary operating location in Bloomington, Minnesota to Oxbow Realty, LLC, or Oxbow Realty, an entity controlled by our principal owner for $39 million, less applicable transaction costs of $1.5 million and transaction services fees paid to Oxbow Realty of $2.0 million, and paid a guarantee fee to our principal owner of $2.0 million. We subsequently entered into an agreement to lease the land and building from Oxbow Realty for initial payments of $0.4 million per month over 20 years. The monthly payments are subject to a 2% increase each year during the term of the lease. Due to our continuing involvement in the property, we are accounting for the transactions as a failed sale leaseback (a financing transaction). Under failed sale leaseback accounting, we are deemed the owner of the property with the proceeds received recorded as a financial obligation.

Revolving Credit Agreement

On December 28, 2020, we entered into an amended and restated revolving credit agreement with Wells Fargo, or Revolver, of up to $65 million that replaced our previous Line of Credit and Term Loan. Under this Revolver, the facility is available on a revolving basis, subject to availability under a borrowing base consisting of a percentage of eligible accounts receivable, inventory and owned equipment. The Revolver can be repaid and borrowed again at any time without penalty or premium until the maturity date of December 28, 2025. The Revolver is available for issuance of letters of credit to a specified limit of $10 million.

Under the Revolver, we can elect the base rate (greatest of the federal funds rate plus 0.5%, LIBOR for a one-month period plus 1%, or the institution’s prime rate) or LIBOR for a period of one, two, three or six months as selected by us, plus a margin depending on the amount of borrowings outstanding “prime rate.” We will also pay a commitment

 

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fee equal to 0.25% to 0.375% of the average commitment not utilized, depending on the amount not utilized. Interest payments are due monthly.

The Revolver includes a financial covenant that requires us to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 on a rolling twelve-month basis. The fixed charge coverage ratio included in our revolving credit agreement is defined as (A) earnings before interest, taxes, depreciation and amortization, or EBITDA, less unfinanced capital expenditures, divided by (B) fixed charges, which are generally defined as cash interest and income taxes, scheduled principal payments on loans and contingent consideration arrangements, and restricted payments such as dividends. EBITDA, as defined in the Revolver, includes adjustments for such items as unusual gains or losses, equity-based compensation and management fees, as well as other adjustments. The Revolver also includes a financial covenant that requires us to maintain a leverage ratio of no greater than 3.5 to 1.0 on a rolling twelve-month basis measured quarterly. On January 2, 2022, the ratio decreases to 3.0 to 1.0 through the remainder of the agreement. The leverage ratio included in our revolving credit agreement is defined as our funded indebtedness as of the measurement date divided by our EBITDA for the twelve-month period as of the measurement date.

The Revolver contains covenants, including restrictions on indebtedness, liens, mergers, consolidations, investments, acquisitions, disposition of assets, and transactions with affiliates. Dividends, redemptions and other payments on equity (restricted payments) are limited to (1) restricted payments to the loan parties, and (2) declaring and making dividend payments or other distributions payable solely in capital stock, and so long as no default or event of default exists or would result therefrom, we may pay management fees and compensation to Oxbow Industries, LLC, or Oxbow, our principal owner, or to our director Loren Unterseher, not exceeding an agreed upon amount in any fiscal year. In addition, so long as no default or event of default exists or would result therefrom, the Revolver permits redemption of up to $5 million of Class B Preferred Units, $10.2 million of Common Units and our warrant liability. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of certain covenants, default to material indebtedness, bankruptcy, ERISA violations, material judgments, change in control and termination or invalidity of guaranty or security documents.

The Revolver is secured by a security interest in substantially all of our accounts receivable, inventory and equipment.

In connection with the Revolver, we repaid all outstanding amounts owed under our Term Loan totaling $28.2 million of principal, accrued interest and prepayment penalties. Amounts owed under our Line of Credit totaling $2.8 million of principal and accrued interest were rolled over into the Revolver and our Line of Credit was discontinued. On December 28, 2020, we also repurchased the warrants held by the lender of our Term Loan for $14 million from our cash and cash equivalents.

As of January 3, 2021, we were not in compliance with the fixed charge coverage ratio and leverage ratio covenants related to the Revolver. On March 19, 2021, we were granted a waiver by amendment from the lender related to these financial covenants. The amendment modified those ratios and we are no longer in an event of default. Based on these modifications, we are in full compliance with the Revolver covenant requirements as of the date of this prospectus.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with preparing our consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expense, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our consolidated financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, valuation of long-lived assets, contingent consideration, our warrant liability and unit-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.

 

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Revenue Recognition

Revenue is recognized either over time as work progresses using an output measure or at a point-in-time, depending upon contract-specific terms and the pattern of transfer of control of the product or service to the customer. Due to the nature of our contracts there can be judgment involved in determining the performance obligations that are included in the related contract. We analyze each contract to conclude what enforceable rights and obligations exist between us and our customers. In doing so, we determine our unit of account by identifying the promises within the contract that are both (1) considered to be distinct and (2) distinct within the context of each contract.

Our performance obligations generally result in a custom product with no alternative use. This could result in over time revenue recognition to the extent there is an enforceable right to payment for work completed plus a reasonable margin. In some cases our contracts may require judgment to conclude if this enforceable right to payment plus a reasonable margin is present and thus would result in over time revenue recognition. Generally, our contracts to provide wafers do not have an enforceable right to payment for cost plus a reasonable margin and therefore revenue from such contracts are recognized at a point in time. Our fixed price and time-and-materials contracts generally do not create an asset with alternative use, but we have an enforceable right to payment for performance completed to date plus a reasonable profit margin. For certain of our fixed price and time-and-materials contracts, the customer receives the benefits provided by our performance as we complete it. In both cases, the revenue from our fixed price and time-and-materials contracts are recognized over time as we perform.

For fixed price contracts, revenue is recognized over time using an output method based on surveys of performance completed to date to satisfy our performance obligation. This can require judgment to determine the related measure of progress that will be assigned to the respective contract.

The terms of a contract and historical business practices can, but generally do not, give rise to variable consideration. We estimate variable consideration at the most likely amount we will receive from customers. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. In general, variable consideration in our contracts relates to the entire contract. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at contract inception and require judgment. We have no significant instances where variable consideration is constrained and not recorded at the initial time of sale. In addition, we have not experienced significant changes to our estimates and judgments related to variable consideration in our contracts.

If we make material changes to our assumptions, we may have cumulative catch-up adjustments to make in the financial statements related to revenue previously recognized. No material gross favorable or unfavorable changes to our material long-term contracts existed for fiscal 2020 and fiscal 2019.

Inventory

Inventory is stated at the lower of cost or net realizable value, cost being determined under the first-in, first-out method. The total carrying value of our inventory is reduced for any difference between cost and estimated net realizable value, calculated as the estimated selling price less estimated costs of completion, disposal and transportation. We regularly review inventory quantities on hand to determine whether we are holding inventory that is excess, obsolete or unsellable based upon assumptions about future demand. Future demand is affected by market conditions, technological obsolescence, new products and strategic plans, each of which is subject to change with little or no forewarning. If actual future demand for our products is less than currently forecasted, we may be required to write inventory down below the current carrying value. Once the carrying value of inventory is reduced, it is maintained until the product to which it relates to is sold or otherwise disposed of. Inventoriable shipping and handling costs are classified as a component of cost of goods sold in the consolidated statements of operations.

Contingent Consideration

We recorded a contingent consideration liability for the future estimated earn-out/royalties owed on Advanced Technology Services revenues, at fair value as of the acquisition date of March 1, 2017. For each reporting period thereafter, we revalue future estimated earn-out payments using unobservable inputs and record the changes in fair value of the liability in our consolidated statements of operations.

A number of estimates are used when determining the fair value of the contingent consideration liability, including projected revenues, risk-adjusted discount rates and timing of contractual payments. The preparation of revenue forecasts for use in the estimated liability involve significant judgments that we base primarily on existing orders,

 

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expected timing and amount of future orders, anticipated pricing changes and general market conditions. We discount the cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. The weighted-average cost of capital is comprised of the estimated required rate of return on equity, based on publicly available data for peer companies plus an equity risk premium related to specific company risk factors, and the after-tax rate of return on debt, each weighted at the relative values of the estimated debt and equity for the industry.

Significant changes in our revenue forecasts or our weighted-average cost of capital could affect the discounted cash flows used in revaluing the contingent consideration to fair value each period. A 10% change in forecasted revenue and weighted-average cost of capital would result in an approximately $0.4 million change in the fair value of the contingent consideration. Subsequent revaluations of the contingent consideration liability after the acquisition date have generally resulted in increases to the fair value of the liability principally due to updated revenue forecasts, as a result of the growth in our business, the impacts of discounting and reductions in our weighted-average cost of capital, as we become a more established company. For the 2020 valuation, our forecasted revenue subject to royalties increased 25% over 2019 forecasts and our weighted-average cost of capital increased 25% resulting in a $2.1 million increase to the contingent consideration liability, apart from decreases to the liability as a result of cash payments made during the year.

Unit-Based Compensation

In December 2020, we granted restricted common units which vest in equal amounts over a three-year period, but only in the event we complete an initial public offering, or IPO, of our stock or experience a change of control event. GAAP requires companies to estimate the fair value of unit-based awards on the date of grant using an option-pricing model. The value of the award is recognized as expense over the requisite service periods, which is generally the vesting period, in our consolidated statements of operations, but only after an IPO or change of control event. Application of the option-pricing model involves the use of estimates, judgment and assumptions that are highly complex and subjective, including those regarding our future expected revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable public companies and the probability of future events. We used assumptions as follows:

 

 

 

		2020 GRANT
Expected term (years)			1.0
Expected volatility			55.6	%
Expected dividend yield			0.0	%
Risk-free rate of return			0.1	%

 

 

The expected term represents the period of time that awards granted are expected to be outstanding. An increase in the expected term would result in an increase to our expense. Volatility is a measure of the amount by which the price of our common units is expected to fluctuate each year during the expected term of the award and is based on current implied volatilities from companies in our peer group. The implied volatilities are impacted by changes in market conditions. An increase in the volatility would result in an increase in our expense. The expected dividend yield is based on our historical dividend yield, which is zero – as we have not historically paid dividends. If we were to begin paying dividends, the dividend yield would increase and result in a decrease in our expense. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. As the risk-free interest rate increases, our expense increases.

Income Taxes

In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business.

 

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We currently have recorded a valuation allowance that we will maintain until, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Our income tax expense recorded in the future may be reduced to the extent of a decrease in our valuation allowance. The realization of our remaining deferred tax assets is primarily dependent on future taxable income. Any reduction in future taxable income may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our financial condition, results of operations or cash flows.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our debt due to fluctuations in applicable market interest rates. In the future our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.

Credit Risk

Financial instruments that potentially subject us to credit risk are cash and cash equivalents and accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. We monitor the financial condition of the financial institutions in which our accounts are maintained and have not experienced any losses in such accounts. We perform ongoing credit evaluations as to the financial condition of our customers with respect to trade receivables. Generally, no collateral is required as a condition of sale. Our consideration of the need for an allowance for doubtful accounts is based upon current market conditions and other factors.

Non-GAAP Financial Measure

Our audited consolidated financial statements are prepared in accordance with GAAP. To supplement our consolidated financials presented in accordance with GAAP, an additional non-GAAP financial measure is provided and reconciled in the following table.

We provide supplemental non-GAAP financial information that our management utilizes to evaluate our ongoing financial performance and provide additional insight to investors as supplemental information to our GAAP results. We use adjusted EBITDA to provide a baseline for analyzing trends in our business and to exclude certain items that may not be indicative of our core operating results. The use of non-GAAP financial information should not be considered as an alternative to, or more meaningful than, the comparable GAAP measure. In addition, because our non-GAAP measure is not determined in accordance with GAAP, it is susceptible to differing calculations, and not all comparable or peer companies may calculate their non-GAAP measures in the same manner. As a result, the non-GAAP financial measure presented in this prospectus may not be directly comparable to similarly titled measures presented by other companies.

This non-GAAP financial measure should not be considered as an alternative to, or more meaningful than, net income determined in accordance with GAAP.

Adjusted EBITDA

Adjusted EBITDA is not a financial measure determined in accordance with GAAP. We define adjusted EBITDA as net income before interest expense, income tax provision (benefit), depreciation and amortization, equity-based compensation and certain other items that we do not view as indicative of our ongoing performance, including fair value changes in contingent consideration, equity-based compensation, fair value changes in warrants and management fees.

We believe adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to,

 

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or more meaningful than, net income determined in accordance with GAAP. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from adjusted EBITDA. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual, unless otherwise expressly indicated.

The following table presents a reconciliation of adjusted EBITDA to net income (loss), our most directly comparable financial measure calculated and presented in accordance with GAAP.

 

 

 

		YEAR ENDED JANUARY 3, 2021				YEAR ENDED DECEMBER 29, 2019
(in thousands)
Net loss		$	(20,617	)		$	(16,419	)
Interest expense			5,499				6,547
Income tax (benefit) expense			4,919				(3,559	)
Depreciation and amortization			18,866				16,662
EBITDA			8,667				3,231
Fair value changes in contingent consideration (1)			2,094				9,271
Equity-based compensation (2)			2,640				4,174
Fair value changes in warrants (3)			(780	)			4,460
Management fees (4)			879				743
Adjusted EBITDA		$	13,500			$	21,879

 

 

(1)

Represents non-cash valuation adjustment of contingent consideration to fair market value during the period.

(2)

Represents non-cash equity-based compensation expense.

(3)

Represents non-cash valuation adjustment of warrants to fair market value during the period.

(4)

Represents a related party transaction with Oxbow, our principal owner. As these fees are not part of the core business, are not expected to continue after this offering and are excluded from management’s assessment of the business, we believe it is useful to investors to view our results excluding these fees.

 

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BUSINESS

Overview

We are a U.S. investor-owned, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from our fabrication facility, or fab, in Minnesota and advanced packaging services from our Florida facility. In our technology as a service model, we leverage a strong foundation of proprietary technology to co-develop process technology IP with our customers that enables disruptive concepts through our Advanced Technology Services for diverse microelectronics (integrated circuits, or ICs) and related micro- and nanotechnology applications. In addition to differentiated technology development services, we support customers with volume production of ICs for high-growth markets through our Wafer Services.

The combination of semiconductor development and manufacturing services we provide our customers is not available to them from a conventional fab. In addition, following this offering, our status as a publicly-traded, U.S.-based, U.S. investor-owned pure-play technology foundry with DMEA Category 1A accreditation from the U.S. Department of Defense, or DoD, is expected to position us well to provide distinct, competitive advantages to our customers. These advantages include the benefits of enhanced IP security and easy access to a U.S. domestic supply chain. In September 2019, we entered into a contract with the DoD to receive up to $170 million to expand and upgrade our manufacturing capabilities, specifically to build next-generation rad-hard wafer solutions for the aerospace and defense sector which will have significant benefits for other commercial markets. Our fab expansion supporting this project began operations in October 2020. In January 2021, we entered into an agreement with Osceola County, Florida to take over operation of the Center for NeoVation facility in Kissimmee, Florida to accelerate pure-play advanced packaging services for differentiated technologies.

We primarily focus on serving diversified, high-growth, end users in numerous vertical markets, including (1) advanced computation, (2) aerospace and defense, or A&D, (3) automotive and transportation, (4) bio-health, (5) consumer and (6) industrial/internet of things, or IoT. By housing both development and manufacturing in a single operation, we rapidly and efficiently transition newly-developed processes to high-yielding volume production, eliminating the time it would otherwise take to transfer production to a third-party fab. Through our Advanced Technology Services, we specialize in co-creating with our customers advanced solutions that directly serve our end markets, such as superconducting ICs for quantum computing, integrated photonics, carbon nanotube technologies, or CNTs, microelectromechanical systems, or MEMS, technologies for biomedical and imaging applications, and advanced packaging. Our Wafer Services include the manufacture of silicon-based analog and mixed-signal ICs for our end markets. It is our opinion that our focus on the differentiated analog and mixed-signal and CMOS markets supports long product life-cycles and requirements that value performance over cost-efficiencies, and leverages our portfolio of IP. Our Advanced Technology Services and Wafer Services customers total 36 active accounts and include Infineon, D-Wave, L3Harris, Leonardo DRS, Microsoft, MGI and Steifpower, compared to 11 customers in 2014.

Before we began independent operations, our Minnesota fab was owned and operated by Cypress Semiconductor Corporation, or Cypress, as a captive manufacturing facility for 20 years. We have leveraged the Cypress system, manufacturing technology and process development capabilities to advance our product offerings. We became an independent company in March 2017 when we were acquired by Oxbow Industries, LLC, or Oxbow, as part of a divestiture from Cypress. Our multi-year FSA with Cypress, which ended in June 2020, created a runway for us to operate the foundry at a high utilization rate while continuing to expand and diversify the customer base transferred by Cypress.

Our Industry

Microelectronics are the enabling technology of the information age and have served as a conduit for the growth of the electronics industry over the past sixty years. Semiconductors make solid state electronics possible and are vital inputs for products such as computers, communications equipment, consumer products, industrial automation and control systems, military equipment, automobiles, medical equipment and increasingly a broad array of internet-enabled products and devices. As electronics have become more sophisticated and integrated, meeting the demand for semiconductors used in these products has required advances in semiconductor design and manufacturing.

 

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According to Gartner, global semiconductor revenue is expected to grow from $419 billion in 2019 to an estimated $580 billion in 2024. Although global semiconductor sales have experienced cyclical variation in annual growth rates, they have increased significantly over the long term.

Microelectronics Categories

Semiconductor devices are historically classified as either digital or analog based on the type of signals they process. Digital semiconductor devices process discrete, binary (“on-off” or “1-0”) electrical signals that are used for computational or data processing functions and that have driven many of the advances in computing and communication in recent years. By contrast, analog devices condition and regulate “real-world” functions such as temperature, pressure, speed, sound and electrical current. An increasing interest and focus on enabling electronics systems to interact with people has propelled analog processing, a trend which we believe will continue in the future. To process inputs from analog sensors, digital processing is required to convert these signals into meaningful information. The demand for processing of these analog signals has led to the creation of a semiconductor category known as “mixed-signal,” which processes both analog signals and digital logic. These mixed-signal semiconductors are developed to support the rapidly expanding applications across markets through the emergence of IoT.

As shown in the chart below, according to Infiniti Research, the global market for analog and mixed-signal semiconductors was $53 billion in 2019 and is expected to grow to $68 billion in 2023.

 

 

Source: “Global Mixed Signal SoC Market 2019-2023,” published April 2019 by Infiniti Research, Inc.

Integrating analog and digital semiconductors on a single semiconductor device results in smaller, highly-integrated devices that are rich in functionality. However, mixed-signal semiconductors present design, process and manufacturing challenges.

Analog and mixed-signal microelectronics as well as derivative and adjacent technologies, such as rad-hard, discrete power devices, superconducting, photonics, MEMS and carbon nanotubes, require higher levels of customizable functionality and performance than digital devices do. Since these analog and mixed-signal devices are produced in lower volumes than digital devices, traditional digital high-volume foundries have been generally unwilling to commit engineering resources to the processes and technologies necessary to innovate beyond their standard process offerings. This has resulted in significant unmet need at a time when demand for these specialty ICs continues to grow due to demand from the A&D, automotive and transportation, advanced computation, bio-health, consumer and industrial/IoT applications.

Rad-hard electronics enable electronic devices to be resistant to malfunctions caused by electromagnetic or particle radiation. Traditional semiconductor circuit structures are at a higher risk of damage from radiation, especially in high-radiation environments, such as space, nuclear use cases, weapon systems and high-altitude aircrafts. To modify these circuits to withstand the effects of radiation, manufacturers use extensive development and testing to create circuits that reduce the impact from electromagnetic radiation. As a result, rad-hard ICs are more expensive

 

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than traditional ICs. Consequently, most purchasers of rad-hard ICs are well-funded military and scientific organizations or produce products in high-value markets such as medical devices. According to AMA Research & Media, the global market for rad-hard ICs was approximately $1.5 billion in 2018, with 70% derived from standard foundries and 30% from custom foundries. The market is expected to grow to $1.9 billion by 2025, driven by an increasing number of space missions globally, higher demand from communication satellites for rad-hard electronics driven by the growth of 5G and IoT, and increased use cases for commercial and military applications.

Moore’s Law

Since 1965, the semiconductor industry has followed the pace of Moore’s Law, which is the observation that the number of transistors on a chip doubles every 18 to 24 months. Moore’s Law has enabled digital logic ICs to be scaled down to small transistor nodes below 10 nanometers, or nm, which has lowered costs for semiconductor manufacturers and increased the processing performance for a given IC or product form factor. This rapid scaling down of transistor nodes works well for digital semiconductors, such as memory and microprocessors for high volume consumer products, but not for analog and mixed-signal and specialty semiconductors which interface with the physical world. At each new node transition, semiconductor design costs, process technology development costs and complexity increase at higher rates as, in accordance with Moore’s Law, the industry is nearing the theoretical limits of performance. In recent years, Moore’s law has no longer accurately predicted the rate of change of processing power in the semiconductor industry. This has caused larger foundries that invest in leading-edge technologies to focus on fewer customers with significant volume demand to generate a positive return on the large investments that the next-generation fab technology requires. Moreover, as this trend has driven the industry for decades, the industry has matured and consolidated, and foundries have been shaped to operate in pursuit of chips that follow Moore’s Law. The conventional foundry model, however, is not optimized to thrive and perform from a financial perspective to the extent that Moore’s Law is no longer economically feasible – as evidenced by the attrition of foundries competing at the leading edge of silicon digital technologies.

This posture by leading conventional foundries has rippled through the industry, causing a resurgence in demand for manufacturing services using mature technology processes, and particularly for moderate volume IC products and emerging micro fabrication-based technologies, such as photonics, MEMS, CNT microelectronics and a myriad of other unique applications which are growing in key end markets that we serve. In addition, because of the dramatic increase in the number of manufacturing process steps for leading-edge design nodes, large foundry customers typically have less ability to customize processes, as changes to manufacturing processes could impact yield and quality. Many semiconductor customers without their own fabs may be too small or lack the volume to utilize larger foundry design and technology services, which increases the value of smaller production scale foundries like us with large design teams.

New Concepts Are Redefining Leading-Edge Technology

While Moore’s Law focused significant industry talent on scaling down transistor nodes with leading-edge transistor geometries, innovation continues on proven mature process nodes due to their reliability, high yields, and relatively affordable economics of customization. New approaches in areas such as optical data processing, superconductivity for harnessing quantum effects, CNTs for 3-dimensional monolithic ICs, MEMS and micro-fluidics that utilize novel materials to advance processing speed and complex silicon architectures require sophisticated manufacturing services but, in many cases, cannot be developed or produced in the large production foundries.

Heterogeneous integration is another rapidly developing trend aimed at delivering increased performance through improving the manner in which chips of various types are integrated together in systems, and includes a range of complementary concepts leveraging interposer, chiplet, hybrid bonding and fan-in/fan-out techniques. This enables technology implementations that enhance performance through new packaging technologies categorized as System in Package (SiP), 2.5D or 3D solutions. We expect demand for these solutions to grow significantly as products across markets and applications adapt to post-Moore’s Law industry dynamics.

We believe these industry dynamics have created a need for pure-play independent technology services that not only produce differentiated silicon-based analog and mixed-signal technologies, power discrete and rad-hard solutions at volume and high operational quality, but also offer advanced development expertise with a range of materials and advanced packaging technologies to assist customers in rapidly taking concepts to market in volume.

 

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Semiconductor Manufacturing Industry Structure

Historically, most semiconductor companies were vertically integrated. They performed all major functions including design, manufacturing, test and assembly, and sales and marketing. These types of semiconductor companies are called integrated device manufacturers, or IDMs.

As the complexity of semiconductor designs has increased over the last several decades, semiconductors have become increasingly challenging to manufacture, requiring both sophisticated manufacturing expertise and exponential increases in fab investments. These requirements have led to the creation of the foundry business model, where the cost of a fab is spread across multiple customers. These economics have driven IDMs to outsource production to foundries and divest their fabs. The industry has therefore matured, consolidated, specialized and evolved to include the following main supplier categories:

 

∎

IDMs. Vertically integrated for all major functions including design, manufacturing, test and assembly and sales and marketing. Some of these IDMs also provide foundry services to third parties.

 

∎

Fabless Semiconductor Companies. Fabless companies primarily focus on designing semiconductors and outsource the manufacturing of their proprietary design to third-party semiconductor foundries or IDMs using their standard manufacturing process technologies.

 

∎

Pure-play Foundries. Pure-play foundries, such as ours, focus exclusively on providing semiconductor manufacturing based on processes and technologies that are developed for other semiconductor companies to utilize for their respective products. Such foundries neither offer nor design their own semiconductor products.

 

∎

Packaging Outsourced Assembly and Tests, or OSATs. Also known as Outsourced Assembly and Testers, these companies work in the supply chain downstream of the groups mentioned above, and provide packaging, assembly and testing services. The same trend driving the creation of the fabless semiconductor and pure-play foundry categories described above has indirectly led to the rise of these service providers.

Pure-Play Foundry Market

As a pure-play technology foundry, we participate in a large global market. According to IC Insights, at the beginning of 2020, pure-play foundry sales were forecasted to grow 10% to a record-high $62.8 billion in 2020, pure-play foundry sales were further forecasted to grow with an 8.5% CAGR, over the period from 2019 to 2024, which would outpace both the forecasted 8.0% CAGR for the entire IC market and 6.0% CAGR for IDMs over the same period. As of a July 2020 update from IC Insights, the global semiconductor market is forecasted to grow at a 1% rate in 2020. Prior to the COVID-19 pandemic the forecasted growth in pure-play foundry sales was being driven by strong demand from fabless semiconductor companies, increased outsourcing by IDMs and larger shipments of custom-designed integrated circuits.

While the current foundry model has successfully improved productivity within the supply chain by spreading the high cost of fab operations across multiple customers, it has predominantly focused technology development resources on advancing performance based on Moore’s Law-driven node-size reduction concepts. As complexity increases and other fundamental roadblocks to scaling continue to drive exponential increases in costs, however, emerging technologies that incorporate new materials, new architectures and heterogeneous integration will offer new dimensions for innovators to develop the future generations of microelectronics that the market demands.

To enable non-traditional technology architectures, foundry services different from those used in the traditional Moore’s Law-centric foundry model are necessary. This new engagement paradigm is critical for enabling strong cross-functional collaboration at lower capital rates while accelerating the time to bring these technologies to market.

This new engagement model is referred to as the “technology foundry,” which delivers technology as a service (TaaS) for micro- and nanotechnology hardware development through innovation as a service and manufacturing as a service. These innovation and manufacturing services are delivered to customers through Advanced Technology Services to drive co-creation of design enabling differentiated process technologies and with volume manufacturing Wafer Services that enable customers to scale into the market. Customers spend on research and development and equipment while the foundry contributes specialized process technology innovation, enabling a high-degree of customization and product differentiation, quicker return on investment and accelerated time-to-market.

 

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The following figures depict the wafer volume and process customization levels in which a pure-play technology foundry operates. Given the scale, a pure-play technology foundry does not service products, such as cell phones, that require high volumes, as the markets for these products demand pricing that requires the scale of the largest foundries, typically found in Asia. These large foundries typically only provide limited customization capability and only manufacture in high volumes. To develop customized products, some customers may engage university labs or prototype fabs, but such facilities lack the capacity to provide production volumes, which requires them to conduct a lengthy process of transferring the technology to production-scale facilities. A pure-play technology foundry offers an alternative between these two extremes by providing customization flexibility during development with the ability to scale into medium-volume production, all within the same facility. A pure-play technology foundry can charge a premium for this customization because only a limited number of foundries can manage the complexity of such a customized offering.

 

 

 

Making More Possible through the Pure-Play Technology Foundry Model

We believe the next computing paradigm will be based on hybrid system architectures that expand on semiconducting and electronic device characteristics to integrate optical and superconducting principles along with low dimensional materials. This will allow IC designers to harness exotic quantum phenomena like those observed in carbon nanotubes, graphene and similar products. Such products require a different path because they necessitate new enablement services to create early-stage technologies and concepts that require extensive process flow customization as supported within our enablement ecosystem. As a result, we believe that the market requires a foundry that couples fully-developed volume manufacturing competencies with innovative processes to streamline the path to market for innovators as they address global technology trends, including proliferation of sensor technologies, more network connected devices, the rise of edge computing, implementation of 5G networks,

 

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evolution of cloud computing capabilities and widespread use of machine learning and artificial intelligence, throughout the ecosystem.

We have targeted the following vertical markets that we believe offer the most attractive growth opportunities for our solutions.

Advanced Computing. The volume of data produced globally is growing at a 35% CAGR as the IoT landscape develops. This extreme change in data service requirements for cloud infrastructures is driving development and adoption of new technologies despite a slowing of advanced node transistor scaling which has enabled large scale computing capabilities up to this point. These new solutions include custom chip accelerators, heterogenous integration with various approaches, optical computing and transmission technologies, analog computing concepts for artificial intelligence enabling neural networks and new computing paradigms like quantum computing concepts. These diverse technologies are developing into complementary capabilities both to enhance edge computing to reduce data to information before transmission to the cloud, and to support next-generation data centers. These data centers enable powerful cloud-based artificial intelligence technologies to process the high volumes of data into valuable information and integrate various specialized capabilities like exascale and quantum computing concepts that can selectively deploy specialized processing architectures and corresponding algorithms based on problem set needs.

At the beginning of 2020, advanced computing hardware market for servers and supercomputers was valued at $21 billion with a five-year CAGR of 6.3% as data centers are scaled and upgraded. The superconducting quantum computing hardware market is valued at $1 billion with a five-year CAGR of 26% based on data supplied by Mind Commerce.

Aerospace & Defense. Microelectronics have been important to aerospace and defense applications since the early days of the technology and have grown to be a critical capability for avionics, communications, space and weapon systems that support national security objectives. While the semiconductor industry has grown and evolved into the fabless/foundry model, several dynamics have impacted sourcing activities of the USG. In particular, the ability of the USG to source advanced technologies from U.S.-owned suppliers has been impacted as most manufacturing within the microelectronics industry has transitioned offshore. The DoD has faced increased competition to support its innovation from the consumer and industrial markets. The DoD has communicated that microelectronics and 5G are top DoD priorities for the nation’s defense.

As the security and assured access needs of this market evolve, the need for domestic sourcing will remain a dominant theme. There are many different approaches to security being actively developed, to complement existing methods such as DMEA Category 1A accreditation as a trusted supplier, which requires strict controls for access to design data and wafers embodying those designs. Some new approaches to security being developed by DARPA, and other USG activities include zero-trust, quantifiable assurance, open source design methods and IP blocks, and formal verification and validation. Both traditional security methods and these alternative trust and assurance methods will likely play a role in the defense microelectronics acquisition ecosystem. An additional dominant theme within the A&D market is the requirement of long lifecycle supply assurance, and we have a long history of providing support for extended product lifecycles with our high-mix manufacturing model.

Growth anticipated in the area of rad-hard microelectronics is expected to be driven by anticipated investments by the USG in the areas that have been communicated by the DoD to peak at a rate of 3.7% of the entire DoD budget in 2029. A fraction of that planned DoD expenditure for rad-hard system upgrades would be allocated for IC manufacturing. This rad-hard infrastructure initiative for upgrading and sustaining systems is in a ramp phase and is expected to be sustained over a period of approximately 20 years.

Automotive & Transportation. The automotive and transportation market is going through rapid evolution, as electric drive technologies are disrupting conventions and semiconductor content within vehicles has reached record levels. The transportation sector remains a pillar sector of the economy as global populations continue to grow, and personal and trade mobility is critical. There has been an increasing adoption of trends within the transportation space stemming from service-based mobility models that will enhance efficiencies of transportation investments but require ever-increasing and rapid product development capabilities. Sensor content will continue to grow, as will

 

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edge computing and artificial intelligence, as the industry drives to high levels of machine autonomy and continues to improve safety and convenience features. These trends may also push into the non-vehicle transportation infrastructure such as roadways and intersections where increased connectivity technologies may play a role in traffic management and autonomous driving concepts.

According to IC Insights, at the beginning of 2020, the automotive and transportation market for integrated circuits was valued at $35 billion and 2019 pure-play foundry total sales for 65 nm to 180 nm complementary CMOS geometries was $19 billion. The forecasted growth in this market will result from sensor and semiconductor content continuing to climb across system types to enable trends of connectivity, electrification, advanced driver-assistance systems concepts and autonomous driving.

Bio-Health. The bio-health industry is rapidly adopting new technologies to improve healthcare outcomes for a growing and aging population. Several trends within the bio-health domains are migrating towards enhanced integration between sensing and microelectronics to enable new diagnostic and intervention therapies in a wide range of categories. These dynamics are driving demand for new genetic sequencing and therapies, improved disease screening technologies, health monitoring wearables and in-body implantable technologies. Implantable technologies have already become a significant market for highly engineered and qualified products used in pacemakers and defibrillators, neurostimulators, drug pumps, spinal fusion stimulators and cochlear and ocular implants.

The available market for microelectronics in the biomedical market for implants, according to MarketsandMarkets, was valued at $24.8 billion in 2016 and forecasted to grow at a 9.8% CAGR through 2025.

Consumer. The consumer industry follows similar trends as adjacent vertical markets with increasing trends for connected, smart devices that increasingly require low-power battery systems and wireless connectivity to support product requirements for wearables, gaming, extended reality, voice assistants and a wide range of other convenience and entertainment-oriented applications. While the high value smartphone industry is widely known to have driven significant growth within semiconductor markets for leading-edge technologies, much of the consumer industry exists within more modest market volumes and within product pricing structures that cannot integrate high value leading-edge semiconductor technologies and so align well with existing mature process nodes in order to support competitive price structures. This space also sees tremendous competition and requires rapid time-to-market as many consumer product companies rely on speed of product development and innovation as their competitive edge to differentiate themselves from competitors.

According to IC Insights, at the beginning of 2020, the consumer market for integrated circuits was valued at $42 billion and 2019 pure-play foundry total sales for 65 nm to 180 nm geometries was $19 billion.

Industrial/IoT. Industrial infrastructure for manufacturing, communications, business operations, food, agriculture and related areas is driven to continuously improve productivity, speed and safety, which in turn drives demand for sensing, device connectivity, communications, and edge computing. Greater emphasis is being placed on effective supply chain management to enable improved visibility to dynamics that impact profitability. The 5G communications infrastructure roll-out is happening now across the world, which we believe will spur product innovation as developers learn to exploit the increase of data throughput and reduced latency of the network. We also expect this market to experience intense competition and rapid time-to-market requirements, with many companies relying on speed of product development and innovation as their competitive edge to remain distinguished from their competitors.

According to IC Insights, at the beginning of 2020, the industrial and communications market for integrated circuits was valued at $170 billion and 2019 pure-play foundry total sales for 65 nm to 180 nm geometries was $19 billion.

Advantages of 200 millimeter Wafer Fabs

A technology foundry requires a high-degree of customization and differentiation making 200 millimeter, or mm, wafer fabs more aligned with the objectives of a technology foundry than 300 mm wafer fabs. The 200 mm wafers use fast, flexible substrates and require cheaper capital equipment than 300 mm wafer fabs, making them well-suited for applications with specific cost, performance and power requirements. The 200 mm wafers are also the ideal size as the significant degree of factory automation enables high throughput, quality and operational efficiencies. By contrast, 300 mm wafer fabs are primarily used for high-volume consumer applications and have

 

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higher levels of automation that reduce the ability to customize a wafer’s path through the fab for a unique processing flow. As a result, 200 mm wafer fabs operate with lower pressure to maximize throughput capacity, allowing them to operate at lower utilization rates while producing higher margin products to maintain their flexibility and time-to-market competitive advantages.

Since the mid-2000’s, leading edge silicon microelectronics have been produced on 300 mm wafer production lines and the existing 200 mm manufacturing infrastructure has served mixed-signal and analog markets off the leading edge. Strong and growing demand for these technologies to enable IoT devices, sensors and power management applications have sustained high utilization for 200 mm facilities. These forces have been so significant that in recent years demand for 200 mm fab capacity has surged and is even driving expansion of global capacity through new fab construction to support new applications across the A&D, automotive, cloud and communications (including 5G), computation, medical, industrial/IoT and consumer markets.

As shown in the table below, SEMI forecasts the number of 200 mm fabs and 200 mm industry capacity to exceed prior peak capacity by 2021 and is expected to remain viable for manufacturing purposes over the long term.

 

 

Source: SEMI Global 200 mm Fab Outlook, 2019

Our Solution

We offer a unique pure-play technology foundry model that enables our customers through TaaS (see following figure) providing innovation as a service through Advanced Technology Services and 200 mm volume wafer manufacturing capabilities through Wafer Services. By having both services in one operation, we are well-positioned to take advantage of the market opportunity in our end-market industries, build key market relationships as technology develops, and produce those technologies at scale as adoption expands. One advantage of our combined offering is our ability to develop a technology inside a production environment that stabilizes the production line with extensive controls managed by the operations and maintenance teams. These tools and process technology are exercised by the baseline production business, which enables quick cycles of learning and reproducible results. Furthermore, once a technology is developed inside this production environment, the ramp to commercial production is expeditious as it is unimpeded by the transfer to an outside production facility that typically follows development inside a prototyping facility. Our combined business model also takes advantage of amortizing costs of the production facility across the production business, which allows us to have access to production-grade tooling and systems without significant capital and operating costs.

 

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Advanced Technology Services

We deliver Advanced Technology Services to co-create advanced technologies with our customers by providing engineering and process development support. Our programs focus on the next wave of microelectronics technologies, including carbon nanotube transistors, infrared imaging, superconductors, integrated photonics and 3D integration. These technologies are brought online inside a production environment that reduces the process development timeline needed to manufacture at production level scale and yield quality. This gives our customers a significant time-to-market advantage by avoiding a process transfer to another site for manufacturing, as well as stabilizing the new technology on the same tooling as will be used in manufacturing.

We have established an IP and service model that is specifically architected to enable a high degree of collaboration with innovators to facilitate a strong connection between device and process technologists. We foster collaboration by offering a diverse range of enablement services that allow us to engage across many technology platforms and with a spectrum of technology maturity levels. Our average Advanced Technology Services program spend has grown by 75% since March 2017 and has experienced a 60% revenue compound annual growth rate since March 2017.

Wafer Services

We offer semiconductor manufacturing services for a wide variety of silicon-based analog and mixed-signal, power discrete, MEMS and rad-hard ICs. It is our opinion that our focus on the differentiated analog and mixed-signal and CMOS space supports long product life-cycles and requirements that value performance over cost efficiencies. Our Bloomington, Minnesota-based fab can produce up to 156,000 wafers per year (depending on the product mix) and has at least 522 well-maintained fab and sort tools, enabling high volume production for highly customized products. Our utilization rate for 2019 was approximately 68%. We also have strong design enablement capabilities that provide customers with the ability to leverage our IP portfolio. We target customers that are underserved by larger foundries and are looking for a foundry partner that can offer the process customization or operational services and flexibility that they need but do not have the buying power to negotiate elsewhere.

In our Wafer Services category for mixed-signal technologies, the base design IP portfolio for S130 technologies originating from Cypress (now Infineon) was licensed via a technology license agreement in 2017. As our technology platforms evolve, we are making investments in PDK development with industry partners and expanding partnership with critical electronic design automation suppliers alongside emerging relationships with design service and IP suppliers to create and maintain the IP required over the next several years to enable continued customer success.

 

Further technology and design enablement specialization and differentiation will be aligned with emerging business domains. Examples include industrialization of CNT 3-dimensional system on a chip, or 3D-SoCs, resistive random-access memories, or RAM, and power components integrated into the base S130 and S90 platforms. The enablement for custom technologies is aligned with customers using a variety of models. These in turn can support emerging applications across the medical, automotive and standard foundry markets.

 

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Our model depicted in the above figure employs this multi-faceted design enablement ecosystem and our combination of Advanced Technology Services and Wafer Services enables engagement with a wider range of technologies and commercial readiness. During this highly collaborative framework, a strong relationship is built between process and design teams, and significant IP is generated in both of those categories. This is an important defining characteristic of our pure-play technology foundry model.

Our Competitive Strengths

We believe we are a leader in technology innovation services, and believe that we have significant points of differentiation that will enable us to continue to succeed in the pure-play technology foundry industry. Our core strengths include the following:

 

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Following this offering, our status as a publicly-traded, U.S.-based, U.S. investor-owned pure-play technology foundry partner with DMEA Category 1A accreditation from the DoD. Our status following this offering as a publicly-traded U.S.-based and U.S. investor-owned pure-play technology foundry with DMEA accreditation will provide us with a strong position to service the aerospace and defense market. Our current and potential aerospace and defense customers are required to comply with a range of information security protocols for protecting sensitive device intellectual property with national security implications. The DoD established the Trusted Foundry Program in 2007 to provide secure access to leading-edge semiconductor technology and to ensure a trusted microelectronics supply chain for sensitive government programs with national security interests. As of March 5, 2021, there were 58 suppliers designated as “Trusted” under this program by the USG. Of those suppliers, we are one of only seven wafer fabs that have DMEA Category 1A accreditation through the DoD. In addition, there are other end markets, such as automotive and medical, that value working with a supplier operating within the United States, which offers a high level of protection for IP rights, or that value the convenience and branding advantage of services and products made in the United States.

 

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Unique IP model that offers customers an end-to-end solution for microelectronics and next-wave technology needs. We believe our pure-play technology foundry model combines the integrated process technology development services and manufacturing capability and expertise needed to address the high levels of customization specified by our customers. By combining our development lab capabilities in an advanced volume production fab, we are able to leverage our Advanced Technology Services to accelerate our customers’ time-to-market. We work alongside our customers to co-create customized ICs to meet or exceed stringent semiconductor requirements. By providing a full-scale semiconductor technology and manufacturing ecosystem, with substantial process flow integration and customized solutions, we are able to continually attract and retain customers. As of January 3, 2021, we had 34 Advanced Technology Services customers, including five Fortune 300 companies.

 

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Accelerated time-to-market advantage for our customers. Our integration of development and manufacturing into a single ecosystem enables our customers’ products to be designed for manufacturing robustness

 

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without sacrificing the unique customization needed for differentiation. In addition, our wafer fab offers rapid prototyping and validation and accommodates small lot manufacturing, making our facility an optimal size for providing a complete solution for our customers and allowing them the opportunity to access the market more quickly than with other semiconductor foundries.

 

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A seasoned engineering team that leverages our extensive IP portfolio to support the development of emerging technologies in a fully integrated lab-to-fab environment. Our team of over 100 engineers employs intellectual property created over decades, and our fab is specially geared toward managing the complexity of developing emerging technologies alongside manufacturing with world-class excellence. Through direct collaboration with our customers, our team of engineers can leverage existing wafer process technology and process flow options to create custom fabrication processes that best serve our customers’ needs for high-performance analog and mixed-signal ICs. We also specialize in developing advanced processes for emerging technologies such as silicon photonics, superconducting and quantum computing, CMOS image sensing and DNA sequencing, among others. Our Advanced Technology Services provide us with a competitive advantage by offering significant technical expertise and customized engineering practices required for the creation and delivery of scalable specialty applications. The technological capabilities of our foundry shorten design cycles to create an expedited path for our customers’ products to reach the market.

 

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Optimized manufacturing environment for highly-engineered projects. Customers in our end markets value high performance and are willing to pay a premium for the Advanced Technology Services needed for the development of specialized products. Many of our customers are focused on high-margin specialty applications, which typically involve a smaller volume of production. We believe such customers are underserved by our competitors, which primarily focus on higher-volume opportunities. Our high-mix foundry automation and manufacturing systems are geared to handle high levels of customization, making smaller volume projects more economical than for competitive fabs. Our right-sized fab provides opportunities for us to leverage our manufacturing scale and expertise for customized processes and to realize higher margins for the significant engineering effort required by these complicated projects.

 

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Expertise in highly customized projects in a low-volume research and development environment. We specialize in, and have the equipment and process expertise necessary to deliver, effective and cost-efficient solutions while co-creating next-generation technology with our customers. We couple our Advanced Technology Services with existing PDKs that leverage proven intellectual property acquired in our divestiture from Cypress to allow our customers to co-create tailored product offerings. Our technical experience enables us to either modify existing processes or develop new, innovative solutions that are tailored to our customer’s needs. The ability of our competitors to engage in highly customized process development activities within their large-scale manufacturing operations is not feasible without the significant IP and capital expenditures required to retrofit the larger operations for the high-mix and logistically complex requirements of the technology foundry model. Our 200 mm manufacturing lines deliver a degree of agility that allows us to efficiently customize projects without significant lead-times or capital investment, and provides us with the ability to complete rapid prototyping that can quickly translate to volume production. With substantial experience in complex high-mix, mid-market manufacturing, we have consistently demonstrated our ability through deployment of our Advanced Technology Services to excel in customer programs that require specialty knowledge and expertise.

Our Growth Strategy

We intend to become a prominent U.S.-based pure-play technology foundry by leveraging our core competencies in specialty process development and advanced manufacturing, while expanding our customer base and presence in high-margin end markets. To achieve this goal, we intend to pursue the following key strategies:

 

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Diversify our customer base, grow our presence in existing markets, and expand into new end markets. Our Trusted Foundry designation, various industry accreditations and broad range of capabilities and services have established our presence in high-growth specialty applications. We have reduced our revenue concentration from Cypress/Infineon to approximately 29% of our revenues for the year ended January 3, 2021 from approximately 100% of our revenues from the period of acquisition to July 1, 2017. As of January 3, 2021, since divesting from Cypress in March 2017 we have added four new customers to our Wafer Services business and 21 new customers to our Advanced Technology Services business. We intend

 

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to continue to build upon our success in the advanced computation, A&D, automotive and transportation, bio-health, consumer and industrial/IoT markets while expanding into new markets over time. Our technology foundry services, coupled with our Trusted Foundry designation and various industry accreditations, offer unique value to our customers that we plan to leverage as we expand our presence across both current and new end markets. As shown in the chart below, our customer revenue mix has become increasingly diversified since we became an independent company in March 2017.

 

 

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Leverage our Trusted Foundry status and find USG investments to add to our capabilities and expand our markets. We are one of only seven wafer fabrication facilities that have DMEA Category 1A accreditation through the DoD. We believe most foundries are not positioned to partner with the USG because of the Trusted Foundry’s security requirements, stringent government contract provisions and small lot manufacturing typical of government contracts. We have extensive experience working with highly-sensitive government projects that enable new capabilities and subsequently re-applying those capabilities to expand our market, such as the atomic layer deposition tool which was later used for other USG-funded programs and prototyping on typical engagements. In 2018, DARPA awarded the largest contract in the agency’s ERI program to a team consisting of SkyWater, MIT and Stanford University, for the 3DSoC program. We will continue to evaluate these government opportunities as the USG invests to regain global technology leadership in the semiconductor industry by optimizing and securing its IC manufacturing supply chain.

 

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Expand in the microelectronics value chain and champion U.S.-based pure-play advanced packaging foundry services. As our industry evolves into a post-Moore’s Law reality, we believe 2.5D, 3D, and SiP advanced packaging concepts will be adopted broadly and our domestic offering for development and manufacturing of solutions in this space will be in high demand. Furthermore, our strategy is to make these services available not only to our customers developing highly differentiated and disruptive front-end technologies but also to advanced packaging services that may source chips from other foundries and seek our support for onshore heterogeneous integration solutions. In addition, as interest grows within the federal government to enhance domestic infrastructure in this area, we feel we are well positioned to lead efforts to position the U.S. as a leader in advanced packaging technology.

 

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Expand in the rad-hard market. There are increasing uses for various radiation-hardened applications across multiple industries. In September 2019, we received a DoD contract for up to $170 million to build a next-generation rad-hard chip manufacturing capability, with volume production beginning in 2021. We believe our fab’s lower capital requirements will provide an attractive opportunity for future projects of this nature.

 

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Co-develop next-generation technologies with our customers, and grow our Advanced Technology Services. We intend to continue to engage in advanced development opportunities and leverage technologies developed to broaden our portfolio of semiconductor solutions. Access to our engineering team, production-grade technology and equipment, verified IP and trade secrets developed over several decades enable us to provide highly differentiated and customized process development and Advanced Technology Services. We

 

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believe that investing in these capabilities will enable us to maintain our market leadership and attract customers that require lower volumes and intricate engineering specifications.

 

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Invest in design block IP development and enable third-party creation of IP. The foundation of a PDK-driven foundry offering for wafer services is a comprehensive library of silicon-proven, well-characterized design IP blocks. We will continue to invest in IP blocks organically, through targeted external investments, by encouraging IP design companies to offer their blocks for use with customer-paid royalties.

 

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Expand our capabilities through cost-effective capital management, including seeking M&A opportunities to drive growth. We will continue to invest in additional manufacturing capacity and evaluate growth opportunities through acquisitions of other businesses and operations, including, with respect to (1) other foundries, (2) larger foundries looking to divest existing low-volume programs, (3) low-cost manufacturing capacity that increases our scale, and (4) adjacent markets such as AP and BAT. We also may expand our current facility or convert existing spaces into clean rooms to add to our contaminant-free manufacturing environment. We believe acquiring low-cost U.S.-based facilities will expand our scale and customer base while maintaining our domestic competitive advantage without disrupting current operations.

Currently, our gross margin is negatively impacted by the depreciation expense we record on the fair values of the building and equipment acquired from Cypress in 2017. We believe that achievement of the key elements of our growth strategy, along with a majority of those acquired assets becoming fully depreciated, will result in a corresponding improvement in our gross margin as shown in the chart below.

 

 

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Our Customers

We serve a diverse array of customers, ranging from designers producing near-commodity volume chips to those requiring highly-specialized next-wave technology solutions. Cypress accounted for 29% and 48% of our revenue for the years ended January 3, 2021 and December 29, 2019, respectively. Two customers, other than Cypress, represented 16% and 14% of our revenue for the year ended January 3, 2021. Other than Cypress, two customers represented 13% and 11% of our revenue for the year ended December 29, 2019. The chart below depicts how our Advanced Technology Services customer base has expanded and diversified since we became an independent company in March 2017.

 

Our Platform Technologies

We deliver our Advanced Technology Services and Wafer Services through a wide range of proprietary platform process technologies that are targeted to multiple markets. The table below summarizes the platform technologies and the corresponding target markets.

 

 

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Analog and Mixed-Signal Based Technologies

Our S90 (90 nm gate), S130 (130 nm gate) and CMOS process flows (greater than 130 nm) are the foundation of our business. These process flows have collectively produced a multitude of devices at our fab for products across a range of applications including IoT, memory, automotive, consumer wearables, and vision systems. Our process technology enables application specific integrated circuit, or ASIC, designers to produce a wide range of system-on-chip devices, or SoCs, with embedded memory. Further, we possess unique IP technology acquired from Cypress, which is anticipated to drive additional demand with IoT customers. With the deployment of 5G networks, we expect an increase in IoT devices leveraging 5G for smart sensors and connectivity applications with low power device capabilities. We offer a set of solutions for these applications with an ideal mix of digital and analog performance and a mature field of portable IP.

Rad-Hard CMOS

Our rad-hard technology is used extensively in microelectronics and mission-critical applications across aerospace & defense and bio-health end markets. We have a long legacy of supporting rad-hard CMOS. In 2019, we were awarded rad-hard program by the DoD of up to $170 million to fund a facility expansion to house and develop a new 90 nm radiation hardened by process (RHBP) mixed-signal CMOS process that will be qualified for production by late 2021. This new process technology, which is forecasted to double the performance of devices, is expected to become the most advanced strategic RHBP foundry in the United States. Furthermore, this S90RH platform uses the already-proven 90 nm fully depleted silicon-on insulator, or FDSOI, frontend process licensed from MIT-Lincoln Laboratory, where the FDSOI architecture provides improved radiation tolerance, higher transistor speed, and lower power operation. This contract also includes an option for the DoD to fund enhancements and extensions to this technology.

Discrete Power Devices

We believe our fab capabilities are well-suited for high-volume manufacturing of various discrete switching devices used in power management applications including MOSFETS, IGBTs, transient-voltage-suppression, or TVS, diodes and comparable topologies. These technologies are in high demand and growing as semiconductor content grows across product categories. These less complex devices typically require fewer mask layers than full CMOS IC flows and thus afford us the ability to produce these and other low mask count devices structures in relatively high volumes. This product category has seen continued innovation and investment in device performance and process integration, and is ideally aligned with our Advanced Technology Services which are often needed for new devices architectures. We have licensing agreements and partnerships with fabless design companies that utilize our fab to manufacture a wide variety of discrete power devices for the general market, along with one partnership to offer radiation-hardened discrete power devices.

Advanced Packaging & Silicon Interposers

While transistor scaling is slowing and the industry at large considers new avenues for improving system performance while defraying costs, advanced semiconductor packaging is providing a solution for end markets such as computing, communications and aerospace & defense. This has created a large market opportunity which we believe we are well positioned to address through our proprietary IP. Our silicon interposer process has a variety of advantages over traditional printed circuit board implementations including improved size, speed, power, thermal matching and excellent reliability, among others.

Our foundational mixed-signal CMOS platforms and developing copper interconnect capability align well with various requirements for passive and active solutions. Our approach confers cost, yield and IP reuse benefits that combine with recent advances in interposer interconnect standards that lower the cost and improve the speed of interconnected signals routed through the interposer as well as increase the level of security. The recent addition of our Florida facility adds unique interposer technology licensed from imec and will also accelerate our roadmaps for other key technologies in this category.

Heterogenous integration technologies are gaining traction in the advanced computing field to combine chips produced with different process technologies in order to achieve improved performance at the system level with attractive economics. This methodology requires integration of disparate devices using various wafer level and 2.5D and 3D integration and packaging concepts, which in turn requires new manufacturing flows and corresponding business offerings. Our Advanced Technology Services and 90 nm and 130 nm process geometries are ideal for many applications to produce active or passive bridge and interposer type interconnect products.

 

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Superconducting

Since our initial partnership with D-Wave in 2013, we have been a leading superconducting process flow developer. We have expanded our customer base in this market to include eight companies as they develop their own proprietary superconducting technologies for both quantum computing Qubits and supercomputing applications. For example, in order to address non-traditional architectures required by quantum computing, D-Wave’s device team co-created superconducting qubits based on new materials, new devices and new architecture in order to develop efficiently, enable manufacturing and maintain confidence that their IP remains highly-competitive. D-Wave is now a leader in quantum computing hardware and cloud services and formed a partnership with Amazon Web Services in 2020 for cloud quantum computing services. We also support customers developing superconducting microelectronics for non-quantum devices for supercomputing applications where the use of zero-resistance architectures can significantly reduce the staggering amount of energy consumption used by today’s supercomputers and data centers.

3DSoC & Carbon Nanotube Transistors

In 2018, DARPA awarded the largest contract in the agency’s ERI program to a team consisting of us, MIT and Stanford University, for the 3DSoC program. The ERI funding program is focused on restoring U.S. leadership in semiconductor manufacturing technologies.

The 3DSoC initiative is focused on transitioning technology concepts demonstrated at MIT into a commercial foundry environment at SkyWater and create a multilayer stackup of logic and memory that is interconnected with fine-pitch vias that are only possible with monolithic fabrication. This combination of technologies, which tightly integrates memory with digital logic, is predicted to overcome the performance “memory wall” which is currently slowing device performance gains. The technology has disruptive potential due to facilitating leading-edge computing performance

at a fraction of leading-edge costs, along with improved power and performance.

With the improved power and performance made possible through the 3DSoC program, we have the capability to apply this technology in areas such as computing, IoT and aerospace & defense.

Silicon Photonics

Optical data transmissions are pushing further into our digital infrastructure, including in data center interconnect data transmission and also within-chip data process domains to increase computation throughput.

We co-create unique solutions for customers in a range of applications, including high-speed data links, such as 100G, and 400G, LiDAR, phased-array photonics, and photon-based quantum computing. Today, we focus on serving photonics with fabrication of low-loss waveguides with integrated detectors, optical modulators, grating couplers, phase modulators, and passive alignment fiber couplers. With the recent addition of a deep trench etching capability we can serve a larger range of photonics capabilities in our facility. In addition, we see further potential for integration of active photonics light source elements, along with integration of these architectures with our foundational CMOS technologies to unlock inherent performance gains and lower overall system cost structure with this integration.

MEMS

We have supported MEMS fabrication since 2013 for microfluidic applications for DNA sequencing applications and have co-developed a process flow for a highly sensitive infrared imager. The infrared imager was so well-received that many subsequent USG-funded and customer-funded enhancements have pushed the performance of infrared imaging performance to its limits. Earlier in 2020, we added deep-trench etching capability which enables us to serve a variety of MEMS customers. This expansion yields new opportunities for revenue growth by allowing us to address a new market.

Manufacturing

Process Technologies. In our Minnesota facility’s 200 mm fab, process flow for a number of different node dimensions is offered ranging from 90 nm—350 nm. Given that high performance analog and mixed-signal applications do not typically benefit from the advanced node dimensions, we are well-positioned to service IoT markets with high-performance analog and mixed-signal solutions on 90 nm and 130 nm process flows. We are under contract with the DoD to stand up 65 nm once the 90 nm project is qualified.

 

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Operational Capabilities. Managing the technology foundry’s signature high-mix manufacturing operation requires special competencies with respect to the manner by which the volume production activities flow through the fab while experimental and development efforts are interspaced on the same equipment sets. This capability has been developed within our organization over decades as the site was previously the center for Cypress process development and volume manufacturing. A unique operational model also has been developed for fab asset-tracking and equipment ownership to ensure efficient operations despite, at times, competing interests within the fab.

Our fab’s throughput capacity is up to 156,000 wafers per year (device mix dependent).

Equipment. Front-end semiconductor foundry wafer manufacturing services utilize unique combinations of film process steps including photolithography, film deposition, etching and ion implantation. We maintain the equipment sets to support these processing steps and maintain a skilled internal staff to service and repair equipment to enable the 24/7 manufacturing operation. Onsite capabilities also exist for wafer testing which support our quality programs and customer required acceptance testing. As described above, government and customer programs are adding a wide variety of capabilities.

Raw materials. As a manufacturer of high precision products, we maintain critical supplier relationships to ensure high quality starting materials are available to be used in our processing activities. These raw materials include silicon wafers, high-purity compressed gases, high-purity metals for film deposition processes, high-purity acid, base, and cleaning solutions for various wet processing steps, and semiconductor grade photoresist and developer for photolithography. Our principal suppliers for these materials are:

 

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GlobalWafers Singapore Pte. Ltd. (silicon wafers)

 

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SEH America, subsidiary of Shin-Etsu Handotai, Ltd. (silicon wafers)

 

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Honeywell Electronic Materials, Inc. (metal sputter targets)

 

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Air Products & Chemicals, Inc. (bulk and specialty gases, chemicals)

 

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Praxair, Inc. (bulk and specialty gases)

 

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KMG Chemicals, Inc. (chemicals)

 

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The Dow Chemical Company (photoresist)

 

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JSR Corporation (photoresist)

 

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Tokyo Ohka Kogyo America, Inc. (photoresist)

 

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Air Products & Chemicals, Inc., Moses Lake (developer)

Certifications. We maintain several quality certifications, including industry-specific certifications required to supply products into safety-sensitive applications. These certifications require extensive information system handling audits to verify business processes ensuring best practices are followed to enable devices to be manufactured at low defect levels and with traceability to ensure individual die can be traced from foundry manufacturing process steps through their life in their real-life use cases. Our current certifications include the following:

 

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ISO 9001:2015

 

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IATF 16949:2016 (Automotive)

 

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ISO 14001:2015

 

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RoHS Directive 2011/2015

 

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ISO 13485 (Medical)—pending

Our Competition

We compete internationally and domestically with dedicated foundry service providers as well as with these IDMs which have in-house semiconductor manufacturing capacity or foundry operations. Many of our competitors in the conventional foundry or IDM categories have substantial production, financial, research and development and marketing resources. These competitors include the “mega” foundries such as Taiwan Semiconductor, United Microelectronics and Intel Corporation, as well as speciality foundries such as Vanguard Semiconductor, Tower Semiconductor and XFAB Silicon Foundries.

 

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In the aerospace and design foundry market, our competition includes fabs which partner exclusively with major U.S. defense contractors. While these fabs will continue to serve the critical, but often boutique, needs of the USG, we expect the USG and defense community to gradually shift to more economical routes to serve their mission. Other competition in this market includes U.S.-based commercial IDMs and foundries, such as ONSemi, Tower Semiconductor and Global Foundries. Other competitors for technology services include prototype fabs/labs such as MIT Lincoln Labs.

Our Advanced Technology Services category is highly distinguished, and we do not believe there is a directly competitive offering in the market today. There are alternative solutions for concept demonstration and feasibility work with vastly contrasting value propositions that include university, government or corporate laboratories. These options lack manufacturing expertise and scale to take customers to market and do not have the same position to support design for manufacturability from an early point in the development cycle as their facilities do not support quality focused manufacturing. In contrast, our model Technology as a Service model accelerates new technologies to market by streamlining the development and scaleup activities for our customers.

The principal elements of competition in the semiconductor wafer foundry industry include: technical competence; production speed and cycle time; time-to-market; research and development quality; available capacity; fab and manufacturing yields; customer service; price; management expertise; and strategic relationships.

We believe that our custom end-to-end non-recurring engineering, manufacturing, scalable production, U.S. location and the flexibility built into our core process positions us as a “right sized” fab for diverse projects of all sizes and is a key differentiator within the market.

Our ability to compete successfully also depends on factors outside of our direct control, including industry and general economic trends. Any significant increase in competition may erode our profit margins, weaken earnings or increase losses. If we cannot compete successfully in our industry, our business and results of operations could be harmed.

Sales and Marketing

Sales. Our sales processes are driven by the typical electronic system design cycle and follow standard project phases including scoping, prototyping, evaluation and qualification, and production. Variations of this cycle are common as unique customer purchasing cycles exist in different engagements across government programs and public versus private company customer types. The multi-phase purchase process results in sales cycles ranging from several months to more than a year from initial contact to volume production. In addition, for Advanced Technology Services sales engagements of next-wave technologies, close relationships are built while serving our unique Advanced Technology Services due to close collaboration between technical teams as well as business leaders in order to monitor progress and drive engagements forward. Customer relationships are important due to the long sales cycles. Our sales staff members possess significant technical competence and well-developed interpersonal skills to win and maintain customer relationships. This differentiates our front-end business organization from conventional foundries. Our highly technical staff members serve in customer-facing roles early and often in engagements in order to communicate the value of these services during a customer’s decision process.

In order to increase geographic access to customers the sales organization leverages an outside network of sales representatives to give us access to potential customers in key markets. These sales representatives provide us coverage in the continental United States, where our corporate value proposition gives us the greatest competitive advantage. Plans are currently developing to increase our presence in Europe for differentiated CMOS solutions and unique next-wave process technologies. Next-wave technology offering representation in Asia is also being considered.

Marketing. Our marketing efforts are focused on increasing industry awareness of our corporate value proposition and our product offerings, customer engagement and ultimately converting need into demand that can be captured by the sales team. In support of these objectives, we are focused on investing in operational capabilities to help us define markets for our offerings guided by a marketing funnel that measures our marketing performance and return on investment as customer progress through stages of awareness, interest, consideration, intent, evaluation and eventually, purchase. These efforts benefit customers by helping them in pre-purchase stages to understand our

 

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offering and how it may benefit their objectives and serves to indicate to us the state of interest of various customers so that we can engage sales resources with them as their plans evolve. In addition, the nature of our business-to-business relationships provides for a unique customer purchase process in which numerous stakeholders participate. These stakeholders usually represent various parts of the customer’s business and engage with different parts of our organization. This means that building a strong brand reputation which is consistent across all types of the customer experience is important and presents the opportunity to differentiate our organization from our competition as we efficiently and consistently meet various customer needs across all engagement types.

Intellectual Property and Research and Development

We rely on a combination of copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual provisions, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand.

In addition, we seek to protect our intellectual property rights by requiring our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.

Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications, technology, and other industries in which we operate may own large numbers of patents, copyrights, trade secrets and trademarks and may frequently threaten litigation, or file suit against us based on allegations of infringement, misappropriation, or other violations of intellectual property rights. In the future, we may also face allegations that we have infringed, misappropriated, or otherwise violated the intellectual property rights of third parties. For additional information, see “Risk Factors—Risks Relating to Intellectual Property.”

We have also made significant investments in research and development for our platform. Our research and development activities seek to upgrade and improve our manufacturing technologies and processes. A substantial portion of our research and development activities are undertaken in cooperation with our customers and equipment vendors. Due to the rapid changes in technology that characterize the semiconductor industry, effective research and development is essential to our success. We plan to continue to invest significantly in research and development activities in order to develop advanced process technologies for new applications. Our research and development expenses were approximately $4.2 million and $6.3 million for the years ended January 3, 2021 and December 29, 2019, respectively.

Environmental, Safety and Quality Matters

We use, generate and discharge hazardous chemicals and waste in our research and development and manufacturing activities. United States federal, state and local regulations, in addition to those of other foreign countries in which we operate, impose various environmental rules and obligations, which are becoming increasingly stringent over time, intended to protect the environment and in particular to regulate the management and disposal of hazardous substances. As a result, our facilities are ISO 14001 certified, an international standard that provides management guidance on how to achieve an effective environmental management system.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive) and similar legislation in California. Other laws impose liability on owners and operators of real property for any contamination of the property even if they did not cause or know of the contamination. While to date we have not experienced any material adverse impact on our

 

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business from environmental regulations, we cannot provide assurance that environmental regulations will not impose expensive obligations on us in the future, or otherwise result in the incurrence of liabilities such as the following:

 

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a requirement to increase capital or other costs to comply with such regulations or to restrict discharges;

 

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liabilities to our employees and/or third parties; and

 

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business interruptions as a consequence of permit suspensions or revocations, or as a consequence of the granting of injunctions requested by governmental agencies or private parties.

We have placed significant emphasis on achieving and maintaining a high standard of manufacturing quality. Our facilities are ISO 9001 certified, an international quality standard that provides guidance to achieve an effective quality management system. In addition, our facilities are TS16949 certified.

As previously discussed, our facilities also have been accredited as a Category 1A Trusted Fab for fabrication, design and testing of DoD Trusted Microelectronics.

Our facilities are currently pursuing OHSAS 18001 certification, which recognizes compliance with international occupational health and safety standards that provide guidance on how to achieve an effective health and safety management system. The health and safety standard management system assists in evaluating compliance status with all applicable health and safety laws and regulations as well as establishing preventative and control measures. We believe we are currently in compliance with all applicable health and safety laws and regulations.

Our goal in implementing OHSAS 18001, ISO 14001, ISO 9001 and TS16949 systems is to continually improve our environmental, health, safety and quality management systems.

Facilities

We believe that our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available in the future. We intend to develop or procure additional space in the future as we continue to add employees or customers and expand geographically.

SkyWater Minnesota (SKMN)

Our corporate headquarters and fabrication facility is located in Bloomington, Minnesota, where we occupy facilities of approximately 396,000 square feet. As described under “Certain Relationships and Related Party Transactions—Sale Leaseback Transaction with Oxbow,” on September 29, 2020, SkyWater Technology Foundry entered into a sale leaseback transaction with Oxbow Realty and we now lease the property from Oxbow Realty.

SkyWater Florida (SWFL)

In January 2021 we expanded our operations with the addition of the Center for NeoVation, a 200 mm advanced packaging facility in Kissimmee, FL. The facility will be operated and maintained by SkyWater through a public-private partnership with Osceola County, FL which is developing a broader technology and STEM education infrastructure at the same campus where the Center for NeoVation is located. We will utilize the 109,000 square foot facility, with approximately 36,000 square feet of cleanroom space, to address emerging commercial and government agency needs for U.S.-sourced electronics.

Employees and Labor Relations

As of January 3, 2021, we had 500 full-time employees, all of whom were employed in the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement.

Legal Proceedings

From time to time, we are involved in legal proceedings and subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the resolution of these ordinary-course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Even if any particular litigation is not resolved in a manner that is adverse to our interests, such litigation could have a negative impact on us because of defense and settlement costs, diversion of management resources from our business and other factors.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information as of March 1, 2021 concerning our executive officers and individuals who will serve on our board of directors after the completion of this offering.

 

 

 

NAME		AGE		POSITION
Thomas Sonderman (3)		57		President, Chief Executive Officer and Director
Steven Wold		54		Chief Administrative Officer
Steve Manko		40		Chief Financial Officer
Wendi B. Carpenter (2)		64		Director
John T. Kurtzweil (1)		64		Director
Thomas R. Lujan (2)		71		Director
Gary J. Obermiller (1)(3)		72		Chair and Director
Loren A. Unterseher(1)(3)		56		Director

 

 

(1)

Member of our audit committee.

(2)

Member of our compensation committee.

(3)

Member of our nominating and corporate governance committee.

Each executive officer serves at the discretion of the board of directors and holds office until the officer’s successor is duly elected and qualified, or until the officer’s earlier resignation or removal.

The following is a biographical summary of the experience of our executive officers and individuals who will serve on our board of directors prior to the completion of this offering. In addition, we have described the experience, qualifications, attributes and skills of each individual who will serve as a director following the completion of the offering that were considered in determining that such individual should serve on the board.

Thomas Sonderman, President, Chief Executive Officer and Director

Mr. Sonderman has served as our President and Chief Executive Officer since December 2020 and as a member of our board since October 2020. He has served as the President of SkyWater Technology Foundry since October 2017. From January 2014 until October 2017, Mr. Sonderman served as the Vice President and General Manager of the Integrated Solutions Group at Rudolph Technologies, Inc., or Rudolph Technologies, a semiconductor company that merged with Nanometrics Incorporated to form Onto Innovation Inc. At Rudolph Technologies, Mr. Sonderman was responsible for delivering predictable profitability for the company’s integrated hardware/software business unit. From February 2009 until he joined Rudolph Technologies, Mr. Sonderman served as Vice President of Manufacturing for Globalfoundries, a semiconductor foundry, where he oversaw the spinout of GlobalFoundries from Advanced Micro Devices, Inc. Mr. Sonderman is an active member of the SEMI Fab Owners Association and the Global Semiconductor Alliance. Mr. Sonderman received a Bachelor of Science in Chemical Engineering from the Missouri University of Science Technology and a Master of Science in Electrical Engineering from National Technological University. The board selected Mr. Sonderman to serve as a director because of his extensive expertise and demonstrated leadership in the semiconductor industry.

Steven Wold, Chief Administrative Officer

Mr. Wold has served as our Chief Administrative Officer since December 2020. He has served as the Chief Administrative Officer of SkyWater Technology Foundry since July 1, 2020, prior to which he served as the Chief Financial Officer of SkyWater Technology Foundry since January 2018. From January 2016 until June 2017, Mr. Wold served as Treasurer of Arctic Cat Inc., an American brand of snowmobiles and all-terrain vehicles, where he was responsible for executing all financing and risk management functions, including completing multiple rounds of financing, and played a key role in completing the sale of the company to Textron Inc. in March 2017. From January 1996 through May 2013, he served in several financial leadership roles of Orbital ATK, a global leader in aerospace and defense technologies, including Vice President, Treasurer and Vice President, Investor Relations and Corporate Finance. Mr. Wold began his career as a CPA with Audit and Assurance division of Deloitte & Touche LLP, a multinational professional services and accounting firm, focusing on providing services to both publicly traded and

 

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privately held manufacturing entities. He holds a Bachelor of Accountancy from the University of North Dakota and is a member of the American Institute of Certified Public Accountants and the Minnesota Society of CPAs.

Steve Manko, Chief Financial Officer

Mr. Manko has served as our Chief Financial Officer since December 2020. He has served as the Chief Financial Officer of SkyWater Technology Foundry since July 1, 2020, prior to which he served as a consultant for SkyWater Technology Foundry since early 2019 in connection with a number of finance and accounting initiatives and projects. From January 2019 until June 2020, Mr. Manko was a Managing Director for Riveron Consulting, a business advisory firm, where he led the Financial Advisory Services practice in Minneapolis, assisting companies through various change events, such as acquisitions and internal process changes and optimizations. Prior to his employment at Riveron Consulting, Mr. Manko served from October 2005 until December 2018 as a Managing Director with Ernst & Young, a multinational professional advisory and accounting firm, and specialized in the Banking & Capital Markets industries. He has a Master of Business Administration from The University of Akron and a Bachelor of Arts in Accounting and Business Administration from Malone University. Mr. Manko is also a member of various accounting and finance committees and organizations.

Wendi B. Carpenter, Director

Wendi B. Carpenter has served as a member of our board since October 2020. She is a principal and founder of Gold Star Strategies, LLC, a consulting company providing services in strategic planning, organizational transformation, risk assessment, human capital and corporate governance, which position she has held since January 2012. Ms. Carpenter served as the Tenth President and Special Envoy and Advisor of the State of New York (SUNY) Maritime College from August 2011 to January 2014. From 1977 until 2011, Ms. Carpenter served as a Naval Officer in the U.S. Navy, during which she commanded or was the deputy in multiple organizations which oversaw worldwide maritime and air operations, logistics, manpower, installation and facilities management, and training of forces. Ms. Carpenter also served in key advisory roles and board positions with private, education and government organizations. Ms. Carpenter’s career in the U.S. Navy culminated in the rank of Rear Admiral. Ms. Carpenter holds a Bachelor of Science in Psychology from the University of Georgia and a Master of Arts in International Relations from Salve Regina University, and is a distinguished graduate of the U.S. Naval War College. Ms. Carpenter has also completed numerous executive courses in business, organizational transformation and diplomacy, including the Capstone Program at the National Defense University and the Senior Policy Course at the NATO School. The board selected Ms. Carpenter to serve as a director because of her extensive experience with government agencies and the DoD, work with disruptive and leading-edge technologies, and decades of senior leadership and management experience in large and complex organizations with global reach.

John T. Kurtzweil, Director

John T. Kurtzweil has served as a member of our board since October 2020. He has served as principal of Kurtzweil Consulting, LLC, providing consulting services in the area of capital formation and accountancy, since November 2014. Mr. Kurtzweil has served as a member of the board of directors of Axcelis Technologies, Inc., a semiconductor capital equipment company, since May 2015, and he currently chairs its audit committee. Mr. Kurtzweil previously served as a director of Akoustis Technologies, Inc., an integrated device manufacturer for mobile and other wireless applications, from January 2017 to July 2017, at which time he became the Chief Financial Officer until November 2018. From June 2015 to March 2017, Mr. Kurtzweil was Vice President of Finance of Cree, Inc., a provider of light emitting diode, lighting and semiconductor products, and Chief Financial Officer of its subsidiary, Wolfspeed, a Cree Company. From 2012 until 2014, Mr. Kurzweil served as Senior Vice President, Chief Financial Officer and Special Advisor to the Chief Executive Officer of Extreme Networks, Inc., a provider of open networking innovations. From 2006 to 2012, Mr. Kurtzweil served as Executive Vice President, Finance and as Chief Financial Officer and Treasurer of Cree, Inc. From 2004 to 2006, Mr. Kurtzweil was Senior Vice President and Chief Financial Officer at Cirrus Logic, Inc., a fabless semiconductor company. Mr. Kurtzweil holds a Bachelor of Accountancy degree from Arizona State University and a Master of Business Administration from the University of St. Thomas, and is a licensed CPA and CMA. The board selected Mr. Kurtzweil to serve as a director based on his semiconductor industry background, merger and acquisition experience, and 19 years as chief financial officer of publicly traded technology companies. Mr. Kurtzweil is an active member of the National Association of Corporate Directors.

 

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Thomas R. Lujan, Director

Thomas R. Lujan has served as a member of our board since October 2020. He has served as a director of SkyWater Technology Foundry since March 2017, as the Secretary of SkyWater Technology Foundry since July 2017, and as a manager of SkyWater Federal since September 2018. Mr. Lujan is the founder of Lujan Legal Counsel, LLC, where he has served as an attorney since June 2015. Mr. Lujan represents and advises various corporate entities in all areas of general business law. From 2001 until 2015, Mr. Lujan served as an attorney and founder of Lundquist & Lujan, PLLP, where he provided legal advice to companies in a general business law practice and served as a consultant to the DoD. From 1979 until 1998, Colonel (Ret.) Lujan served as a Judge Advocate Officer in the U.S. Army. He has served on the boards of various private companies and charitable organizations. He graduated with a Bachelor of Science in Engineering from the United States Military Academy at West Point, New York and holds a Juris Doctor from the University of Minnesota Law School. The board selected Mr. Lujan to serve as a director because of his legal and governmental expertise, as well as his significant leadership experience.

Gary J. Obermiller, Chair and Director

Gary J. Obermiller has served as Chair of our board since October 2020 and previously served as a member of our board from February 2018 to January 2020. He has served as the chairman of the board of directors of SkyWater Technology Foundry since March 2017 and served as the interim chief executive officer of SkyWater Technology Foundry from March 2017 to October 2017. He is a co-founder and Operating Partner of Mill City Capital, a private equity firm investing in lower middle market companies, which position he has held since January 2016, after previously serving as Managing Director since January 2010. From 2004 until 2010, Mr. Obermiller was a Managing Director of Goldner Hawn Johnson & Morrison, a private equity investment firm. Prior to 2004, Gary served with Deltak for 14 years in several senior management roles, including as President, President and Chief Operating Officer, and Director of Global Power Equipment Group Inc., Deltak’s eventual parent company, an international manufacturer of equipment for gas turbine power plants. Mr. Obermiller also held managerial positions in operations, sales, marketing and engineering with Graco, Inc. and Econo-Therm Energy Systems Corporation both domestic and internationally. Mr. Obermiller currently serves as a board member at HN Precision, a specialized machining company, as a director for Kobuk Holdings (formerly ABP Induction), a German large electrical equipment supplier, and Acme Industries, a specialized machining company, and is a member of the Dean’s Advisory Board for the University of Minnesota’s College of Science and Engineering, and a member of the University of St. Thomas Board of Governors for the School of Engineering. Mr. Obermiller holds a Bachelor of Science in Mechanical Engineering from the University of Minnesota and a Master of Business Administration from the University of St. Thomas, and is a Licensed Professional Engineer (inactive). The board selected Mr. Obermiller to serve as a director because of his investment and management experience.

Loren A. Unterseher, Director

Loren A. Unterseher has served as a member of our board since September 2016. From March 2017 to April 2021, he was employed as an advisor to SkyWater Technology Foundry. He is the Managing Partner of Oxbow Industries, LLC, a holding company investing in middle-market private companies, which position he has held since 2004. Over his career, Mr. Unterseher has completed over $2.5 billion in corporate finance transactions. Prior to Oxbow, Mr. Unterseher was a Principal/Shareholder & Director of Mergers and Acquisitions for Craig-Hallum Capital Group LLC. Prior to Craig-Hallum, he was Director of Private Equity for Lazard Middle Market LLC (formerly known as Goldsmith, Agio, Helms & Lynner LLC). Mr. Unterseher started his investment banking career as a Vice-President in Mergers and Acquisitions at Royal Bank of Canada (formerly known as Dain Rauscher Incorporated). He began his professional career as an attorney and was a Partner at Stinson Leonard Street LLP (formerly known as Leonard, Street & Deinard), a major Minneapolis-based law firm. Mr. Unterseher also has served since 2018 as a member of the board of directors, and chairs the audit committee, of Insignia Systems, Inc., a publicly-traded manufacturer of signage and promotional media. Mr. Unterseher is currently Chairman of the Board of Inno-flex, LLC, a private company (a director since 2016), and serves on the boards of Town & Country Fence, LLC (since 2017), Ascent Solutions, LLC (since 2018) and FactRight LLC (since 2018), each of which is a private company. Mr. Unterseher has served on several other private company and not-for-profit boards of directors. Mr. Unterseher holds a Bachelor of Business Administration degree in Finance from the University of Iowa and a Juris Doctor from the University of North Dakota. The board selected Mr. Unterseher to serve as a director because of his investment, mergers and acquisitions, and finance experience.

 

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Board of Directors

In accordance with the terms of our certificate of incorporation and bylaws that will be in effect prior to the completion of this offering, upon completion of this offering, our board of directors will consist of six directors. Each director will serve for a one year term and until the election and qualification of successor directors at the annual meeting of stockholders, or until the director’s earlier resignation or removal.

In accordance with the terms of our certificate of incorporation that will become effective prior to the completion of this offering, our directors may be removed with or without cause by the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in an election of directors.

Our nominating and corporate governance committee and our board of directors will consider a broad range of factors relating to the qualifications and background of nominees. Our nominating and corporate governance committee’s and our board of directors’ priority in selecting board members is identification of persons who will further the interests of our stockholders through their established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business, understanding of the competitive landscape, professional and personal experiences and expertise relevant to our growth strategy.

Election of Directors

In accordance with the terms of our bylaws that will be in effect prior to the completion of this offering, the members of our board or directors will be elected by a plurality of the votes cast.

Director Independence

Subject to an exemption available to a “controlled company,” the Nasdaq Marketplace Rules, or the Listing Rules, require that a majority of a listed company’s board of directors be composed of “independent directors,” as defined in those rules, and that such independent directors exercise oversight responsibilities with respect to director nominations and executive compensation. After the completion of this offering, we expect to qualify as a “controlled company” and will be able to rely on the controlled company exemption from these provisions. The Listing Rules define a “controlled company” as “a company of which more than 50% of the voting power is held by an individual, a group or another company.” As described elsewhere in this prospectus, after this offering, Oxbow will beneficially own shares of our common stock representing more than 50% of the combined voting power of our outstanding common stock. Therefore, following the completion of this offering, we are not required to have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, or an entirely independent compensation committee, and may not perform annual performance evaluations of the nominating and corporate governance and compensation committees unless and until such time as we are required to do so. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of these corporate governance requirements.

If we cease to be a controlled company, we will be required to comply with Nasdaq’s corporate governance requirements applicable to listed companies generally, subject to a phase-in period during the first year after we cease to be a controlled company. See “Risk Factors—Risks Relating to this Offering and Ownership of our Common Stock—We have elected to take advantage of the controlled company exemption from certain corporate governance requirements, which could make our common stock less attractive to some investors or otherwise harm our stock price” for additional information. Even though we expect to be a controlled company for purposes of the Listing Rules, we will have to comply with the requirements of those rules relating to the membership, qualifications and operations of the audit committee of the board of directors, including the requirement that, within the first year after the closing of this offering, the audit committee be composed of at least three directors who meet the independence requirements under the rules for membership on that committee.

Leadership Structure of the Board

Our bylaws and corporate governance guidelines, which will be in effect upon the completion of this offering, will provide our board of directors with flexibility to combine or separate the positions of chair of our board of directors and chief executive officer (or equivalent thereof) or the implementation of a presiding or lead director. It is our

 

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board of directors’ view that rather than having a rigid policy, our board of directors should determine, as and when appropriate upon consideration of all relevant factors and circumstances, whether the two offices should be separate.

We expect our leadership structure to separate the offices of chief executive officer and chair of the board, with Thomas Sonderman serving as our chief executive officer and Gary J. Obermiller serving as non-executive chair of the board. We believe that this leadership structure is appropriate at this time because it provides Mr. Sonderman with the ability to focus on our day-to-day operations while Mr. Obermiller focuses on the oversight of our board of directors.

We anticipate that our board of directors will periodically review our leadership structure and may make such changes in the future as it deems appropriate.

Role of Board in Risk Oversight Process

Our board of directors will have oversight responsibility for the company’s risk management process. The board of directors will administer its oversight function through its committees, but will retain responsibility for general oversight of risks. The committee chairs will be responsible for reporting findings regarding material risk exposure to the board of directors as quickly as possible. The board of directors will delegate to the audit committee oversight responsibility to review our code of conduct, including whether the code of conduct is successful in preventing illegal or improper conduct, and our management’s risk assessments and management’s financial risk management policies, including the policies and guidelines used by management to identify, assess and manage our exposure to financial risk. Our compensation committee will assess and monitor any major compensation-related risk exposures and the steps management should take to monitor or mitigate such exposures. We believe that the leadership structure of our board of directors provides appropriate risk oversight of our activities.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each having the composition and responsibilities described below. From time to time, our board of directors may establish other committees to facilitate the management of our business. Each committee will operate under a written charter that satisfies the applicable rules of the SEC and the Nasdaq Listing Rules. Upon the completion of this offering, copies of each committee charter will be posted on our website.

Audit Committee

Upon the completion of this offering, our audit committee will consist of three directors, John T. Kurtzweil, who will serve as chair, Loren A. Unterseher and Gary J. Obermiller. Our board of directors has determined as of the date of this prospectus that all of the audit committee members meet the financial literacy requirements under the rules and regulations of the Nasdaq Capital Market and the SEC and that Mr. Kurtzweil is an audit committee “financial expert” as defined by Item 407(d) of Regulation S-K under the Securities Act. In making this determination, our board of directors considered the nature and scope of experience that Mr. Kurtzweil has previously had with public reporting companies. Our board of directors has determined that Mr. Obermiller and Mr. Kurtzweil satisfy the relevant independence requirements for service on the audit committee set forth in the rules of the SEC and the Nasdaq listing rules. Under phase-in rules, we are required to have our audit committee consist of all independent members within one year from the IPO listing date. Our audit committee is currently comprised of three members, two of whom are independent. Both our independent registered public accounting firm and management will periodically meet privately with our audit committee.

The principal duties and responsibilities of our audit committee include, among other matters:

 

∎

appointing, compensating, retaining, replacing and overseeing our independent auditor;

 

∎

pre-approving all audit and permitted non-audit services to be provided by our independent auditor;

 

∎

assisting our board of directors in its oversight of our consolidated financial statements and other financial information to be provided by us;

 

∎

recommending based upon the audit committee’s review and discussions with management and our independent registered public accounting firm whether our audited consolidated financial statements shall be included in our Annual Report on Form 10-K;

 

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∎

overseeing our compliance with legal and regulatory matters and aspects of our risk management processes;

 

∎

reviewing all related person transactions for potential conflict of interest situations and approving all such transactions;

 

∎

discussing with management and our independent auditors any major issues as to the adequacy of our internal controls, any actions to be taken in light of significant or material control deficiencies and the adequacy of disclosures about changes in internal control over financial reporting; and

 

∎

establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Compensation Committee

Upon the completion of this offering, our compensation committee will consist of two directors, Wendi B. Carpenter, who will serve as chair, and Thomas R. Lujan. Because we expect to be a “controlled company” under the corporate governance rules of the Nasdaq Capital Market, our compensation committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a controlled company under the current rules, we will adjust the composition of the compensation committee accordingly in order to comply with such rules.

The principal duties and responsibilities of our compensation committee will include, among other matters:

 

∎

annually reviewing and recommending to the board of directors the corporate goals and objectives relevant to the compensation of our executive officers;

 

∎

evaluating the performance of our chief executive officer in light of such corporate goals and objectives and based on such evaluation reviewing and recommending to the board of directors the compensation of our chief executive officer;

 

∎

reviewing and recommending to the board of directors the compensation of our other executive officers;

 

∎

providing oversight of our executive compensation policies, plans and benefit programs;

 

∎

evaluating and assessing potential and current compensation advisors in accordance with the independence standards identified in the applicable Nasdaq listing rules;

 

∎

administering our equity compensation plans;

 

∎

preparing our compensation committee report if and when required by SEC rules;

 

∎

reviewing and discussing annually with management our “Compensation Discussion and Analysis,” if and when required to be included in our annual proxy statement;

 

∎

reviewing the compensation arrangements for our non-employee directors and recommending any changes to the board of directors; and

 

∎

overseeing and reviewing our executive team and management succession plans.

Nominating and Corporate Governance Committee

Upon the completion of this offering, our nominating and corporate governance committee will consist of three directors, Loren Unterseher, who will serve as chair, Thomas Sonderman and Gary J. Obermiller. Because we expect to be a “controlled company” under the corporate governance rules of the Nasdaq Capital Market, our nominating and corporate governance committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a controlled company under the current rules, we will adjust the composition of the nominating and corporate governance committee accordingly in order to comply with such rules.

The nominating and corporate governance committee’s responsibilities will include, among other matters:

 

∎

identifying qualified candidates to be considered for appointment or election to the board of directors;

 

∎

making recommendations to the board of directors regarding the selection and approval by the board of director of nominees to be submitted for election by a stockholder vote;

 

∎

determining the composition of the board and its committees and making recommendations to the board of directors regarding the appointment of directors to serve as members of each committee;

 

∎

monitoring and reviewing any issues regarding the independence of our non-employee directors or involving potential conflicts of interest affecting any such directors; and

 

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∎

developing and implementing our corporate governance guidelines and recommending any changes to the board of directors.

Board Diversity

Upon completion of this offering, our nominating and corporate governance committee will be responsible for reviewing with our board of directors, on an annual basis, the appropriate characteristics, skills and experience required for our board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), we expect that the nominating and corporate governance committee, in recommending candidates for election, and our board of directors, in approving (and, in the case of vacancies, appointing) such candidates, will take into account many factors, including the following:

 

∎

personal and professional integrity;

 

∎

ethics and values;

 

∎

experience in corporate management, such as serving as an officer or former officer of a publicly traded company;

 

∎

experience in the industries in which we compete;

 

∎

experience as a board member or executive officer of another publicly traded company;

 

∎

diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

 

∎

diversity of background and perspective, including but not limited to, with respect to race, gender or national origin;

 

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conflicts of interest; and

 

∎

practical and mature business judgment.

We have no formal policy regarding board diversity. Currently, our board of directors evaluates, and following the closing of this offering will evaluate, each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

Code of Ethics and Code of Conduct

We will adopt a code of code of ethics in connection with this offering applicable to our chief executive officer and senior financial officers. In addition, we will adopt a code of conduct applicable to the conduct of our business by our employees, officers and directors. Our code of ethics and code of conduct will be posted on our website. We intend to disclose any amendments to certain provisions of our code of ethics, or any waivers of those provisions, as required by the Nasdaq Listing Rules, the rules and regulations of the SEC and applicable law.

Non-Employee Director Compensation Policy

Our board of directors will adopt a non-employee director compensation policy in connection with this offering. Under the compensation policy, our non-employee directors will be eligible to receive compensation for service on our board of directors and committees of our board of directors. In addition, our non-employee directors are entitled to reimbursement of ordinary, necessary and reasonable out-of-pocket travel expenses incurred in connection with attending in-person meetings of our board of directors or committees thereof.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

The following presents information about compensation paid to our principal executive officer and our other two executive officers as of January 3, 2021. We refer to those officers as our named executive officers. Because only two individuals served as our executive officers at any time during fiscal 2019, we had only two named executive officers for that year.

Summary Compensation Table

The following table sets forth information regarding total compensation earned by our named executive officers during fiscal 2019 and fiscal 2020.

 

 

 

NAME AND PRINCIPAL POSITION		YEAR				SALARY ($)				BONUS ($)				STOCK AWARDS ($)				OPTION AWARDS ($)				NON-EQUITY INCENTIVE PLAN COMPENSATION  (1) ($)				ALL OTHER COMPENSATION (2) ($)				TOTAL ($)
Thomas Sonderman			2020				300,000				—				—				—				84,371				8,628				392,999
President and Chief Executive Officer			2019				300,000				—				—				—				44,066				9,519				353,585
Steven Wold (3)			2020				250,000				39,000				—				—				66,576				7,567				363,143
Chief Administrative Officer			2019				250,000				—				—				—				34,772				6,298				291,070
Steve Manko (3)			2020				113,461				50,000				2,078,433	(4)			—				—				2,885				2,244,779
Chief Financial Officer

 

 

(1)

Represents the actual amounts earned by each of our named executive officers under the cash incentive plan described below under “—SkyWater Long-Term Incentive Compensation Plan.”

(2)

Represents a matching contribution under our 401(k) employee benefit plan.

(3)

Steven Wold served as Chief Financial Officer during fiscal 2019. Effective as of July 1, 2020, Mr. Wold assumed responsibility as Chief Administrative Officer, and Steve Manko assumed responsibility as Chief Financial Officer.

(4)

Represents an award pursuant to which Mr. Manko may receive up to 369,828 common units (after the Corporate Conversion, that number of shares of common stock determined pursuant to the Corporate Conversion) in equal one-third increments subject to his continued service through each of July 1, 2021, July 1, 2022 and July 1, 2023. The award also requires the occurrence of a liquidity event, which this offering will satisfy, in order to vest. The award may also vest on an accelerated basis in connection with certain involuntary terminations of employment within 12 months following a change in control of the Company (as defined in the award).

For fiscal 2020, our named executive officers were compensated through a combination of base salary, annual cash incentive opportunity, equity award (in the case of Mr. Manko), long-term incentive awards and employee benefits. Our named executive officers were also entitled to cash severance and other benefits in the event of a qualifying termination of employment or certain transactions.

Base Salaries

The amount reported for Mr. Sonderman’s fiscal 2020 salary above reflects his base salary at an annual rate of $300,000 as chief executive officer of our company. The amount reported for Mr. Wold’s fiscal 2020 salary above reflects his base salary at an annual rate of $250,000 as Chief Administrative Officer of our company. The amount reported for Mr. Manko’s fiscal 2020 salary above reflects his base salary at an annual rate of $250,000 as Chief Financial Officer of our company. Following the completion of this offering, we expect that base salaries for Messrs. Sonderman, Wold and Manko will be $450,000, $290,000 and $315,000, respectively. We expect that any base salary adjustments, will be determined by evaluating the responsibilities of the executive’s position, the executive’s experience, and industry practice among our peer companies and other companies with which we will compete executive talent.

SkyWater Long-Term Incentive Compensation Plan

Our board of managers adopted the SkyWater Technology Foundry, Inc. Long-Term Incentive Compensation Plan, or the Long-Term Incentive Plan, on April 25, 2018. The purpose of the Long-Term Incentive Plan is to retain key managerial employees, as determined in the sole discretion of the board, by allowing these individuals to receive

 

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compensation on a deferred basis in order to provide retirement benefits for themselves, and pre-retirement death benefits for their survivors. The Long-Term Incentive Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the U.S. Internal Revenue Code of 1986, as amended, or the Code. The Long-Term Incentive Plan is also intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. The Long-Term Incentive Plan is administered by the board of managers, which has complete discretion to make all decisions relating to the Long-Term Incentive Plan. Awards under the Long-Term Incentive Plan do not represent units in our company.

Only the company may make contributions under the Long-Term Incentive Plan and such contributions generally vest 50% after three years of service and 100% following five years of service. Participants are 100% vested in the event of death, disability, retirement, or upon a change in control for those participants with at least one year of service immediately prior to the change in control. Vested participant accounts are paid in cash upon separation from service. The Board is expected to terminate the Long-Term Incentive Plan prior to the offering, and provide for full vesting of accounts under the Long-Term Incentive Plan.

As of January 3, 2021, Mr. Sonderman’s benefit under the Long-Term Incentive Plan was $239,696, of which $119,848 was vested. As of January 3, 2021, Mr. Wold’s benefit under the Long-Term Incentive Plan was $199,746, of which $0 was vested.

SkyWater Incentive Plan

We established the SkyWater Incentive Plan, or the Incentive Plan, to provide cash incentives to employees based on performance. Under the Incentive Plan, all regular company employees not already assigned to an incentive plan are eligible to receive four quarterly awards, based on exceeding 50% of established key performance indices, as well as an additional annual award based on overall company performance. Quarterly awards range between 1% and 2% of guaranteed base pay. Annual awards are based on job level and may not exceed individually-based annual target incentives. The executive staff is ultimately responsible for scoring performance indices and reserves the right to modify or cancel the plan, cancel any payment due or earned, or discontinue participation of any participant in this plan, at any time and for whatever reason.

Stock Awards

In December 2020, Mr. Manko received a one-time award pursuant to which Mr. Manko may receive up to 369,828 common units (after the Corporate Conversion, that number of shares of common stock determined pursuant to the Corporate Conversion) in equal 1/3 increments subject to his continued service through each of July 1, 2021, July 1, 2022 and July 1, 2023. The award also requires the occurrence of a liquidity event, which this offering will satisfy, in order to vest. The award may also vest on an accelerated basis in connection with certain involuntary terminations of employment within 12 months following a change in control of the Company (as defined in the award). He may participate in all applicable employee benefit plans.

Bonus Agreements

Each of our named executive officers has entered into a bonus agreement with SkyWater Technology Foundry effective as of August 28, 2020. Pursuant to these bonus agreements, Mr. Sonderman is eligible for bonus earnings of up to $300,000, Mr. Manko is eligible for bonus earnings of up to $250,000, and Mr. Wold is eligible for bonus earnings of up to $62,500, in each case dependent upon the completion of this offering and other conditions, including each individual’s performance related to this offering.

Executive Severance and Change of Control Plan

On March 5, 2021, our board adopted the SkyWater Technology, Inc. Executive Severance and Change of Control Plan, or the Severance Plan, effective March 5, 2021, providing for specified payments and benefits to plan participants upon termination of employment as a result of severance eligible events. The participants in the plan are executive officers and other key employees of the Company and its affiliates who are designated as participants by the compensation committee and who execute the required consent confirming their status as participants.

The severance multiple (corresponding to months of value) for plan benefits is 24 for individuals designated as Tier 1 participants and 12 for individuals designated as Tier 2 participants under the Severance Plan. The change of

 

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control severance multiple for plan benefits is 24 for individuals designated as Tier 1 participants and 18 for individuals designated as Tier 2 participants under the Severance Plan. Mr. Sonderman is a Tier 1 participant and Messrs. Wold and Manko are Tier 2 participants.

The Severance Plan provides for payments and benefits to participants as follows:

 

∎

Termination by the participant without good reason (as defined in the Severance Plan), termination by the Company for cause (as defined in the Severance Plan), or termination for disability (as defined in the Severance Plan) or by reason of death: the participant is entitled to (1) base salary earned through the date of termination, (2) incentive compensation earned but unpaid, and (3) accrued but unpaid vacation, sick leave and other paid time-off to the extent not theretofore paid, which we refer to collectively as the Accrued Obligations;

 

∎

Termination by the Company without cause (as defined in the Severance Plan) or termination by the participant with good reason (as defined in the Severance Plan) not associated with a change of control (as defined in the Severance Plan): the participant is entitled to (1) the Accrued Obligations, (2) a lump sum payment in an amount equal to the participant’s base salary for a number of months equal to the applicable severance multiple, plus the amount of cash incentive the participant would receive for performance at “target” for the year in which the termination occurs times the applicable severance multiple divided by 12, and (3) at the Company’s option, either a lump sum payment equal to the cost of COBRA continuation under the Company’s medical and dental plans or continued participation in the Company’s medical and dental plans, in either case, for a number of months equal to the applicable severance multiple; or

 

∎

Termination by the Company without cause (as defined in the Severance Plan) or termination by participant with good reason (as defined in the Severance Plan) within the three months preceding a change of control (as defined in the Severance Plan) and at the request of a third party involved in the change of control or during the twelve month period following a change of control: the participant is entitled to (1) the Accrued Obligations, (2) a lump sum payment in an amount equal to the participant’s base salary for a number of months equal to the applicable change of control severance multiple, plus the amount of cash incentive the participant would receive for performance at “target” for the year in which the termination occurs times the applicable change of control severance multiple divided by 12, and (3) at the Company’s option, either a lump sum payment equal to the cost of COBRA continuation under the Company’s medical and dental plans or continued participation in the Company’s medical and dental plans, in either case, for a number of months equal to the applicable change of control severance multiple.

A participant is entitled to benefits and payments under the Severance Plan (other than the Accrued Obligations) only upon the participant’s timely execution of a release and the participant’s compliance with the applicable restrictive covenants outlined in the Severance Plan. Payments and benefits under the Severance Plan are generally intended to be exempt from the provisions of Section 409A of the Internal Revenue Code. Any payments or benefits that constitute “nonqualified deferred compensation” to a participant who is a “specified employee” within the meaning of Section 409A of the Internal Revenue Code shall be accumulated and paid six months following the termination date.

Outstanding Equity Awards as of January 3, 2021

The following table provides information regarding equity awards held by our named executive officers that were outstanding as of January 3, 2021.

 

 

 

						STOCK AWARDS
NAME		GRANT DATE				NUMBER OF UNITS OR SHARES OF STOCK THAT HAVE NOT VESTED (#)				MARKET VALUE OF UNITS OR SHARES OF STOCK THAT HAVE NOT VESTED ($)
Thomas Sonderman			—				—				—
Steven Wold			—				—				—
Steve Manko			12/18/2020				369,828			$	2,078,433

 

 

 

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2021 Equity Incentive Plan

We expect that our board of directors and stockholders will approve and adopt the 2021 Plan, in connection with this offering. A summary of the material terms of the 2021 Plan is set forth below.

Adoption, Effective Date and Term

If our board of directors and stockholders approve the 2021 Plan, it will become effective following the Corporate Conversion and will terminate on the tenth anniversary of the effective date, unless the 2021 Plan is terminated earlier by the board or in connection with a change in control of our company.

Purpose and Types of Awards

We believe that adoption and maintenance of the 2021 Plan will assist us in recruiting, rewarding and retaining employees, officers, non-employee directors and other service providers. We believe that granting awards under the 2021 Plan will provide recipients with an incentive to contribute to the success of our company and to operate and manage our business in a manner that will provide for our long-term growth and profitability to benefit our stockholders and other important stakeholders, including our employees and customers, and will ensure that key personnel act in our best interests during and after their service to our company as a condition of enjoying the benefits of such rewards. The 2021 Plan provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards and cash bonus awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of annual or long-term performance goals.

Administration

The 2021 Plan will be administered by the compensation committee of our board of directors. The composition of the committee will satisfy the requirements of any stock exchange on which our common stock is listed. During any period of time in which we do not have a compensation committee, the 2021 Plan will be administered by the board or another committee appointed by the board. With certain exceptions and to the extent permitted by applicable law, the compensation committee may delegate some or all of its authority to our chief executive officer or any other officer.

The compensation committee will have full power and authority to take all actions and to make all determinations required or provided for under, and to interpret all provisions of, the 2021 Plan and any award or award agreement thereunder. The committee also will determine who will receive awards under the 2021 Plan, the type of award and its terms and conditions, and the number of shares of common stock subject to the award or to which an award relates.

Eligibility

Awards may be granted under the 2021 Plan to individuals who are employees, officers, or non-employee directors of our company or any of our affiliates, consultants and advisors who perform services for our company or any of our affiliates, and any other individual whose participation in the 2021 Plan is determined to be in the best interests of our company by the compensation committee.

Share Authorization, Usage and Limits

We have reserved 5,000,000 shares of common stock for issuance pursuant to awards under the 2021 Plan. The share reserve of the 2021 Plan will be increased effective the first business day of each calendar year commencing in 2022 by an amount equal to the least of: (i) 150,000 shares of common stock; (ii) three percent (3%) of the shares of common stock outstanding on the final day of the immediately preceding calendar year; and (iii) such smaller number of shares of common stock as determined by the committee. If any awards terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised or paid or if any awards are forfeited or expire or otherwise terminate without the delivery of any shares of common stock or are settled in cash in lieu of shares of common stock, the shares of common stock subject to such awards will again be available for purposes of the 2021 Plan. However, the number of shares of common stock available for issuance under the 2021 Plan will not be increased by the number of shares tendered, withheld or subject to an award surrendered in connection with the purchase of shares of common stock upon exercise of an option; not issued upon the net settlement or net exercise of a stock appreciation right that is settled in shares; deducted or delivered from payment of an award in connection with our tax withholding obligations; or purchased by us with the proceeds from option exercises.

 

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Shares of common stock that are subject to awards will be counted against the 2021 Plan share limit as one share of common stock for every one share of common stock subject to the award. An award that, by its terms, cannot be settled in shares of common stock will not count against the share limit of the 2021 Plan.

Options

The 2021 Plan permits the grant of incentive stock options (under Section 422 of the Code) and options that do not qualify as incentive stock options, which are referred to as nonqualified stock options. Any or all of the shares of common stock reserved for issuance under the 2021 Plan are available for issuance pursuant to incentive stock options, but incentive stock options may be granted only to our employees and employees of our corporate subsidiaries. The exercise price of each option will be determined by the compensation committee, except that the exercise price may not be less than 100% (or, for incentive stock options to any 10% stockholder, 110%) of the fair market value of a share of common stock on the date on which the option is granted. To the extent that the aggregate fair market value of shares of common stock determined on the date of grant with respect to which incentive stock options are exercisable for the first time during any calendar year exceeds $100,000, the option, or such excess portion of the option, will be treated as a nonqualified stock option.

The term of an option may not exceed ten years (or, for incentive stock options to any 10% stockholder, five years) from the date of grant. The compensation committee will determine the time or times at which each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the compensation committee. Awards of options are nontransferable, except for transfers by will or the laws of descent and distribution or, if authorized in the applicable award agreement, for transfers of nonqualified stock options, not for value, to family members pursuant to the terms and conditions of the 2021 Plan.

Stock Appreciation Rights

The 2021 Plan permits the grant of stock appreciation rights. A stock appreciation right represents the grantee’s right to receive a compensation amount, based on the value of the appreciation in our common stock from the date of grant to the date of exercise, if vesting criteria or other terms and conditions established by the compensation committee are met. The exercise price of each stock appreciation right will be determined by the compensation committee, except that the exercise price may not be less than 100% of the fair market value of a share of common stock on the date on which the stock appreciation right is granted, and the term of a stock appreciation right may not exceed ten years from the date of grant. A grantee who receives stock appreciation rights will have no rights of a stockholder as to the shares of common stock on which the stock appreciation right is based. If the vesting criteria or other terms and conditions are met, we will settle stock appreciation rights in cash, shares of common stock, or a combination of the two. Awards of stock appreciation rights are nontransferable, except for transfers by will or the laws of descent and distribution or, if authorized in the applicable award agreement, for transfers not for value to family members pursuant to the terms and conditions of the 2021 Plan.

No Repricing

The compensation committee may not amend the terms of outstanding options or stock appreciation rights to reduce the applicable exercise price, cancel outstanding options or stock appreciation rights in exchange for or substitution of options or stock appreciation rights with an exercise price that is less than the exercise price of the original options or stock appreciation rights, or cancel outstanding options or stock appreciation rights with an exercise price above the current fair market value of a share of our common stock in exchange for cash or other securities, in each case, unless such action is subject to and approved by our stockholders or would not be deemed to be a repricing under the rules any stock exchange on which our common stock is listed.

Restricted Stock

The 2021 Plan permits the grant (or sale at the purchase price determined by the compensation committee) of restricted stock awards. A restricted stock award is an award of shares of common stock that may be subject to restrictions on transferability and other restrictions as the compensation committee determines in its sole discretion on the date of grant. The restrictions, if any, may lapse over a specified period of time or through the satisfaction of conditions, in installments, or otherwise, as the compensation committee may determine. Unless otherwise provided in an award agreement, a grantee who receives restricted stock will have all of the rights of a stockholder as to those

 

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shares, including, without limitation, the right to vote and the right to receive dividends or distributions on the shares of common stock, except that the compensation committee may require any dividends to be withheld and accumulated contingent on vesting of the underlying shares or reinvested in shares of restricted stock. Dividends paid on shares of restricted stock which vest based on the achievement of performance goals will not vest unless the applicable performance goals are achieved. During the period, if any, in which shares of restricted stock are non-transferable or forfeitable, a grantee is prohibited from selling, transferring, assigning, pledging or otherwise encumbering or disposing of his or her shares of restricted stock.

Restricted Stock Units and Deferred Stock Units

The 2021 Plan also permits the grant of restricted stock units and deferred stock units. Restricted stock units represent the grantee’s right to receive a compensation amount, based on the value of the shares of common stock, if vesting criteria or other terms and conditions established by the compensation committee are met. If the vesting criteria or other terms and conditions are met, we will settle restricted stock units in cash, shares of common stock or a combination of the two. Deferred stock units are restricted stock units that provide for the settlement and delivery of cash, shares of common stock, or a combination of the two after the date of vesting, consistent with the terms of Section 409A of the Code. A grantee who receives restricted stock units or deferred stock units will have no rights of a stockholder as to the shares of common stock on which the restricted stock unit or deferred stock unit is based, though the compensation committee may provide that a grantee of restricted stock units or deferred stock units will be entitled to receive dividend equivalent rights paid on an equivalent number of shares of common stock. The compensation committee may provide that any such dividend equivalent rights will be deemed withheld and accumulated contingent on vesting of the underlying award or reinvested in shares of restricted or deferred common stock or other awards. Dividend equivalent rights paid on restricted stock units or deferred stock units which vest based on the achievement of performance goals will not vest unless the applicable performance goals are achieved. During the period, if any, in which restricted stock units or deferred stock units are non-transferable or forfeitable, a grantee is prohibited from selling, transferring, assigning, pledging or otherwise encumbering or disposing of his or her restricted stock units or deferred stock units.

Unrestricted Stock and Other Equity-Based Awards

The 2021 Plan permits the grant (or, for unrestricted stock, sale at the purchase price determined by the compensation committee) of unrestricted stock and other types of common stock-based awards. An unrestricted stock award is an award of shares of common stock free of any restrictions. Other equity-based awards are payable in cash, shares of common stock or other equity, or a combination thereof, and may be restricted or unrestricted, as determined by the committee. The terms and conditions that apply to other equity-based awards are determined by the compensation committee.

Dividend Equivalent Rights

The 2021 Plan permits the grant of dividend equivalent rights in connection with the grant of any equity-based award, other than options and stock appreciation rights. Dividend equivalent rights are rights to receive (or to receive credits for the future payment of) cash, shares of common stock, other awards or other property equal in value to dividend payments or distributions paid or made with respect to a specified number of shares of common stock. The compensation committee will determine the terms and conditions of any dividend equivalent rights, except that no dividend equivalent rights granted as a component of a performance-based award will vest unless the underlying performance goals are achieved.

Performance Awards

The 2021 Plan permits the grant of performance awards and annual incentive awards in such amounts and upon such terms as the compensation committee may determine. Each grant of a performance award will have an initial actual or target cash value or an actual or target number of shares of common stock that is established by the committee at the time of grant. The committee may set performance goals in its discretion which, depending on the extent to which they are met, will determine the amount of cash or value or number of shares of common stock that will be earned by a grantee under such performance awards and annual incentive awards. The performance goals may be based on one or more of the performance measures described below. The compensation committee will establish the performance periods for performance awards and annual incentive awards. Performance awards and

 

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annual incentive awards may be payable in cash or shares of common stock, or a combination thereof, as determined by the compensation committee.

Performance Measures

Under the 2021 Plan, the compensation committee may use one or more of the following business criteria in establishing performance goals:

 

∎

net earnings or net income;

 

∎

operating earnings;

 

∎

pretax earnings;

 

∎

earnings per share;

 

∎

share price, including growth measures and total stockholder return;

 

∎

before interest and taxes;

 

∎

earnings before interest, taxes, depreciation and/or amortization;

 

∎

earnings before interest, taxes, depreciation and/or amortization as adjusted to exclude any one or more of the following: stock-based compensation expense; income from discontinued operations; gain on cancellation of debt; debt extinguishment and related costs; restructuring, separation or integration charges and costs; reorganization and/or recapitalization charges and costs; impairment charges; merger-related events; impact of purchase accounting; gain or loss related to investments; amortization of intangible assets; sales and use tax settlements; legal proceeding settlements; gain on non-monetary transactions; and adjustments for the income tax effect of any of the preceding adjustments;

 

∎

sales or revenue growth or targets, whether in general or by type of product, service or customer;

 

∎

gross or operating margins;

 

∎

return measures, including return on assets, capital, investment, equity, sales or revenue;

 

∎

cash flow, including: operating cash flow; free cash flow, defined as operating cash flow less capital expenditures or as earnings before interest, taxes, depreciation and/or amortization (as adjusted to exclude any one or more of the items that may be excluded pursuant to the performance measure specified in the eighth bullet point above) less capital expenditures; levered free cash flow, defined as free cash flow less interest expense; cash flow return on equity; and cash flow return on investment;

 

∎

productivity ratios;

 

∎

costs, reductions in cost and cost control measures;

 

∎

expense targets;

 

∎

market or market segment share or penetration;

 

∎

financial ratios as provided in our credit agreements;

 

∎

working capital targets;

 

∎

completion of acquisitions of businesses, companies or assets or completion of integration activities following an acquisition of businesses, companies or assets;

 

∎

completion of divestitures and asset sales;

 

∎

regulatory achievements or compliance;

 

∎

customer satisfaction measurements;

 

∎

execution of contractual arrangements or satisfaction of contractual requirements or milestones;

 

∎

product development achievements;

 

∎

monthly recurring revenue;

 

∎

revenue retention rates; and

 

∎

any combination of the foregoing business criteria.

The compensation committee may establish performance goals on a company-wide basis or with respect to one or more business units, divisions, affiliates or operating segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices, and it may use goals other than the foregoing business criteria.

 

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The compensation committee has the authority to provide for accelerated vesting of any performance award or annual incentive award based on the achievement of performance goals pursuant to the performance measures and the discretion to adjust awards, either on a formula or discretionary basis, or on any combination thereof, as the committee determines.

Change in Control

Unless otherwise provided in an applicable award agreement, if we experience a change in control in which outstanding awards will not be assumed or continued by the surviving entity:

 

∎

except for performance awards and annual incentive awards, immediately before the change in control, all outstanding shares of restricted stock and all restricted stock units, deferred stock units and dividend equivalent rights will vest, and the shares of common stock underlying, or cash payment promised under, such awards will be delivered; and

 

∎

at the discretion of the compensation committee, either all options and stock appreciation rights will become exercisable at least 15 days before the change in control and terminate, if unexercised, upon the completion of the change in control, and/or all options, restricted stock, restricted stock units, deferred stock units and dividend equivalent rights will be canceled in exchange for cash and/or capital stock.

In the case of performance awards and annual incentive awards, if less than half of the performance period has lapsed, the awards will be treated as though target performance thereunder has been achieved, and if at least half of the performance period has lapsed, actual performance to date (if determinable) will be determined and treated as achieved. If actual performance is not determinable, the awards will be treated as though target performance thereunder has been achieved. Other equity-based awards will be governed by the terms of the applicable award agreement.

Unless otherwise provided in an applicable award agreement, if we experience a change in control in which outstanding awards will be assumed or continued by the surviving entity, the 2021 Plan and awards granted thereunder will continue under their terms, with appropriate adjustments to the number of shares subject to or underlying an award and to the exercise prices of options and stock appreciation rights.

Adjustments for Certain Events

The compensation committee will make appropriate adjustments in outstanding awards and the number of shares of common stock reserved and available for issuance under the 2021 Plan to reflect certain changes in our stock on account of mergers, reorganizations, recapitalizations, reclassifications, stock splits, spin-offs, combinations of stock, exchanges of stock, stock dividends and other, similar events.

Amendment, Suspension or Termination

The board of directors may, at any time and from time to time, amend, suspend or terminate the 2021 Plan so long as no amendment, suspension or termination adversely impairs the rights or obligations under any outstanding award without the affected grantee’s consent. The effectiveness of any amendment to the 2021 Plan will be contingent on approval of such amendment by our stockholders to the extent provided by the board of directors or required by applicable laws (including, for so long as our common stock is listed on a stock exchange, the rules of such stock exchange).

U.S. Federal Income Tax Consequences

The material U.S. federal income tax consequences of the 2021 Plan under current U.S. federal income tax law are summarized in the following discussion, which deals with the general tax principles applicable to the 2021 Plan. The following discussion is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed because they may vary depending on individual circumstances and from jurisdiction to jurisdiction.

Nonqualified Stock Options

There are no immediate U.S. federal income tax consequences of receiving an award of nonqualified stock options under the 2021 Plan. Upon exercise of the option, the difference between the exercise price and the fair market

 

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value of the shares subject to the option on the exercise date will constitute compensation income taxable to the participant. We will be entitled to a deduction equal to the amount of compensation income taxable to the participant if we comply with applicable reporting requirements, subject to the limitations of Section 162(m) of the Code. Upon the participant’s disposition of shares acquired upon exercise, any gain realized in excess of the amount reported as ordinary income will be reportable by the participant as a capital gain, and any loss will be reportable as a capital loss. Capital gain or loss will be long-term if the participant held the shares for more than one year. Otherwise, the capital gain or loss will be short-term.

Incentive Stock Options

There are no immediate U.S. federal income tax consequences of receiving an award of incentive stock options under the 2021 Plan. In addition, although a participant generally will not recognize taxable income upon the exercise of an incentive stock option, the participant’s alternative minimum taxable income will be increased by the amount by which the aggregate fair market value of the shares underlying the option, which is generally determined as of the exercise date, exceeds the aggregate exercise price. Further, except in the case of the participant’s death or disability, if an option is exercised more than three months after the participant’s termination of employment, the option will cease to be treated as an incentive stock option and will be subject to taxation under the rules applicable to nonqualified stock options.

If a participant sells the shares acquired upon exercise of an incentive stock option at least two years after the date on which the incentive stock option was granted and at least one year after the date on which the incentive stock option was exercised, any excess of the sale price of the option shares over the exercise price will be treated as long-term capital gain taxable to the option holder at the time of the sale. If the disposition occurs before such two-year and one-year periods, the excess of the fair market value of the option shares on the disposition date over the exercise price will be taxable income to the option holder at the time of the disposition. Of that income, the amount up to the excess of the fair market value of the shares at the time the option was exercised over the exercise price will be ordinary income for income tax purposes, and the balance, if any, will be long-term or short-term capital gain, depending upon whether or not the shares were sold more than one year after the option was exercised. We will not be entitled to a deduction with respect to an incentive stock option unless the participant engages in a disqualifying disposition, at which time we will be entitled to a deduction equal to the amount of the compensation income taxable to the participant.

Stock Appreciation Rights

There are no immediate U.S. federal income tax consequences of receiving an award of stock appreciation rights under the 2021 Plan. Upon exercise of stock appreciation rights, the distribution of shares of common stock or the cash payment in satisfaction of the stock appreciation rights will be taxable as ordinary income when the distribution or payment is actually or constructively received by the participant. The amount taxable as ordinary income is the aggregate fair market value of the shares of common stock determined as of the date they are received or, in the case of a cash award, the amount of the cash payment. We will be entitled to a deduction equal to the amount of any compensation income taxable to the participant, subject to the limitations of Section 162(m) of the Code and, as to stock appreciation rights that are settled in shares of common stock, if we comply with applicable reporting requirements.

Restricted Stock

Generally, a participant will not recognize any taxable income for U.S. federal income tax purposes in the year of the restricted stock award if the common stock subject to the award is nontransferable and subject to a substantial risk of forfeiture. A participant, however, may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the shares on the award date, determined without regard to the restrictions. If a participant does not make a Section 83(b) election, the fair market value of the shares on the date on which the restrictions lapse will be treated as compensation income to the participant and will be taxable in the year in which the restrictions lapse. Dividends and distributions paid on restricted stock for which a participant has not made a Section 83(b) election are taxed as compensation income subject to withholding taxes. After such restricted stock vests (or earlier upon a participant’s timely Section 83(b) election), dividends and distributions paid on the restricted stock will no longer be considered compensation income. We generally will be

 

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entitled to a deduction for compensation paid equal to the amount treated as compensation income to the participant in the year in which the participant is taxed on the income if we comply with applicable reporting requirements, subject to the limitations of Section 162(m) of the Code.

Restricted Stock Units and Deferred Stock Units

There are no immediate U.S. federal income tax consequences of receiving an award of restricted stock units or deferred stock units under the 2021 Plan. A distribution of shares of common stock or payment of cash in satisfaction of an award of restricted stock units or deferred stock units will be taxable as ordinary income when the distribution or payment is actually or constructively received by the participant. The amount taxable as ordinary income is the aggregate fair market value of the shares of common stock determined as of the date they are received or, in the case of a cash award, the amount of the cash payment. We will be entitled to deduct the amount of such payments when such payments are taxable as compensation to the participant if we comply with applicable reporting requirements, subject to the limitations of Section 162(m) of the Code.

Unrestricted Stock

If a participant receives an award of unrestricted stock, the participant will be required to recognize ordinary income for U.S. federal income tax purposes in an amount equal to the fair market value of the shares on the award date, reduced by the amount, if any, paid for such shares. We will be entitled to deduct the amount of any compensation income taxable to the participant if we comply with applicable reporting requirements, subject to the limitations of Section 162(m) of the Code. Upon the participant’s disposition of shares of unrestricted stock, any gain realized in excess of the amount reported as ordinary income will be reportable by the participant as a capital gain, and any loss will be reportable as a capital loss. Capital gain or loss will be long-term if the participant held the shares for more than one year. Otherwise, the capital gain or loss will be short-term.

Dividend Equivalent Rights

If a participant receives an award of dividend equivalent rights, the participant will be required to recognize ordinary income for U.S. federal income tax purposes in the amount distributed to the participant pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a deduction in the same amount and generally at the same time as the participant recognizes ordinary income, subject to the limitations of Section 162(m) of the Code.

Performance Awards

There are no immediate U.S. federal income tax consequences of receiving a performance or an annual incentive award under the 2021 Plan. A distribution of shares of common stock or payment of cash in satisfaction of a performance or an annual incentive award will be taxable as ordinary income when the distribution or payment is actually or constructively received by the participant. The amount taxable as ordinary income is the aggregate fair market value of the shares of common stock determined as of the date they are received or, in the case of a cash award, the amount of the cash payment. We will be entitled to deduct the amount of such payments when such payments are taxable as compensation to the participant if we comply with applicable reporting requirements, subject to the limitations of Section 162(m) of the Code.

Section 162(m) of the Code

Section 162(m) of the Code limits publicly held companies to an annual deduction for U.S. federal income tax purposes of one million dollars for compensation paid to persons who are or were the chief executive officer, the chief financial and the three highest compensated executive officers (other than the chief executive officer and chief financial officer) determined at the end of each year, referred to as covered employees. Individuals who become covered employees generally retain that status for purposes of the deduction limit even if they cease to serve in a covered role.

SkyWater Technology, Inc. 2021 Employee Stock Purchase Plan

In connection with this offering, we anticipate that our board of directors and shareholders will adopt the SkyWater Technology, Inc. 2021 Employee Stock Purchase Plan, or the ESPP. We anticipate reserving 700,000 shares of our common stock for issuance under the ESPP. The purpose of the ESPP is to encourage and to enable eligible employees to acquire proprietary interests in our company through the purchase and ownership of shares of

 

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our common stock. The ESPP is intended to benefit us and our shareholders by incentivizing participants to contribute to our success and to operate and manage our business in a manner that will provide for our long-term growth and profitability and that will benefit our shareholders and other important stakeholders. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code.

Under the ESPP, eligible employees may authorize payroll deductions of up to 15% of eligible compensation for the purchase of our common stock on specified purchase dates established by the plan administrator. Initially, we intend to have approximately 6-month offering periods. The purchase price for shares in an offering period may be equal to either (1) 85% of the fair market value of a share of our common stock on the date of purchase or (2) 85% of the fair market value of a share of our common stock on the first day of the offering period or the purchase date, whichever is lower. Unless determined otherwise by the plan administrator, the purchase price will be equal to 85% of the fair market value of a share of our common stock on the first day of the offering period or the purchase date, whichever is lower.

Administration

The ESPP may be administered by our board of directors or a committee of the board designated from time to time by resolution of the board, which we refer to in this prospectus as the “plan administrator.” The plan administrator has full authority to adopt such rules and procedures as it may deem necessary for the proper plan administration and to interpret the provisions of the ESPP, including the authority to determine whether the purchase price for any purchase period will be equal to the lower of: (1) 85% of the fair market value of a share of our common stock on the date of purchase or (2) 85% of the fair market value of a share of our common stock on the first day of the offering period or the purchase date.

Shares Available Under the ESPP

A total of 700,000 shares of common stock will be authorized for under the ESPP, subject to adjustment in the event of a stock split, reverse stock split, stock dividend, combination or reclassification or similar event. The ESPP’s share limit will be increased effective the first business day of each calendar year commencing in 2022 by an amount equal to the least of: (i) 7,000 shares of common stock; (ii) one percent (1%) of the shares of common stock outstanding on the final day of the immediately preceding calendar year; and (iii) such smaller number of shares of common stock as determined by the plan administrator.

Offering Periods

The ESPP will be implemented through a series of offerings under which eligible employees are granted purchase rights to purchase our common stock on specified dates during such offerings. The plan administrator will determine offering periods of not more than 27 months in advance without shareholder approval. Unless otherwise determined by the plan administrator, the ESPP will initially be implemented through successive offering periods of approximately six months’ duration. Each participant is granted a separate purchase right to purchase shares of common stock for each offering period in which he or she participates. Purchase rights under the ESPP are granted on the start date of each offering period and are automatically exercised on the last day of the offering period. Each purchase right entitles the participant to purchase the whole number of shares of common stock obtained by dividing the participant’s payroll deductions for the offering period by the purchase price in effect for such period.

Eligibility

Except as described in this paragraph with respect to certain foreign employees, all employees of the Company and any designated parent or subsidiary who are regularly expected to work for more than 20 hours per week for more than five months per calendar year and who have been employed for such continuous period as the plan administrator may require (which period must be less than two years) are eligible to participate in the ESPP. An eligible employee may only join an offering period in advance of the start date of that period. Designated parents and subsidiaries include any parent or subsidiary corporations of the Company, whether now existing or hereafter organized, which elect, with the approval of the plan administrator, to extend the benefits of the ESPP to their eligible employees. Unless the plan administrator determines otherwise, SkyWater Technology Foundry, Inc. is a designated subsidiary.

Employees who are citizens or residents of a non-U.S. jurisdiction (without regard to whether he or she is also a citizen of the United States or a resident alien (within the meaning of Section 7701(b)(1)(A) of the Code)) are ineligible to participate in the ESPP if his or her participation is prohibited under the laws on the applicable non-

 

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U.S. jurisdiction or if complying with the laws of the applicable non-U.S. jurisdiction would cause the ESPP or an offering to violate Section 423 of the Code.

Purchase Provisions

Each participant in the ESPP may authorize periodic payroll deductions that may not exceed 15% of his or her compensation, which is defined in the ESPP to include the regular U.S. payroll base salary, unless the plan administrator determines otherwise. Unless otherwise determined by the plan administrator, compensation will not include bonuses, annual awards, other incentive payments, reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation or contributions (other than employee deferrals under a 401(k) or cafeteria plan). A participant may reduce his or her rate of payroll deductions during an offering period, subject to the rules set by the plan administrator.

On the last day of each offering period, the accumulated payroll deductions of each participant are automatically applied to the purchase shares of common stock at the purchase price in effect for that period.

Purchase Price

The purchase price per share at which common stock is purchased on the participant’s behalf for each offering period may be equal to either (1) 85% of the fair market value of a share of our common stock on the date of purchase or (2) 85% of the fair market value of a share of our common stock on the first day of the offering period or the purchase date, whichever is lower. Unless determined otherwise by the plan administrator, the purchase price will be equal to 85% of the fair market value of a share of our common stock on the first day of the offering period or the purchase date, whichever is lower.

Special Limitations

The ESPP imposes certain limitations upon a participant’s right to acquire common stock, including the following

limitations:

 

∎

No purchase right may be granted to any individual if, immediately after such grant, the individual would own stock (including stock purchasable under any outstanding options or purchase rights) possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its affiliates.

 

∎

No purchase right granted to a participant may permit such individual to purchase common stock at a rate which exceeds $25,000 worth of such common stock (valued at the time such purchase right is granted) for each calendar year.

 

∎

Until otherwise determined by the plan administrator, the maximum number of shares of common stock a participant may purchase in any offering period will be fixed in connection with the adoption of the ESPP.

Termination of Purchase Rights

A participant’s purchase right immediately terminates upon such participant’s loss of eligible employee status, and his or her accumulated payroll deductions for the offering period in which the purchase right terminates are refunded. A participant may withdraw from an offering period by giving advance notice prior to the end of that period and his or her accumulated payroll for the offering period in which withdrawal occurs may be refunded.

Assignability

No purchase right will be assignable or transferable (other than by will or the laws of descent and distribution) and will be exercisable only by the participant.

Corporate Transaction

In the event of certain significant corporate transactions, including (i) a merger or consolidation in which the Company is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of our assets, (iii) the complete liquidation or dissolution, (iv) a reverse merger or series of related transactions culminating in a reverse merger in which the Company is the surviving entity but (A) the shares of common stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger or (v) the acquisition in a single or series of related transactions by any person or related group of persons of beneficial

 

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ownership of securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities during an offering period, all outstanding purchase rights shall be assumed by the successor corporation (or a parent or subsidiary thereof), unless the plan administrator determines, in its sole discretion, to shorten the offering period then in-effect to a new purchase date. If the plan administrator shortens the offering period then in progress to a new purchase date, the plan administrator will provide notice to each participant that (i) his or her purchase right will be automatically exercised on the new purchase date or (ii) the Company will pay to him or her, on the new purchase date, cash, cash equivalents, or property as determined by the plan administrator that is equal to the difference in the fair market value of the shares of common stock covered by his or her purchase right and the purchase price due had the purchase right been automatically exercised on the new purchase date.

Changes in Capitalization

In the event any change is made to the outstanding shares of common stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares, other increases or decreases in the number of shares of common stock outstanding effected without the Company’s receipt of consideration or similar transactions, the plan administrator may make appropriate adjustments to (i) the maximum number of securities issuable under the ESPP, (ii) the maximum number of securities a participant may purchase in an offering period or purchase period, (iii) the number of securities by which the plan reserve is increased annually and (iv) the number of securities subject to each outstanding purchase right and the purchase price payable per share thereunder.

Amendment and Termination

The ESPP will terminate ten years after it becomes effective, unless terminated earlier by the plan administrator. The plan administrator may at any time terminate or amend the ESPP. To the extent required by Section 423 of the Code (or any successor rule or provision or any other applicable law), the Company will seek shareholder approval of amendments in such a manner and to such a degree as so required.

Potential Payments Upon Termination or Change in Control

Thomas Sonderman

Under the Executive Severance and Change of Control Plan, upon a termination of Mr. Sonderman’s employment by the Company without cause or by Mr. Sonderman with good reason, Mr. Sonderman would receive a severance benefit equal to 24 months’ base salary plus an amount equal to two times his target bonus. Mr. Sonderman would also be entitled to COBRA continuation under the Company’s medical and dental plans for up to 24 months (or the lump sum cash equivalent). If the termination without cause or with good reason occurred in connection with or within 12 months following a change of control, the severance benefit would equal 24 months’ base salary plus an amount equal to two times his then target bonus. In that event, the COBRA continuation benefit would last up to 24 months. Any unvested amounts under the Long-Term Incentive Compensation Plan would become 100% vested upon a change in control.

Steven Wold

Under the Executive Severance and Change of Control Plan, upon a termination of Mr. Wold’s employment by the Company without cause or by Mr. Wold with good reason, Mr. Wold would receive a severance benefit equal to 12 months’ base salary plus an amount equal to his target bonus. Mr. Wold would also be entitled to COBRA continuation under the Company’s medical and dental plans for up to 12 months (or the lump sum cash equivalent). If the termination without cause or with good reason occurred in connection with or within 12 months following a change of control, the severance benefit would equal 18 months’ base salary plus an amount equal to 1.5 times his then target bonus. In that event, the COBRA continuation benefit would last up to 18 months.

Steve Manko

Under the Executive Severance and Change of Control Plan, upon a termination of Mr. Manko’s employment by the Company without cause or by Mr. Manko with good reason, Mr. Manko would receive a severance benefit equal to 12 months’ base salary plus an amount equal to his target bonus. Mr. Manko would also be entitled to COBRA continuation under the Company’s medical and dental plans for up to 12 months (or the lump sum cash equivalent). If the termination without cause or with good reason occurred in connection with or within 12 months following a change of control, the severance benefit would equal 18 months’ base salary plus an amount equal to 1.5 times his then target bonus. In that event, the COBRA continuation benefit would last up to 18 months.

 

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Emerging Growth Company Status

As an emerging growth company, we will be exempt from certain requirements related to executive compensation, including the requirements to hold a nonbinding advisory vote on executive compensation and to provide information relating to the ratio of total compensation of our principal executive officer to the median of the annual total compensation of all of our employees, each as required by the Investor Protection and Securities Reform Act of 2010, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

401(k) Plan

We maintain a defined contribution retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees may defer eligible compensation on a pre-tax basis, up to the statutorily prescribed annual limits on contributions under the Code. We have not historically made discretionary contributions to the 401(k) plan for the benefit of employees. Employee contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participant’s directions. Employees are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan.

Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. It also is possible that the director or officer could amend the plan when not in possession of material, nonpublic information. In addition, our directors and executive officers may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

Indemnification of Directors and Officers and Limitation of Liability

Our certificate of incorporation that will be in effect prior to the completion of this offering will contain provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by the Delaware General Corporation Law. Our certificate of incorporation and bylaws to be in effect prior to the completion of this offering will also entitle our directors and executive officers to receive indemnification from us to the fullest extent permitted by the Delaware General Corporation Law.

We will maintain a general liability insurance policy that covers certain liabilities of our directors and executive officers arising out of claims based on acts or omissions in their capacities as directors or executive officers. In addition, we intend to enter into indemnification agreements with each of our directors and executive officers. These indemnification agreements will require us, among other matters, to indemnify each such director or executive officer for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by him or her in any action or proceeding arising out of his or her service as one of our directors or executive officers.

Director Compensation

For fiscal 2020 and prior to the Corporate Conversion, as a limited liability company, our business and affairs were managed under the direction of a board of managers. In connection with the Corporate Conversion, we will appoint certain directors to serve as members of our newly formed board of directors, as described above under “Management.”

Fiscal 2020 Director Compensation

The following table presents the total compensation for each person who served as a member of our board of managers during fiscal 2020. Other than as set forth in the table and described more fully below, we did not pay any compensation, reimburse any expense of, make any equity awards or non-equity awards to, or pay any other compensation to, any of the following members of our board of managers in 2020.

 

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NAME		FEES EARNED OR PAID IN CASH ($) (1)				RESTRICTED UNIT AWARDS ($)				ALL OTHER COMPENSATION ($)				TOTAL ($)
Wendi B. Carpenter			10,000				9,998				—				19,998
John T. Kurtzweil			10,000				9,998				—				19,988
Thomas R. Lujan (2)			22,000				—				—				22,000
Gary J. Obermiller			66,416				—				—				66,416
Loren A. Unterseher (3)			—				—				62,534	(4)			62,534

 

 

(1)

Does not include reimbursement of travel expenses.

(2)

Lujan Legal Counsel, LLC, of which Mr. Lujan is the Managing Partner, received $147,760 in legal fees in fiscal 2020 in consideration of the provision of professional legal services and the performance of duties as Corporate Secretary for SkyWater Technology Foundry.

(3)

Oxbow, of which Mr. Unterseher is a Managing Partner, received $640,000 in management and financial consulting fees in fiscal 2020 in connection with a professional services agreement with us.

(4)

In fiscal 2020, Mr. Unterseher received a $60,008 salary for his employment as advisor to SkyWater Technology Foundry and received employee benefits valued at $2,526. Mr. Unterseher’s employment with SkyWater Technology Foundry will terminate before the closing of this offering.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Oxbow as our Controlling Stockholder

Oxbow acquired our business from Cypress in March 2017. As of April 12, 2021, after giving effect to the Corporate Conversion, Oxbow will hold approximately 90.1 percent of our outstanding common stock, and will therefore control more than a majority of the voting power of such common stock. As described elsewhere in this prospectus, after the offering, we expect that Oxbow will own approximately 76.0 percent of our outstanding common stock.

Indemnification Agreements

We will enter into indemnification agreements with each of our directors and executive officers, as described in “Executive and Director Compensation—Indemnification of Directors and Officers and Limitation of Liability.”

Registration Rights Agreement

In connection with this offering, we intend to enter into a registration rights agreement with CMI Oxbow and other holders of our common stock. The registration rights agreement will provide that CMI Oxbow and each entity under common control with CMI Oxbow and their respective affiliates, or the Oxbow Affiliated Funds, will be entitled to demand registration rights and customary Form S-3 demand registration rights when we are eligible to register shares on Form S-3. In addition, the registration rights agreement will provide certain piggyback registration rights for other holders of our common stock for such demand registrations and other registrations.

Oxbow Management Agreement

In connection with our divestiture from Cypress on March 1, 2017, our wholly-owned subsidiary, SkyWater Technology Foundry, entered into a management fee agreement with Oxbow, our principal owner, under which Oxbow provides management and financial consulting services to us, including advice and administrative support in connection with our business policies and processes, lender and contractual relationships, and information technology, accounting and reporting systems and procedures. Oxbow also assists with monitoring our financial performance and advises us on courses of action for our consideration. The management fee we pay to Oxbow for such services is not to exceed $700,000 annually. We incurred $640,000 of management fees to Oxbow during fiscal 2020. The management fee agreement with Oxbow will be terminated effective as of the pricing of this offering, and therefore no management fees will accrue or be payable for periods after the pricing of this offering.

Sale Leaseback Transaction with Oxbow

SkyWater Technology Foundry, our wholly-owned subsidiary, entered into a purchase agreement, dated as of September 29, 2020, with Oxbow Realty Partners, LLC, or Oxbow Realty, a Delaware limited liability company affiliated with Oxbow. Under the purchase agreement, we sold our property, consisting of our office and manufacturing facility, located at 2401 and 2411 East 86th Street, in Bloomington, Minnesota, to Oxbow Realty for a purchase price of $39 million. We paid transaction services fees to Oxbow Realty of $2.0 million and paid a guarantee fee to Oxbow of $2.0 million.

SkyWater Technology Foundry subsequently entered into a lease, dated as of September 30, 2020, with Oxbow Realty, as landlord, and SkyWater Technology Foundry, as tenant. Under the lease agreement, Oxbow Realty will lease the aforementioned property to SkyWater Technology Foundry for a term of 20 years, commencing on September 30, 2020 and terminating on September 29, 2040. SkyWater Technology Foundry retains a right of first offer in the event that Oxbow Realty elects to sell the property, in whole or in part, during the term of the lease. SkyWater Technology Foundry is required to pay to Oxbow Realty certain base monthly rent amounts set forth on an agreed upon rent schedule. The aggregate amount of base rent for the term of the lease is approximately $114.8 million. SkyWater Technology Foundry also is 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.

Redemption Agreements

On December 29, 2020, we entered into a redemption agreement with Thomas R. Lujan, a director of the Company. Under the redemption agreement, we purchased an aggregate of 310,000 common units from Mr. Lujan at a redemption price of $1,326,800.

 

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On December 29, 2020, we entered into a redemption agreement with Gary Obermiller, a director of the Company. Under the redemption agreement, we purchased an aggregate of 324,103 common units of the Company from Mr. Obermiller at a redemption price of $1,387,162.

Professional Service Fees

In fiscal 2020, we paid $147,760 in legal fees to Lujan Legal Counsel, LLC for the provision of professional legal services and for its performance of duties as Corporate Secretary for SkyWater Technology Foundry. Thomas Lujan, a director of the Company, is the Managing Partner of Lujan Legal Counsel, LLC.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 12, 2021, and as adjusted to reflect the sale of common stock by us in this offering, for:

 

∎

each person, or group of affiliated persons, who beneficially owns more than 5% of our common stock;

 

∎

each of our directors and director nominees;

 

∎

each of our named executive officers; and

 

∎

all of our directors, director nominees and executive officers as a group.

The percentage ownership information prior to this offering shown in the following table is based upon 31,055,729 shares of common stock outstanding as of April 12, 2021, after giving effect to the Corporate Conversion. The percentage ownership information after this offering shown in the following table is based upon 36,855,729 shares of common stock outstanding as of April 12, 2021, after giving effect to the sale of 5,800,000 shares of common stock by us in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of the prospectus and assuming no exercise of the underwriters’ option to purchase additional shares.

We have determined beneficial ownership in accordance with the rules and regulations of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options, warrants or other rights that are exercisable as of or within 60 days after April 12, 2021. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

Each individual or entity shown on the table has furnished information with respect to beneficial ownership. Except as otherwise indicated below, the address for each of the persons listed in the table below is c/o SkyWater Technology Foundry, Inc., 2401 East 86th Street, Bloomington, Minnesota 55425.

 

 

 

		NUMBER OF SHARES BENEFICIALLY OWNED (1)				PERCENTAGE OF SHARES BENEFICIALLY OWNED (1)
NAME OF BENEFICIAL OWNER						PRIOR TO OFFERING				AFTER OFFERING
5% Stockholders:
Oxbow Industries, LLC (2)			27,995,374				90.1	%			76.0	%
Directors and named executive officers:
Thomas Sonderman			458,907				1.5	%			1.2	%
Wendi B. Carpenter (3)			3,395				*				*
John T. Kurtzweil (4)			3,395				*				*
Thomas R. Lujan			467,320				1.5	%			1.3	%
Gary J. Obermiller			444,680				1.4	%			1.2	%
Loren A. Unterseher (2)			—				—				—
Steven Wold			611,876				2.0	%			1.7	%
Steve Manko			—				—				—
All directors and executive officers as a group (8 persons)			1,989,573				6.4	%			5.4	%

 

 

*

Represents beneficial ownership of less than 1%.

 

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(1)

The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by that person, which includes the number of shares as to which that person has the right to acquire voting or investment power as of or within 60 days after that date, by the sum of the number of shares of common stock outstanding as of such date plus the number of shares as to which that person has the right to acquire voting or investment power as of or within 60 days after that date. Consequently, the denominator for calculating beneficial ownership percentages may be different for each beneficial owner.

(2)

Loren A. Unterseher is a member, and the Managing Partner, of Oxbow Industries, LLC, which we also refer to as Oxbow. Oxbow holds 800,000 Common Units, or 80% of the outstanding equity interests, of CMI Oxbow. As described in this prospectus, before the closing of this offering, CMI Oxbow owns all of our outstanding voting interests. Following the closing of this offering, Oxbow and its affiliates (including CMI Oxbow) will own approximately 76.0% of our outstanding common stock (or approximately 74.2% if the underwriters exercise their over-allotment option in full), and will therefore control more than a majority of the voting power of all of our outstanding shares of common stock. The address for each of Oxbow Industries, LLC, CMI Oxbow and Mr. Unterseher is c/o Oxbow Industries, LLC, 4450 Excelsior Blvd. Suite 440, Minneapolis, Minnesota 55416.

(3)

The shares of common stock shown as beneficially owned by Ms. Carpenter consist of restricted shares of common stock which are subject to vesting.

(4)

The shares of common stock shown as beneficially owned by Mr. Kurtzweil consist of restricted shares of common stock which are subject to vesting.

 

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DESCRIPTION OF OUR CAPITAL STOCK

The following description summarizes important provisions of our certificate of incorporation and bylaws, in each case as they will be in effect before the closing of the offering, that affect the rights of holders of our capital stock. This description is intended as a summary and is qualified in its entirety by the forms of certificate of incorporation and bylaws filed as exhibits to the registration statement. For complete information, you should refer to the forms of our certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, as well as the relevant provisions of the Delaware General Corporation Law.

Authorized and Outstanding Capital Stock

Upon the closing of this offering, our authorized capital stock will consist of 200,000,000 shares of our common stock, par value $0.01 per share, and 80,000,000 shares of undesignated preferred stock, par value $0.01 per share.

As of April 12, 2021, after giving effect to the Corporate Conversion, there were 31,055,729 shares of our common stock issued and outstanding held by nine stockholders of record and no outstanding shares of preferred stock.

Common Stock

Voting Rights

Votes Per Share. Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Under our certificate of incorporation and our bylaws, our stockholders will not have cumulative voting rights.

Quorum for Stockholder Meeting; Required Vote. Unless otherwise required by law or provided for in our certificate of incorporation or bylaws, at any stockholder meeting, the holders of shares representing a majority in voting power of the shares of stock outstanding and entitled to vote at the meeting, present in person or represented by proxy, will constitute a quorum. Except in the election of directors (as described below), when a quorum is present at any stockholder meeting, the affirmative vote of the holders of shares representing a majority in voting power of the shares of stock present in person or represented by proxy at the meeting and entitled to vote on such matter will decide such matter unless the matter is one upon which a different vote is required by express provision of our certificate of incorporation or bylaws or law, in which case such express provision will govern.

Subject to the rights of holders of any outstanding series of preferred stock, directors will be elected by a plurality of the votes cast by the holders of the shares of stock present in person or represented by proxy at the meeting and entitled to vote on the election of directors.

Dividend Rights

Subject to the provisions of any outstanding series of preferred stock, holders of our common stock are entitled to receive ratably any dividends that our board of directors, in its discretion, may declare and pay out of funds legally available for that purpose.

Rights and Preferences

Holders of our common stock will have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may issue in the future.

Right to Liquidation Distributions

In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of our preferred stock.

 

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Assessability

All shares of our common stock to be outstanding upon the completion of this offering will be fully paid and nonassessable.

Preferred Stock

Following this offering, our board of directors will have broad discretion with respect to the creation and issuance of preferred stock without stockholder approval, subject to any applicable rights of holders of shares of any series of preferred stock outstanding from time to time. Our certificate of incorporation authorizes the board of directors from time to time and without further stockholder action to adopt a resolution or resolutions providing for the issuance of authorized but unissued shares of preferred stock in one or more series and in such amounts as may be determined by the board of directors. The powers, designation, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations and restrictions of shares of the series, if any, will be as set forth in such resolution or resolutions.

The holders of our common stock may be adversely affected by the rights, privileges and preferences of holders of shares of any series of preferred stock which the board of directors may designate and we may issue from time to time. Among other actions, by authorizing the issuance of shares of preferred stock with particular voting, conversion or other rights, the board of directors could adversely affect the voting power of the holders of the common stock and otherwise could discourage any attempt to effectuate a change in control of our company, even if such a transaction would be beneficial to the interests of our stockholders.

Registration Rights

In connection with this offering, we intend to enter into the registration rights agreement with CMI Oxbow, an affiliate of Oxbow. The registration rights agreement will provide that CMI Oxbow and the Oxbow Affiliated Funds will be entitled to demand registration rights and customary Form S-3 demand registration rights when we are eligible to register shares on Form S-3. In addition, the registration rights agreement will provide certain piggyback registration rights for other holders of our common stock for such demand registrations and other registrations.

Anti-Takeover and Other Protective Provisions

The provisions of the Delaware General Corporation Law and our certificate of incorporation and our bylaws to be in effect prior to the completion of this offering may have the effect of delaying, deferring or discouraging another person from acquiring control of the company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.

Section 203 of the Delaware General Corporation Law

Under our certificate of incorporation, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, Section 203 prohibits a Delaware corporation from engaging in a business combination with any “interested stockholder” for a period of three years following the time that such stockholder became an interested stockholder, unless:

 

∎

before that time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

∎

upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder), those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

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∎

at or after that time, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662⁄3% of the outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines “business combination” to include the following transactions, subject to specified exceptions:

 

∎

any merger or consolidation of the corporation or any majority-owned subsidiary of the corporation with the interested stockholder or, in specified circumstances, any other entity if the merger or consolidation is caused by the interested stockholder;

 

∎

any sale, lease, exchange, mortgage, pledge, transfer, or other disposition involving the interested stockholder of assets of the corporation or of any majority-owned subsidiary of the corporation which have an aggregate market value equal to 10% or more of either (1) the aggregate market value of the consolidated assets of the corporation or (2) the aggregate market value of all outstanding stock of the corporation;

 

∎

subject to certain limited exceptions, any transaction that results in the issuance or transfer by the corporation or any majority-owned subsidiary of the corporation of any stock of the corporation to the interested stockholder;

 

∎

any transaction involving the corporation or any majority-owned subsidiary of the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation or any such subsidiary owned by the interested stockholder; or

 

∎

any receipt by the interested stockholder of any direct or indirect benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation or any majority-owned subsidiary of the corporation.

In general, Section 203 defines an “interested stockholder” as any entity or person who beneficially owns 15% or more of the outstanding voting stock of the corporation and the affiliates and associates of such person.

The application of Section 203 may make it difficult and expensive for a third party to pursue a takeover attempt with respect to our company that our board of directors does not approve even if some of our stockholders would support such a takeover attempt.

Certificate of Incorporation and Bylaws

Provisions of our certificate of incorporation and our bylaws, each of which will become effective prior to the completion of this offering, may delay or discourage transactions involving an actual or potential change in control of our company or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other matters, our certificate of incorporation and our bylaws:

 

∎

permit our board of directors to issue up to 80,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;

 

∎

provide that the authorized number of directors may only be changed by resolution of the board of directors;

 

∎

provide that all vacancies, including newly created directorships, may only, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

∎

provide that directors may only be removed with or without cause by the holders of at least three-fourths of the voting power of the shares eligible to vote for directors;

 

∎

provide that a special meeting of stockholders may be called only by our chief executive officer (or the equivalent thereof), the chair of our board of directors or by a resolution adopted by a majority of our board of directors;

 

∎

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

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∎

provide that our bylaws may be amended or repealed by the board of directors or by our stockholders by the affirmative vote of the holders of at least two-thirds of the votes that all our stockholders would be entitled to cast in an election of directors;

 

∎

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also meet certain requirements as to the form and content of a stockholder’s notice as set forth in our bylaws; and

 

∎

do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose).

Exclusive Forum Certificate of Incorporation Provision

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for:

 

∎

any derivative action or proceeding brought on our behalf;

 

∎

any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers or other employees, or stockholders to us or our stockholders;

 

∎

any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware;

 

∎

any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or the bylaws (including any right, obligation or remedy thereunder); and

 

∎

any action asserting a claim governed by the internal affairs doctrine or any other “internal corporate claim” as such term is defined in Section 115 of the Delaware General Corporation Law, in each case subject to such court’s having personal jurisdiction over the indispensable parties named as defendants.

Our certificate of incorporation also provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.

Any person purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or with our directors, our officers or other employees, or our other stockholders, which may discourage such lawsuits against us and such other persons. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations and financial condition.

Our choice of forum provision is intended to apply to the fullest extent permitted by law to the above-specified types of actions and proceedings, including, to the extent permitted by the federal securities laws, to lawsuits asserting both the above-specified claims and claims under the federal securities laws. Application of the choice of forum provision may be limited in some instances by applicable law. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the choice of forum provision will not apply to actions arising under the Exchange Act or the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, subject to a limited exception for certain “covered class actions.” Accordingly, although this provision will apply to claims arising under the Securities Act, there is uncertainty as to whether a court would enforce the provision in connection with such claims. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is

 

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possible that a court could find these types of provisions to be inapplicable or unenforceable. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. Our stockholders cannot waive claims arising under the federal securities laws and the rules and regulations thereunder.

Limitations of Liability and Indemnification

Our certificate of incorporation which will be in effect prior to the completion of this offering provides that our directors will not be personally liable to us or our stockholders for monetary damages resulting from a breach of their fiduciary duties as directors, except to the extent that the exemption from liability or the limitation of liability is not permitted under the Delaware General Corporation Law. In accordance with the Delaware General Corporation Law, this provision in our certificate of incorporation will not eliminate or limit our directors’ liability to us or our stockholders for (1) any breach of the director’s duty of loyalty to us or our stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) unlawful payments of dividends or unlawful stock repurchases or redemptions under Section 174 of the Delaware General Corporation Law or (4) any transaction from which the director derived an improper benefit.

For further information, see “Executive and Director Compensation—Limitations on Liability and Indemnification Matters.”

Transfer Agent and Registrar

We expect to appoint American Stock Transfer & Trust Company, LLC to act as the transfer agent and registrar for our common stock. The transfer agent and registrar’s address is 6201 15th Avenue, Brooklyn, New York 11219.

Listing of Common Stock

In connection with this offering, we have applied to list our common stock on the Nasdaq Capital Market under the symbol “SKYT.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there was no public market for our common stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. We cannot predict the effect, if any, that sales of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Future sales of substantial amounts of shares of our common stock in the public market after this offering, or the perception that such sales may occur, could adversely affect the market prices of our common stock at such time, which could make it more difficult for you to sell your shares of common stock at a time and price that you consider appropriate, and could impair our ability to raise equity capital or use our common stock as consideration for acquisitions of other business, investments or other corporate purposes. Furthermore, because only a limited number of shares of our common stock will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after such restrictions lapse, or the anticipation of such sales, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.

Immediately after this offering, based on an assumed initial offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we will have outstanding a total of 36,855,729 shares of our common stock (or 37,725,729 shares if the underwriters’ option to purchase additional shares is exercised in full), based on our outstanding shares as of April 12, 2021, after giving effect to the Corporate Conversion. All of the shares sold in this offering (plus any shares sold as a result of the underwriters’ exercise of their over-allotment option) will be freely tradable without restriction or further registration under the Securities Act, unless those shares are held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Our affiliates may sell their shares of common stock in the public market in compliance with the restrictions of Rule 144 described below.

The remaining 31,055,729 shares of common stock to be outstanding after this offering will be “restricted securities” under Rule 144. All of these shares will be subject to transfer restrictions for 180 days from the date of this prospectus pursuant to lock-up agreements described below. The restricted securities will be eligible for public sale only if they are registered under the Securities Act for sale in accordance with the registration rights referred to below or otherwise, or if they qualify for an exemption from registration, including the exemption afforded by Rule 144.

We may issue shares of our common stock from time to time for a variety of corporate purposes, including in capital-raising activities through future public offerings or private placements, in connection with exercise of stock options or warrants, vesting of restricted stock units and other issuances relating to our employee benefit plans and as consideration for future acquisitions, investments or other purposes. The number of shares of our common stock that we may issue may be significant, depending on the events surrounding such issuances. In some cases, the shares we issue may be freely tradable without restriction or further registration under the Securities Act. In other cases, we may grant registration rights covering the shares issued in connection with these issuances, in which case the holders of the common stock will have the right, under certain circumstances, to cause us to register any resale of such shares to the public.

Lock-up Agreements

We, our directors and officers and specified holders of our equity securities expect to agree, subject to certain exceptions, not to offer, pledge sell, contract to sell, transfer, lend or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for common stock, during the period ending 180 days after the date of this prospectus without first obtaining the written consent of Jefferies LLC, on behalf of the underwriters. The lock-up restrictions and specified exceptions are described in more detail under “Underwriting.”

Rule 144

In general, under Rule 144 as in effect on the date of this prospectus, once we have been subject to public company reporting requirements for at least 90 days, a person who has beneficially owned shares proposed to be sold for at

 

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least six months, including the holding period of any prior owner other than our affiliates, and is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale, will be entitled to sell, upon expiration of the lock-up agreements described above, such shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. Such a person who has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than an affiliate, will be entitled to sell these shares without limitation.

In general, under Rule 144 as currently in effect, an affiliate (or anyone selling shares on behalf of our affiliates or who was our affiliate at any time during the preceding three months) who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

∎

1% of the number of shares of our common stock then outstanding, which will equal approximately 368,557 shares, based on the number of shares of our common stock outstanding immediately after this offering (or approximately 377,257 shares if the underwriters exercise their over-allotment option in full); or

 

∎

the average weekly trading volume of our common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

Sales by our affiliates or persons selling shares on behalf of our affiliates under Rule 144 are also subject to manner of sale provisions and notice provisions and to the availability of public information about us. To the extent that shares were acquired from one of our affiliates, a person’s holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate.

Upon expiration of the 180-day lock-up period described above, 31,048,940 shares of our common stock will be eligible for sale under Rule 144. In addition, 2,328,886 shares of our common stock were subject to outstanding restricted stock units as of April 12, 2021, after giving effect to the Corporate Conversion. We expect that these shares will become eligible for sale under Rule 144 subsequent to the expiration of the lock-up period. We cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.

Registration Statement on Form S-8

In connection with the closing of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act covering all of the shares of our common stock reserved for issuance under our equity incentive plan. We expect to file these registration statements, as applicable, as soon as permitted under the Securities Act. However, the shares registered on Form S-8 may be subject to the volume limitations and the manner of sale, notice and public information requirements of Rule 144 and will not be eligible for resale until expiration of the lock-up and market standoff agreements to which they are subject.

Registration Rights

Upon completion of this offering, the holders of approximately 31,048,940 shares of our common stock will be eligible to exercise certain rights to cause us to register their shares for resale under the Securities Act, subject to various conditions and limitations. For a further description of these rights, see “Description of Our Capital Stock—Registration Rights.” Upon the effectiveness of a registration statement covering these shares, the shares would become freely tradable, and a large number of shares may be sold into the public market, which may adversely affect the market price of our common stock.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

This section summarizes the material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of our common stock acquired by “non-U.S. holders” (as defined below) pursuant to this offering. This summary does not provide a complete analysis of all potential U.S. federal income tax considerations relating thereto. The information provided below is based upon provisions of the Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions currently in effect. These authorities may change at any time, possibly retroactively, or the Internal Revenue Service, or IRS, might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of our common stock could differ from those described below. As a result, we cannot assure you that the tax consequences described in this discussion will not be challenged by the IRS or will be sustained by a court if challenged by the IRS.

This summary does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws. In addition, this discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:

 

∎

banks, insurance companies or other financial institutions;

 

∎

partnerships or entities or arrangements treated as partnerships or other pass-through entities for U.S. federal tax purposes (or investors in such entities);

 

∎

corporations that accumulate earnings to avoid U.S. federal income tax;

 

∎

persons subject to the alternative minimum tax or Medicare contribution tax on net investment income;

 

∎

tax-exempt organizations or tax-qualified retirement plans;

 

∎

controlled foreign corporations or passive foreign investment companies;

 

∎

dealers in securities;

 

∎

traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

 

∎

persons that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below);

 

∎

certain former citizens or former long-term residents of the United States;

 

∎

persons who hold our common stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction;

 

∎

persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes); or

 

∎

persons deemed to sell our common stock under the constructive sale provisions of the Code.

In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. Accordingly, this summary does not address tax considerations applicable to partnerships that hold our common stock, and partners in such partnerships should consult their tax advisors.

INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS, AND TAX TREATIES.

Non-U.S. Holder Defined

For purposes of this summary, a “non-U.S. holder” is any beneficial owner of our common stock, other than a partnership, that is not:

 

∎

an individual who is a citizen or resident of the United States;

 

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∎

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States, any state therein or the District of Columbia;

 

∎

a trust if it (1) is subject to the primary supervision of a U.S. court and one of more U.S. persons have authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or

 

∎

an estate whose income is subject to U.S. income tax regardless of source.

If you are a non-U.S. citizen that is an individual, you may, in many cases, be treated as a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For these purposes, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Resident aliens are subject to U.S. federal income tax as if they were U.S. citizens. Such an individual is urged to consult his or her own tax advisor regarding the U.S. federal income tax consequences of the ownership or disposition of our common stock.

Dividends

We do not expect to declare or make any distributions on our common stock in the foreseeable future. If we do make distributions on shares of our common stock, however, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, a non-U.S. holder’s adjusted tax basis in shares of our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of our common stock. See “Sale of Common Stock” below for additional information.

Any dividend paid to a non-U.S. holder of our common stock that is not effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States will generally be subject to U.S. withholding tax at a 30% rate. The withholding tax might apply at a reduced rate, however, under the terms of an applicable income tax treaty between the United States and the non-U.S. holder’s country of residence. You should consult your tax advisors regarding your entitlement to benefits under a relevant income tax treaty. Generally, in order for us or our paying agent to withhold tax at a lower treaty rate, a non-U.S. holder must certify its entitlement to treaty benefits. A non-U.S. holder generally can meet this certification requirement by providing an IRS Form W-8BEN or Form W-8BEN-E (or any successor of such forms) or appropriate substitute form to us or our paying agent. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to the agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS in a timely manner.

Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder, and if required by an applicable income tax treaty between the United States and the non-U.S. holder’s country of residence, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States, are not subject to U.S. withholding tax. To obtain this exemption, a non-U.S. holder must provide us or our paying agent with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated income tax rates applicable to U.S. persons, net of certain deductions and credits. In addition to being taxed at graduated tax rates, dividends received by corporate non-U.S. holders that are effectively connected with a U.S. trade or business of the corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.

 

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Sale of Common Stock

Subject to the discussions below regarding backup withholding and the Foreign Account Tax Compliance Act, non-U.S. holders will generally not be subject to U.S. federal income tax on any gains realized on the sale, exchange or other disposition of our common stock unless:

 

∎

the gain (1) is effectively connected with the conduct by the non-U.S. holder of a U.S. trade or business and (2) if required by an applicable income tax treaty between the United States and the non-U.S. holder’s country of residence, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States (in which case the special rules described below apply);

 

∎

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or other disposition of our common stock, and certain other requirements are met (in which case the gain would be subject to a flat 30% tax, or such reduced rate as may be specified by an applicable income tax treaty, which may be offset by certain U.S. source capital losses, even though the individual is not considered a resident of the United States); or

 

∎

the rules of the Foreign Investment in Real Property Tax Act, or FIRPTA, treat the stock as a “U.S. real property interest” as defined in Section 897 of the Code.

If any gain from the sale, exchange or other disposition of our common stock (1) is effectively connected with a U.S. trade or business conducted by a non-U.S. holder and (2) if required by an applicable income tax treaty between the United States and the non-U.S. holder’s country of residence, is attributable to a permanent establishment maintained by such non-U.S. holder in the United States, then the gain generally will be subject to U.S. federal income tax at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the non-U.S. holder is a corporation, under certain circumstances, that portion of its earnings and profits that is effectively connected with its U.S. trade or business, subject to certain adjustments, generally would be subject also to a “branch profits tax.” The branch profits tax rate is 30% unless reduced by applicable income tax treaty.

The FIRPTA rules may apply to a sale, exchange or other disposition of our common stock if we are, or were within the shorter of the five-year period preceding the disposition and the non-U.S. holder’s holding period, a “U.S. real property holding corporation” (as defined in Section 897 of the Code), or USRPHC. In general, we would be a USRPHC if interests in U.S. real estate comprised at least half of the value of our business assets. We do not believe that we are a USRPHC and we do not anticipate becoming one in the future. Even if we become a USRPHC, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if beneficially owned by a non-U.S. holder that actually or constructively owned more than 5% of our outstanding common stock at sometime within the five-year period preceding the disposition.

Backup Withholding and Information Reporting

The Code and the Treasury regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by “backup withholding” rules. These rules require the payors to withhold tax, currently at a rate of 24%, from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or failing to report interest or dividends on his returns. The backup withholding rules do not apply to payments to corporations, whether domestic or foreign, provided they establish such exemption.

Payments to non-U.S. holders of dividends on common stock generally will not be subject to backup withholding, and payments of proceeds made to non-U.S. holders by a broker upon a sale of common stock will not be subject to information reporting or backup withholding, in each case so long as the non-U.S. holder certifies its status as a non-U.S. holder (and we or our paying agent do not have actual knowledge or reason to know the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied) or otherwise establishes an exemption. The certification procedures to claim treaty benefits described under “Dividends” will generally satisfy the certification requirements necessary to avoid the backup withholding tax. We must report annually to the IRS any dividends paid to each non-U.S. holder and the tax withheld, if any, with respect to these dividends. Copies of these reports may be made available to tax authorities in the country where the non-U.S. holder resides.

 

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Under the Treasury regulations, the payment of proceeds from the disposition of shares of our common stock by a non-U.S. holder made to or through a U.S. office of a broker generally will be subject to information reporting and backup withholding unless the beneficial owner certifies, under penalties of perjury, among other things, its status as a non-U.S. holder (and the broker does not have actual knowledge or reason to know the holder is a U.S. person) or otherwise establishes an exemption. The payment of proceeds from the disposition of shares of our common stock by a non-U.S. holder made to or through a non-U.S. office of a broker generally will not be subject to backup withholding and information reporting, except as noted below. Information reporting, but not backup withholding, will apply to a payment of proceeds, even if that payment is made outside of the United States, if you sell our common stock through a non-U.S. office of a broker that is:

 

∎

a U.S. person (including a foreign branch or office of such person);

 

∎

a “controlled foreign corporation” for U.S. federal income tax purposes;

 

∎

a foreign person 50% or more of whose gross income from certain periods is effectively connected with a U.S. trade or business; or

 

∎

a foreign partnership if at any time during its tax year (1) one or more of its partners are U.S. persons who, in the aggregate, hold more than 50% of the income or capital interests of the partnership or (2) the foreign partnership is engaged in a U.S. trade or business, unless the broker has documentary evidence that the beneficial owner is a non-U.S. holder and certain other conditions are satisfied, or the beneficial owner otherwise establishes an exemption (and the broker has no actual knowledge or reason to know to the contrary).

Backup withholding is not an additional tax. Any amounts withheld from a payment to a holder of common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder and may entitle the holder to a refund, provided that the required information is furnished to the IRS in a timely manner.

Foreign Account Tax Compliance Act

A U.S. federal withholding tax of 30% may apply to dividends and the gross proceeds of a disposition of our common stock paid to a foreign financial institution (as specifically defined by the applicable rules) unless such institution enters into an agreement with the USG to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S. federal withholding tax of 30% will also apply to dividends and the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules and certifies as such on a Form W-8BEN-E (or any successor of such form). Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. Holders should consult with their own tax advisors regarding the possible implications of the withholding described herein.

Under proposed Treasury regulations, which may be relied upon by taxpayers until final regulations are issued, the withholding provisions described above generally will not apply to proceeds from a sale or other disposition of our common stock. Prospective investors should consult their tax advisors regarding this legislation.

THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

 

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UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement, dated                    , 2021, among us and Jefferies LLC and Cowen and Company, LLC, as the representatives of the underwriters named below and the joint book-running managers of this offering, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the respective number of shares of common stock shown opposite its name below:

 

 

 

UNDERWRITER		NUMBER OF SHARES
Jefferies LLC
Cowen and Company, LLC
Piper Sandler & Co.
Total

 

 

The underwriting agreement provides that the obligations of the several underwriters are subject to certain conditions precedent such as the receipt by the underwriters of officers’ certificates and legal opinions and approval of certain legal matters by their counsel. The underwriting agreement provides that the underwriters will purchase all of the shares of common stock if any of them are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of those liabilities.

The underwriters have advised us that, following the completion of this offering, they currently intend to make a market in the common stock as permitted by applicable laws and regulations. However, the underwriters are not obligated to do so, and the underwriters may discontinue any market-making activities at any time without notice in their sole discretion. Accordingly, no assurance can be given as to the liquidity of the trading market for the common stock, that you will be able to sell any of the common stock held by you at a particular time or that the prices that you receive when you sell will be favorable.

The underwriters are offering the shares of common stock subject to their acceptance of the shares of common stock from us and subject to prior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. In addition, the underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority.

Commission and Expenses

The underwriters have advised us that they propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers, which may include the underwriters, at that price less a concession not in excess of $        per share of common stock. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $        per share of common stock to certain brokers and dealers. After the offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.

 

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The following table shows the public offering price, the underwriting discounts and commissions that we are to pay the underwriters and the proceeds, before expenses, to us in connection with this offering. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.

 

 

 

PER SHARE

TOTAL

WITHOUT OPTION TO PURCHASE ADDITIONAL SHARES

WITH OPTION TO PURCHASE ADDITIONAL SHARES

WITHOUT OPTION TO PURCHASE ADDITIONAL SHARES

WITH OPTION TO PURCHASE ADDITIONAL SHARES

Public offering price

$

$

$

$

Underwriting discounts and commissions paid by us

$

$

$

$

Proceeds to us, before expenses

$

$

$

$

 

 

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $3.9 million.

Determination of Offering Price

Prior to this offering, there has not been a public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiations between us and the representatives. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

We offer no assurances that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market for the common stock will develop and continue after the offering.

Listing

We have applied to have our common stock listed on Nasdaq Capital Market under the trading symbol “SKYT.”

Stamp Taxes

If you purchase shares of common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

Option to Purchase Additional Shares

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of shares from us at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. If the underwriters exercise this option, each underwriter will be obligated, subject to specified conditions, to purchase a number of additional shares proportionate to that underwriter’s initial purchase commitment as indicated in the table above. This option may be exercised only if the underwriters sell more shares than the total number set forth on the cover page of this prospectus.

No Sales of Similar Securities

We, our officers, directors and holders of all or substantially all our outstanding capital stock and other securities have agreed, subject to specified exceptions, not to directly or indirectly:

 

∎

sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-l(h) under the Securities Exchange Act of 1934, as amended, or

 

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∎

otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock, or securities exchangeable or exercisable for or convertible into shares of common stock currently or hereafter owned either of record or beneficially, or

 

∎

publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of Jefferies LLC.

This restriction terminates after the close of trading of the common stock on and including the 180th day after the date of this prospectus.

Jefferies LLC may, in its sole discretion and at any time or from time to time before the termination of the 180-day period release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our shareholders who will execute a lock-up agreement, providing consent to the sale of shares prior to the expiration of the lock-up period.

Stabilization

The underwriters have advised us that they, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in short sale transactions, stabilizing transactions, syndicate covering transactions or the imposition of penalty bids in connection with this offering. These activities may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. Establishing short sales positions may involve either “covered” short sales or “naked” short sales.

“Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares of our common stock in this offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares of our common stock or purchasing shares of our common stock in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the option to purchase additional shares.

“Naked” short sales are sales in excess of the option to purchase additional shares of our common stock. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering.

A stabilizing bid is a bid for the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A syndicate covering transaction is the bid for or the purchase of shares of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. Similar to other purchase transactions, the underwriter’s purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriters to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the common stock originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member.

Neither nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.

The underwriters may also engage in passive market making transactions in our common stock on The Nasdaq Capital Market in accordance with Rule 103 of Regulation M during a period before the commencement of offers or sales of shares of our common stock in this offering and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.

 

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Electronic Distribution

A prospectus in electronic format may be made available by e-mail or on the web sites or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares of common stock for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ web sites and any information contained in any other web site maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by us or the underwriters and should not be relied upon by investors.

Other Activities and Relationships

The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for us and our affiliates, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments issued by us and our affiliates. If the underwriters or their respective affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The underwriters and their respective affiliates may hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the common stock offered hereby. Any such short positions could adversely affect future trading prices of the common stock offered hereby. The underwriters and certain of their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Settlement

We expect to deliver the shares of common stock against payment therefor on or about the date specified on the cover page of this prospectus.

 

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LEGAL MATTERS

The validity of the shares of our common stock being offered by this prospectus will be passed upon for us by our counsel, Hogan Lovells US LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Goodwin Procter LLP, Redwood City, California.

EXPERTS

The consolidated financial statements as of January 3, 2021 and December 29, 2019, and for each of the two years in the period ended January 3, 2021, included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

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WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock being offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by such reference. The SEC maintains an Internet website at www.sec.gov that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC.

Upon the completion of this offering, we will become subject to the full information reporting requirements of the Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports, proxy statements and other information with the SEC. We intend to furnish our stockholders with annual reports containing financial statements certified by an independent public accounting firm. We also maintain a website at www.skywatertechnology.com, at which you will be able to access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or electronically furnished to, the SEC. However, the information contained on or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and potential investors should not rely on such information in deciding to purchase our common stock in this offering.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Index To Consolidated Financial Statements

 

 

 

Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations			F-4
Consolidated Statements of Members’ Equity (Deficit)			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

 

 

 

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members and the Board of Managers of CMI Acquisition, LLC

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CMI Acquisition, LLC and subsidiaries (the “Company”) as of January 3, 2021 and December 29, 2019, the related consolidated statements of operations, members’ equity (deficit), and cash flows, for each of the two years in the period ended January 3, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 3, 2021 and December 29, 2019, and the results of its operations and its cash flows for each of the two years in the period ended January 3, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

March 22, 2021

We have served as the Company’s auditor since 2019.

 

F-2

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except unit data)

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Assets
Current assets:
Cash and cash equivalents		$	7,436			$	4,605
Accounts receivable, net			29,995				61,447
Inventories			27,169				15,994
Prepaid assets and other current assets			11,972				2,471
Total current assets			76,572				84,517
Property and equipment, net			178,078				101,870
Intangible assets, net			4,561				1,621
Other assets			3,998				2,427
Total assets		$	263,209			$	190,435
Liabilities and Members’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt		$	2,772			$	4,148
Accounts payable			16,792				11,258
Accrued expenses			25,496				10,234
Income taxes payable			1,710				—
Current portion of contingent consideration			8,904				14,219
Current portion of foundry services obligation			—				3,732
Deferred revenue—current			30,653				2,980
Total current liabilities			86,327				46,571
Long-term liabilities:
Long-term debt, less current portion and unamortized debt issuance costs			69,828				43,839
Contingent consideration, less current portion			1,996				5,881
Long-term incentive plan			3,185				1,032
Warrant liability			—				14,780
Deferred revenue—long-term			95,399				48,494
Deferred income tax liability, net			8,058				5,671
Total long-term liabilities			178,466				119,697
Total liabilities			264,793				166,268
Commitments and contingencies
Members’ equity (deficit):
Class A Preferred Units (2,000,000 Class A Preferred Units authorized; none issued and outstanding)			—				—
Class B Preferred Units (18,000,000 Class B Preferred Units authorized; 18,000,000 Units issued and outstanding)			—				—
Common Units (5,000,000 Common Units authorized; 3,057,344 Units issued and 2,107,452 outstanding at January 3, 2021; none issued and outstanding at December 29, 2019)			3,767				7,333
Retained earnings (deficit)			(3,783	)			16,834
Total members’ equity (deficit), CMI Acquisition, LLC			(16	)			24,167
Non-controlling interests			(1,568	)			—
Total members’ equity (deficit)			(1,584	)			24,167
Total liabilities and members’ equity (deficit)		$	263,209			$	190,435

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except unit and per unit data)

 

 

 

		YEAR ENDED JANUARY 3, 2021				YEAR ENDED DECEMBER 29, 2019
Net sales		$	140,438			$	136,725
Cost of sales			117,746				111,379
Gross profit			22,692				25,346
Selling and marketing expenses			7,778				4,326
Research and development			4,208				6,330
General and administrative expenses			17,254				14,390
Change in fair value of contingent consideration			2,094				9,271
Operating loss			(8,642	)			(8,971	)
Other income (expense):
Change in fair value of warrant liability			780				(4,460	)
Loss on debt modification and extinguishment			(1,434	)			—
Interest expense			(5,499	)			(6,547	)
Total other income (expense)			(6,153	)			(11,007	)
Loss before income taxes			(14,795	)			(19,978	)
Income tax expense (benefit)			4,919				(3,559	)
Net loss			(19,714	)			(16,419	)
Less: net income attributable to non-controlling interests			903				—
Net loss attributable to CMI Acquisition, LLC		$	(20,617	)		$	(16,419	)
Net loss per unit attributable to CMI Acquisition, LLC, basic and diluted		$	(1.15	)		$	(0.91	)
Weighted average units used in computing net loss per unit, basic and diluted			18,000,000				18,000,000

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Consolidated Statements of Members’ Equity (Deficit)

(dollars and units in thousands)

 

 

 

		CLASS A UNITS								CLASS B UNITS								COMMON UNITS								RETAINED EARNINGS (DEFICIT)				TOTAL MEMBERS’ EQUITY (DEFICIT), CMI ACQUISITION LLC				NON-CONTROLLING INTERESTS				TOTAL MEMBERS’ EQUITY (DEFICIT)
		Units				Amount				Units				Amount				Units				Amount
Members’ equity—December 30, 2018			—			$	—				18,000			$	—				—			$	3,925			$	33,253			$	37,178			$	—				37,178
Unit-based compensation			—				—				—				—				—				3,408				—				3,408				—				3,408
Net loss			—				—				—				—				—				—				(16,419	)			(16,419	)			—				(16,419	)
Members’ equity—December 29, 2019			—				—				18,000				—				—				7,333				16,834				24,167				—				24,167
Unit-based compensation			—				—				—				—				—				488				—				488				—				488
Exercise of Common Unit options			—				—				—				—				3,053				31				—				31				—				31
Repurchase of Common Units			—				—				—				—				(950	)			(4,085	)			—				(4,085	)			—				(4,085	)
Issuance of restricted Common Units			—				—				—				—				5				—				—				—				—				—
Distribution to VIE member			—				—				—				—				—				—				—				—				(2,471	)			(2,471	)
Net income (loss)			—				—				—				—				—				—				(20,617	)			(20,617	)			903				(19,714	)
Members’ equity (deficit)—January 3, 2021			—			$	—				18,000			$	—				2,108			$	3,767			$	(3,783	)		$	(16	)		$	(1,568)			$	(1,584	)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

		YEAR ENDED JANUARY 3, 2021				YEAR ENDED DECEMBER 29, 2019
Cash flows from operating activities:
Net loss		$	(19,714	)		$	(16,419	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Depreciation and amortization			18,866				16,662
Foundry services obligation			(3,732	)			(8,316	)
Gain on sale of property and equipment			(1,124	)			(159	)
Amortization of debt issuance costs included in interest expense			1,661				1,719
Loss on debt extinguishment			1,434				—
Long-term incentive and unit-based compensation			2,640				4,174
Change in fair value of warrant liability			(780	)			4,460
Change in fair value of contingent consideration			2,094				9,271
Cash paid for contingent consideration in excess of initial valuation			(7,296	)			—
Deferred income taxes			2,387				(3,835	)
Changes in operating assets and liabilities:
Accounts receivable			31,452				(42,467	)
Inventories			(11,175	)			2,036
Other assets and prepaid expenses			(9,411	)			(1,963	)
Accounts payable			483				(595	)
Accrued expenses			11,601				(2,031	)
Deferred revenue			74,578				49,586
Income tax receivable & payable			2,231				(1,200	)
Net cash provided by operating activities			96,195				10,923
Cash flows from investing activities:
Purchase of software and licenses			(4,085	)			(511	)
Proceeds from sale of property and equipment			1,676				1,598
Purchases of property and equipment			(85,768	)			(8,455	)
Net cash used in investing activities			(88,177	)			(7,368	)
Cash flows from financing activities:
Proceeds from term loan			—				5,472
Repayment of term loan			(38,270	)			(3,018	)
Cash paid for term loan extinguishment			(405	)			—
Net (repayment on) proceeds from line of credit			(12,380	)			8,037
Net proceeds from Revolver			32,303				—
Proceeds from Financing			39,000
Proceeds from Paycheck Protection Program loan			6,453				—
Cash paid for debt issuance costs			(5,182	)			(68	)
Proceeds from exercise of Common Unit options			31				—
Repurchase of warrants			(14,000	)
Repurchase of Common Units			(4,085	)			—
Cash paid for offering costs			(2,183	)			—
Cash paid for contingent consideration			(3,998	)			(9,871	)
Distributions to VIE member			(2,471	)			—
Net cash provided by (used in) financing activities			(5,187	)			552
Net change in cash and cash equivalents			2,831				4,107
Cash and cash equivalents—beginning of period			4,605				498
Cash and cash equivalents—end of period		$	7,436			$	4,605
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	4,444			$	4,733
Income taxes		$	149			$	1,383
Supplemental disclosures of noncash investing and financing activity:
Capital expenditures incurred, not yet paid		$	15,614			$	6,903

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

Note 1 NATURE OF BUSINESS

CMI Acquisition, LLC (“CMI”), together with its consolidated subsidiaries (“we”, “us”, “our”, or “SkyWater”), is a U.S.-owned, independent, pure-play technology foundry that provides a broad range of Wafer Services for volume manufacturing based on proprietary technology for high-growth markets and co-develops process technology intellectual property which enables disruptive technologies, with its Advanced Technology Services.

EMERGING GROWTH COMPANY STATUS

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are (1) no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (1) the last day of the first fiscal year (A) following the fifth anniversary of the completion of this offering, (B) in which our total annual gross revenue is at least $1.07 billion or (C) when we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Note 2 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements are presented in thousands of U.S. dollars (except unit and per unit information) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include our assets, liabilities, revenues, and expenses, as well as the assets, liabilities, revenues, and expenses of subsidiaries in which we have a controlling financial interest, SkyWater Technology Foundry, Inc. (“SkyWater Technology Foundry”) and SkyWater Federal, LLC (“SkyWater Federal”), and variable interest entities (“VIE”) for which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated statements of operations, members’ equity (deficit) and cash flows are for the years ended January 3, 2021 and December 29, 2019. Our fiscal year ends on the Sunday closest to the end of the calendar year. The years ended January 3, 2021 and December 29, 2019 contained 53 weeks and 52 weeks, respectively.

USE OF ESTIMATES

The preparation of our 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 at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. 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.

COVID-19

In March 2020, the World Health Organization declared the novel coronavirus 2019 (“COVID-19”) outbreak a global pandemic. The COVID-19 pandemic continues to spread throughout the United States and the world, with the

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

continued potential for significant impact. Our business has been adversely affected by the effects of COVID-19. We implemented modifications to employee travel and employee work locations, as required in some cases by federal, state and local authorities, which has had a negative impact on employee productivity. Because we have manufacturing operations, we may be vulnerable to an outbreak of a new coronavirus or other contagious diseases. Although we have not experienced a shutdown of our manufacturing operations, the effects of such an outbreak could include the temporary shutdown of our facilities or the operations of our customers, disruptions or restrictions on the ability to ship our products to our customers as well as disruptions that may affect our suppliers. Any disruption of our ability to manufacture or distribute our products, the ability of our suppliers to deliver key components on a timely basis, or our customers’ ability to order and take delivery of our products could have a material adverse effect on our sales and operating results. The future broader implications of the pandemic remain uncertain and will depend on certain future developments, including the duration, scope and severity of the pandemic and the availability and effectiveness of vaccines.

OPERATING SEGMENT AND GEOGRAPHIC 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. We view our operations and manage our business as one operating segment.

The following table discloses revenue by country as determined based on the customer address:

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
United States		$	118,480			$	115,874
Canada			9,138				13,286
All others			12,820				7,565
		$	140,438			$	136,725

 

 

All of our long-lived assets are located in the United States.

NET LOSS PER UNIT

Basic net loss per unit is calculated by dividing the net loss by the weighted-average number of Preferred Class B Units outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per unit is computed by dividing the net loss by the weighted-average number of Preferred Class B Units and potentially dilutive securities outstanding for the year determined using the treasury-stock method. Due to the exercise of Common Unit options in December 2020 near the end of our fiscal year, an immaterial amount of earnings was allocated to the Common Units for the year ended January 3, 2021. This amount was not shown in our net loss per unit calculations due to the insignificant effect on the reported amounts.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

The following table sets forth the computation of basic and diluted net loss per unit:

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
Numerator:
Net loss attributable to CMI Acquisition, LLC		$	(20,617	)		$	(16,419	)
Denominator:
Weighted-average units outstanding			18,000,000				18,000,000
Weighted-average units used to compute net loss per unit, basic and diluted			18,000,000				18,000,000
Basic and diluted net loss per unit		$	(1.15	)		$	(0.91	)

 

 

Note 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents.

We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in our deposit accounts.

ACCOUNTS RECEIVABLE

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts. Management determines the need for an allowance for doubtful accounts by identifying troubled accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. We did not have an allowance for doubtful accounts at January 3, 2021 or December 29, 2019.

INVENTORIES

Inventories consist of wafer raw materials, work in process, and supplies and spare parts. Cost is determined on the first-in, first-out basis. Raw materials are stated at weighted-average cost, while work in process inventory is stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Supplies and spare parts are measured at cost and expensed when utilized. Supplies and spare parts are classified as Inventory if expected use is within one year. Supplies and spare parts not expected to be used within one year are classified as Other assets in our consolidated balance sheets.

DEFERRED OFFERING COSTS

Deferred offering costs are capitalized and consist of fees incurred in connection with the anticipated sale of units in an initial public offering (“IPO”) and include legal, accounting, printing, and other IPO-related costs. Upon completion of an IPO, these deferred costs will be reclassified to equity and recorded against the proceeds from the offering. In the event an IPO is terminated or significantly delayed, the deferred offering costs would be expensed in the period of termination as a charge to operating expenses in the consolidated statement of operations. The balance of deferred offering costs included within Prepaid assets and other current assets at January 3, 2021 was $2,183. As of December 29, 2019, we had not incurred any IPO-related costs.

PROPERTY AND EQUIPMENT

Property and equipment acquired in the normal course of business are initially recorded at cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

incurred. When equipment is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in our consolidated statement of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are generally seven years for machinery and equipment and 25 years for buildings.

INTANGIBLE ASSETS

Our intangible assets consist of a customer list, software and licenses, initially recorded at cost. Amortization is computed using the straight-line method over an estimated useful life of 4.25 years for the customer list and 3 to 6 years for software and licenses.

IMPAIRMENT OF LONG-LIVED ASSETS

We review our long-lived assets, including property and equipment and intangible assets, to determine potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Recoverability is measured by comparing the carrying amount of the asset group with the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, an impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of long-lived assets. Management determined that there was no impairment of long-lived assets during the years ended January 3, 2021 and December 29, 2019.

DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT

Deferred debt issuance costs and debt discounts consist of costs incurred in relation to obtaining our long-term debt and line of credit. These costs are amortized over the life of the related agreements using the effective interest method or on a basis which approximates the effective interest method. The amortization of these costs is included in interest expense. The unamortized debt issuance costs and debt discount are presented as a direct reduction from the outstanding borrowings in our consolidated balance sheet. Unamortized deferred debt issuance costs and debt discount at the time of an extinguishment of debt are charged to interest expense, as are third party costs of a modification.

CONTINGENT CONSIDERATION

In connection with our acquisition of the business from Cypress Semiconductor Inc. (“Cypress”), the purchase price of the acquisition was allocated to assets acquired and liabilities assumed and did not result in any goodwill being recorded. We recorded a contingent consideration liability of $24,900 for the future estimated earn-out/royalties owed on Advanced Technology Services revenues, at fair value as of the acquisition date in March 2017. For each reporting period thereafter, we revalue future estimated earn-out payments and record the changes in fair value of the liability in our consolidated statements of operations.

The royalties represent a declining percentage of revenue generated by the sale of Advanced Technology Services through 2021, and are paid quarterly. The fair value of the contingent consideration royalty liability is the present value of the amount expected to be paid and is based on the forecast of revenue for Advanced Technology Services. The present value of royalties expected to be paid in the 12 months following year-end are classified as a current liability. See Note 11, Fair Value Measurements, for fair value measurements related to the contingent consideration.

Royalties of $11,294 and $9,871 were paid during the years ended January 3, 2021 and December 29, 2019, respectively. During the same periods, we recorded royalty expense of $2,094 and $9,271 to reflect the change in fair value of the contingent consideration obligation in our consolidated statements of operations.

FOUNDRY SERVICES OBLIGATION

The foundry services agreement (“FSA”) obligation relates to a take-or-pay supply contract for us to provide semiconductor wafers to our main customer for a period of 40 months starting March 1, 2017, the date we acquired the business from Cypress. The contract obligation results from fixed pricing in the supply contract and a deferred volume discount that were determined to be out of market. The fair value of the FSA was estimated to be an

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

obligation of $26,200, as of March 1, 2017, using the income approach and is not subsequently remeasured. The volume discount portion of the liability is recognized as revenue to offset the volume discounts made by us, while the fixed priced portion of the liability is amortized to revenue monthly using the straight-line method. The FSA obligation ended in June 2020.

VARIABLE INTEREST ENTITIES

We evaluate whether an entity is a VIE based on the sufficiency of the entity’s equity at risk and by determining whether the equity holders have the characteristics of a controlling financial interest. To determine if we are the primary beneficiary of a VIE, we assess whether we have the power to direct the activities that most significantly impact the economic performance of the entity as well as the obligation to absorb losses or the right to receive benefits that may be significant to the entity. These determinations are both qualitative and quantitative, and they require us to make judgments and assumptions about the entity’s forecasted financial performance and the volatility inherent in those forecasted results. We regularly review all existing entities for events that may result in an entity becoming a VIE or us becoming the primary beneficiary of an existing VIE. See Note 15, Variable Interest Entities.

Non-controlling interests reported in members’ equity (deficit) on the consolidated balance sheets represent the ownership interests in the consolidated VIE held by entities or persons other than CMI.

REVENUE RECOGNITION

Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenues when or as we satisfy a performance obligation. We account 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 consideration is probable. At contract inception, we apply judgment in determining the customer’s ability and intention to pay amounts entitled to us when due based on a variety of factors including the customer’s historical payment experience. See below and Note 4, Revenue, for further discussion of our revenue characteristics.

Performance Obligations

We primarily derive revenue from two sources: the sale of wafers (Wafer Services) and the sale of non-recurring engineering services (Advanced Technology Services).

Wafer Services

Wafers are goods that are generally customer specific, highly customized and have no alternative use to us. For most of our contracts, we have determined that we do not have an enforceable right to obtain payment for performance completed to date plus a reasonable margin should a customer cancel an incomplete contract for reasons other than a failure by us to perform as promised. Accordingly, revenue from the sale of wafers is recognized at a point in time when control of the goods is transferred to the customer, which occurs upon shipment or receipt by the customer, depending on the contract terms. Invoices are generally issued upon shipment of the goods and payable within 30 days.

For those contracts where we have determined that we do have an enforceable right to obtain payment for performance completed to date plus a reasonable margin, revenue is recognized over time using an input method based on costs incurred, which faithfully depicts the progress to meet our obligations under the contract.

Advanced Technology Services

Our Advanced Technology Services result in the customer simultaneously receiving and consuming the benefits provided by our performance because the customer has contractual rights to obtain the engineering, design and development processes in progress and could complete the services on their own or through a third party. Thus,

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

revenue is recognized over time as we perform. Revenue from the sale of Advanced Technology Services is generated from two types of contracts:

1) Time-and-materials contracts (“T&M”)

 

Under T&M contracts, revenue is recognized over time using the right to invoice practical expedient, as the invoiced amount reflects the value transferred to the customer for performance completed to date for which we have a right to payment. Invoices are generally issued monthly and payable within 30 days.

2) Fixed priced research and development contracts (“Fixed Price”)

 

For Fixed Price contracts, revenue is recognized over time using an output method based on surveys of performance completed to date or contractual milestones if they correlate directly with the progress to satisfy our performance obligation. We have an enforceable right to payment for the performance of work completed up to contractually agreed upon milestones. Invoices are issued based on the milestones outlined in the contract, which are generally payable within 30 days.

We generally expense incremental costs of obtaining a contract when the amortization period would be less than one year. We made an accounting policy election to exclude from the measurement of revenues any sales or similar taxes collected from customers. We also elected to include freight and handling costs in cost of sales and treat shipping, after control transfers to the customer, as a fulfillment activity.

In the normal course of business, we do not accept product returns unless the item is defective as manufactured. We generally warrant our products against defects for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement. We do not offer an incremental service-type warranty on a standalone basis apart from providing assurance that the product will function as intended. Warranty returns have been historically insignificant and as such no allowance for future returns is recorded in the financial statements.

ADVERTISING COSTS

We expense advertising costs as they are incurred. Advertising expense for the years ended January 3, 2021 and December 29, 2019 totaled $268 and $96, respectively.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Research and development costs include all costs incurred related to internal technology and process improvements and non-customer funded technology transfers.

LICENSED TECHNOLOGY

We license technology and pay royalties based on the revenue of the related products sold by us. Royalties are expensed as incurred and included in cost of sales in our consolidated statements of operations.

EMPLOYEE UNIT OPTION PLAN

Unit-based compensation cost under the employee unit option plan is measured at the grant date of options to employees, based on the fair value of the award, and is recognized as expense over the requisite service period. Forfeitures reduce compensation expense in the period they occur.

We use the Black-Scholes option-pricing model to measure the grant-date-fair-value of unit-based awards. The Black-Scholes model requires certain assumptions to determine an award’s fair value, including expected term, risk-free interest rate, expected volatility, expected dividend yield and fair value of underlying Common Unit.

INCOME TAXES

We are taxed as a C corporation. Income taxes are accounted for under the liability method. Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities and

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We recognize interest and penalties on the income tax expense line in our consolidated statement of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“Topic 842”). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The standard is effective for public business entities for fiscal years beginning after December 15, 2018. As an emerging growth company, we intend to adopt the new standard on January 3, 2022 for our year ending January 1, 2023. However if we lose our emerging growth company status prior to our intended adoption date, we may be required to adopt the new standard in the year we lose such status. We do not expect adopting Topic 842 will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued a new credit loss accounting standard, ASU 2016-13, Current Expected Credit Losses (“Topic 326”). This guidance replaces the current allowance for loan and lease loss accounting standard and focuses on estimation of expected losses over the life of the loans instead of relying on incurred losses. The standard is effective for certain public business entities for fiscal years beginning after December 15, 2019. As an emerging growth company, we intend to adopt the new standard on January 2, 2023 for our year ending December 31, 2023. However if we lose our emerging growth company status prior to our intended adoption date, we may be required to adopt the new standard in the year we lose such status. We do not expect adopting Topic 326 will have a material impact on our consolidated financial statements.

SUBSEQUENT EVENTS

Through our newly created subsidiary, SkyWater Florida, Inc., we entered into several agreements on January 25, 2021 with the government of Osceola County, Florida (“Osceola”) and ICAMR, Inc., a Florida non-profit corporation (“BRIDG”), to operate the Center for NeoVation (“CfN”), a semiconductor research and development and manufacturing facility. These agreements included a technology and economic development agreement (the “TED Agreement”), a lease agreement (the “CfN Lease”) and a semiconductor line operation agreement (the “LOA”). Under the TED Agreement and the CfN Lease, we agreed to operate the CfN, including certain semiconductor manufacturing equipment, and an advanced water treatment facility currently owned by Osceola for a period of at least 23 years for a lease payment of $1.00 per year. During the period of the CfN Lease, we are responsible for taxes, utilities, insurance, maintenance and operation of those assets. We may terminate the TED Agreement and CfN Lease with 18 months’ notice. In the event we terminate the agreements, we would be required to continue to operate the center until we find a replacement operator or the 18 months expire and may be required to make a payment of up to $15,000 to Osceola.

We intend to account for the CfN Lease as a lease. Given the nominal minimum lease payments required under the lease ($23.00), no assets will initially be recognized on our consolidated balance sheet. As we perform under the agreements, expenses we incur and any revenue we are able to generate from the operations of the center and advanced water treatment facility will be included in our consolidated statements of operations as they are incurred or earned. If we are able to reach and maintain full capacity in the center (as defined) for a minimum period of 20 years, Osceola will convey the land, buildings and equipment to us for no consideration at the end of the CfN Lease. At such time that we believe the conveyance of the land, buildings and equipment is reasonably assured, we will record those assets on our consolidated balance sheet at fair value and record a corresponding deferred gain. We will subsequently amortize the depreciable assets over their remaining economic life and recognize an equivalent amount of income from the amortization of the deferred gain.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

In connection with the TED Agreement and CfN Lease, we executed an LOA with BRIDG. Under the LOA, we agreed to provide engineering and test wafer services as requested by BRIDG based on our standard hourly and activity-based rates, which we intend to account for as revenue over time as we perform. In addition, we agreed to provide BRIDG access to the cleanrooms in the facilities that are subject to the TED Agreement and the CfN Lease for a fee of $15,000. We intend to account for the access fee as a stand-ready obligation with revenue recognized ratably over 33 months, the life of BRIDG’s third-party contracts for which we are a subcontractor.

Subsequent events have been evaluated for recognition or disclosure through March 22, 2021, the date the consolidated financial statements were issued.

Note 4 REVENUE

On March 6, 2020, we executed a contract for total consideration of $32,431 that includes the sale of equipment and the right to use of a portion of our existing facility to produce wafers using the customer’s equipment. We determined that the contract had one performance obligation related to the sale of the equipment to the customer and the installation of the customer’s equipment in our facility, and a lease component for the right to use our facility. The contractual amounts that relate to revenue from contracts with customers and the lease were $11,431 and $21,000, respectively. We allocated the consideration to the equipment based on estimated standalone selling prices. We are recognizing the revenue allocated to the equipment at the point in time in which control passes to the customer. We are recognizing revenue from the lease component over the estimated term of the lease – or 4.5 years.

During 2019, we signed a long-term contract for $79,783 that includes funding for additional manufacturing capacity (expansion of existing facilities and the purchase of new equipment). On March 17, 2020, we executed a contract modification to amend this contract for additional consideration of $25,642. Under the original contract, the customer (1) has a first right of refusal to future manufacturing capacity and product that is discounted over a period of approximately five years, which represents a material right and (2) purchased certain Advanced Technology Services. Advanced Technology Services will be completed over a period of one to two years and revenue allocated to the Advanced Technology Services performance obligation are recognized over time as the performance obligation is satisfied. Consideration allocated to the material right will be recognized when or as the options are exercised or expire, which is expected to occur over the estimated period in which the customer can exercise its option and benefit from purchasing discounted product. The customer, therefore, has a right to acquire a finite number of goods at a discount over the five-year period and such right is either exercised or expires over that term. Our customer’s ability to exercise its option to acquire product at a discount will begin once the expansion is completed and continue for a period of approximately five years.

Through the 2020 modification, the customer executed options for additional equipment commitments that we will own, which will increase our capacity to provide discounted product, and to extend the material right within the contract from five to seven years. We allocated the additional consideration from the modification to the existing performance obligations based upon our use of observable inputs that faithfully depict the selling price of the promised goods or services if we sold them separately to a similar customer.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

DISAGGREGATED REVENUE

The following table discloses revenue by product type and the timing of recognition of revenue for transfer of goods and services to customers (point-in-time or over time):

 

 

 

		FOR THE YEAR ENDED JANUARY 3, 2021												FOR THE YEAR ENDED DECEMBER 29, 2019
		POINT IN TIME				OVER TIME				TOTALS				POINT IN TIME				OVER TIME				TOTALS
Wafer Services		$	46,019			$	—			$	46,019			$	72,413			$	1,395			$	73,808
Advanced Technology Services
T&M			—				64,155				64,155				—				47,037				47,037
Fixed Price			—				29,476				29,476				—				14,231				14,231
Total revenue from contracts with customers		$	46,019			$	93,631				139,650			$	72,413			$	62,663				135,076
Lease revenue											389												—
Other revenue recognized from foundry services obligation											399												1,649
Total revenue										$	140,438											$	136,725

 

 

DEFERRED CONTRACT COSTS

We recognize an asset for the incremental costs of obtaining a contract with a customer (i.e., deferred contract costs) when costs are considered recoverable and the duration of the contract is in excess of one year. We amortize such deferred costs as the related revenue is recognized. We recognized amortization of deferred contract costs in our consolidated statements of operations totaling $462 and $0 for the years ended January 3, 2021 and December 29, 2019, respectively. In our consolidated balance sheet, the current portion of deferred contract costs is included in Prepaid assets and other current assets, while the non-current portion of deferred contract costs is included in Other assets.

CONTRACT ASSETS

Contract assets represent the satisfaction of over time performance obligations in advance of when we have the ability to invoice the customer. Contract assets are included in Accounts receivable, net in our consolidated balance sheets as follows:

 

 

 

Balance at December 30, 2018		$	—
Increase due to revenue recognized in advance of customer billings			172
Balance at December 29, 2019			172
Transfers to accounts receivable, net			(15,505	)
Increase due to revenue recognized in advance of customer billings			23,480
Balance at January 3, 2021		$	8,147

 

 

CONTRACT LIABILITIES

Contract liabilities represent 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 current and long-term portions of contract liabilities are included in Deferred revenue on our consolidated balance sheets.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

The contract liabilities and other significant components of deferred revenue are as follows:

 

 

 

		JANUARY 3, 2021												DECEMBER 29, 2019
		CONTRACT LIABILITIES				DEFERRED LEASE REVENUE				TOTAL DEFERRED REVENUE				CONTRACT LIABILITIES				DEFERRED LEASE REVENUE				TOTAL DEFERRED REVENUE
Current		$	25,986			$	4,667			$	30,653			$	2,980			$	—			$	2,980
Long-term			79,455				15,944				95,399				48,494				—				48,494
Total		$	105,441			$	20,611			$	126,052			$	51,474			$	—			$	51,474

 

 

Significant changes in contract liabilities are as follows:

 

 

 

Balance at December 30, 2018		$	2,056
Revenue recognized included in the balance at the beginning of the period			(216	)
Increase due to payments received, excluding amounts recognized as revenue during the year			49,634
Balance at December 29, 2019			51,474
Revenue recognized included in the balance at the beginning of the period			(1,553	)
Increase due to payments received, excluding amounts recognized as revenue during the year			55,520
Balance at January 3, 2021		$	105,441

 

 

REMAINING PERFORMANCE OBLIGATIONS

As of January 3, 2021, we had approximately $88,173 of transaction price allocated to remaining performance obligations that are unsatisfied (or partially satisfied) on contracts with an original expected duration of one year or more, which are primarily related to Advanced Technology Services contracts. We expect to recognize those remaining performance obligations as follows:

 

 

 

Within one year		$	8,711
From one to two years			15,326
From two to three years			12,827
After three years			51,309
Total		$	88,173

 

 

We do not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less. Further, we do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

CONTRACT ESTIMATES

Pricing is established at or prior to the time of sale with our customers, and we record sales at the agreed-upon selling price. The terms of a contract and historical business practices can, but generally do not, give rise to variable consideration. We estimate variable consideration at the most likely amount we will receive from customers. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. In general, variable consideration in our contracts relates to the entire contract. As a result, the variable consideration is allocated proportionately to all performance obligations. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at contract inception. There are no significant instances where variable consideration is constrained and not recorded at the initial time of sale.

CONTRACT MODIFICATIONS

When contracts are modified to account for changes in contract specifications and requirements, we consider whether the modification either creates new, or changes existing, enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original product or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) under the cumulative catch-up method. When the modifications include additional performance obligations that are distinct and at a relative stand-alone selling price, they are accounted for as a new contract and performance obligation and recognized prospectively. We had one significant contract modification during the year ended January 3, 2021 as noted above. However, this contract modification did not result in an adjustment to previously recognized revenue. We had no significant contract modifications during the year ended December 29, 2019.

Note 5 BALANCE SHEET INFORMATION

Certain significant amounts included in our consolidated balance sheets consist of the following:

Accounts receivable, net:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Trade accounts receivable		$	21,357			$	60,991
Unbilled revenue (contract assets)			8,147				172
Note receivable			230				—
Employee note receivable			222				—
Other receivables			39				284
Total accounts receivable, net		$	29,995			$	61,447

 

 

On December 31, 2020, we entered into a note receivable with a key employee for $222. The note may be repaid any time prior to its maturity date of March 31, 2022 and bears interest at 6%.

Inventories:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Raw materials		$	1,463			$	1,274
Work-in-process			19,719				9,652
Supplies and spare parts			5,987				5,068
Total inventories - current			27,169				15,994
Supplies and spare parts classified as other assets			1,949				2,427
Total inventories		$	29,118			$	18,421

 

 

 

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

Prepaid assets and other current assets:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Prepaid expenses		$	2,761			$	1,925
Tax receivable			—				521
Equipment purchased for customers (1)			5,343				—
Deferred contract costs			1,647				—
Deferred offering costs			2,183				—
Other			38				25
Total prepaid assets and other current assets		$	11,972			$	2,471

 

 

 

(1)

In connection with a customer contract as more fully described in Note 4, Revenue, we acquired equipment for the customer that we will install and calibrate in our facility. Prior to the customer obtaining ownership and control of the equipment, we recorded costs incurred to date within prepaid assets and other current assets.

Property and equipment, net:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Land		$	5,396			$	5,396
Buildings and improvements			85,197				30,400
Machinery and equipment			124,130				99,193
Fixed assets not yet in service			22,602				8,892
Total property and equipment, at cost			237,325				143,881
Less: Accumulated depreciation			(59,247	)			(42,011	)
Total property and equipment, net		$	178,078			$	101,870

 

 

Depreciation expense was $17,721 and $16,324 for the years ended January 3, 2021 and December 29, 2019, respectively.

Intangible assets consist of purchased software and licenses costs and a customer list from our acquisition of the business in 2017. Intangible assets are summarized as follows:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Customer list		$	1,500			$	1,500
Software and licenses			5,408				1,323
Total intangible assets, at cost			6,908				2,823
Less: Accumulated amortization			(2,347	)			(1,202	)
Total intangible assets, net		$	4,561			$	1,621

 

 

For the years ended January 3, 2021 and December 29, 2019, amortization of the customer list intangible asset charged to operations was $353 and amortization of software and licenses was $792 and $338, respectively. The

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

weighted average remaining amortization period for the customer list as of January 3, 2021 was one year. Remaining estimated aggregate annual amortization expense is as follows for the years ending:

 

 

 

		AMORTIZATION EXPENSE
2021		$	1,654
2022			1,041
2023			701
2024			422
2025			422
Thereafter			321
Total		$	4,561

 

 

Other assets:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Supplies and spare parts		$	1,949			$	2,427
Deferred contract costs			2,049				—
Total other assets		$	3,998			$	2,427

 

 

Accrued expenses:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Accrued compensation		$	6,315			$	2,402
Accrued commissions			5,183				242
Accrued fixed asset expenditures			6,337				2,676
Accrued accounts payable			4,608				2,553
Other accrued expenses			3,053				2,361
Total accrued expenses		$	25,496			$	10,234

 

 

Note 6 DEBT

The components of debt outstanding are as follows:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Revolver, net of unamortized debt issuance costs of $1,537		$	30,766			$	—
Financing (by VIE), net of unamortized debt issuance costs of $3,458			35,381				—
Paycheck Protection Program loan			6,453				—
Revolving credit facility (Line of Credit), net of unamortized debt issuance costs of $391			—				11,990
Term Loan, net of unamortized debt issuance costs of $2,273			—				35,997
Total long-term debt			72,600				47,987
Less: current portion of long-term debt			(2,772	)			(4,148	)
Long-term debt, excluding current portion		$	69,828			$	43,839

 

 

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

 

REVOLVER

On December 28, 2020, we entered into an amended and restated revolving credit agreement (“Revolver”) of up to $65,000 that replaced the prior revolving credit agreement (“Line of Credit”) and our term loan agreement (“Term Loan”), both dated October 23, 2018. Under the agreement, the facility is available on a revolving basis, subject to availability under a borrowing base consisting of a percentage of eligible accounts receivable, inventory and owned equipment. The Revolver can be repaid and borrowed again at any time without penalty or premium until the maturity date of December 28, 2025. The Revolver is available for issuance of letters of credit to a specified limit of $10,000.

Under the Revolver, we can elect the base rate (greatest of the federal funds rate plus 0.5%, LIBOR for a one-month period plus 1%, or the institution’s prime rate) or LIBOR for a period of one, two, three or six months as selected by us, plus a margin depending on the amount of borrowings outstanding. We will also pay a commitment fee equal to 0.25% to 0.375% of the average commitment not utilized, depending on the amount not utilized. Interest payments are due monthly.

The Revolver includes a financial covenant that requires us to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 on a rolling twelve-month basis. The fixed charge coverage ratio included in our credit agreement is defined as (A) earnings before interest, taxes, depreciation and amortization (“EBITDA”), less unfinanced capital expenditures, divided by (B) fixed charges, which are generally defined as cash interest and income taxes, scheduled principal payments on loans and contingent consideration arrangements, and restricted payments such as dividends. EBITDA, as defined, includes adjustments for such items as unusual gains or losses, equity-based compensation and management fees, as well as other adjustments. The Revolver also includes a financial covenant that requires us to maintain a leverage ratio of no greater than 3.5 to 1.0 on a rolling twelve-month basis measured quarterly. On January 2, 2022, the ratio decreases to 3.0 to 1.0 through the remainder of the agreement. The leverage ratio included in our credit agreement is defined as our funded indebtedness as of the measurement date divided by our EBITDA for the twelve-month period as of the measurement date.

The Revolver agreement contains covenants, including restrictions on indebtedness, liens, mergers, consolidations, investments, acquisitions, disposition of assets, and transactions with affiliates. Dividends, redemptions and other payments on equity (restricted payments) are limited to (1) restricted payments to the loan parties, (2) declaring and making dividend payments or other distributions payable solely in capital stock, (3) so long as no default or event of default exists or would result therefrom, we may pay management fees and compensation to our principal shareholder not exceeding an agreed upon amount in any fiscal year, and (4) so long as no default or event of default exists or would result therefrom, we may redeem up to $5,000 of Class B Preferred Units, $10,200 of Common Units and our warrant liability. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of certain covenants, default to material indebtedness, bankruptcy, ERISA violations, material judgments, change in control and termination or invalidity of guaranty or security documents.

The Revolver is secured by a security interest in substantially all of our accounts receivable, inventory and equipment.

We incurred third-party transaction costs of $884 and fees paid to the lender of our Revolver of $488, which we recognized, along with the $175 of prior unamortized debt issuance costs from the Line of Credit, as debt issuance costs and are amortizing as additional interest expense over the life of the Revolver.

The outstanding balance of our Revolver was $32,303 as of January 3, 2021 at an interest rate of 3%. Our remaining availability under the Revolver was $21,577 as of January 3, 2021.

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

FINANCING

On September 30, 2020, the VIE which we consolidate (see Note 14, Related Party Transactions, and Note 15, Variable Interest Entities) entered into a loan agreement with Citi Real Estate Fund for $39,000 (the “Financing”). The Financing is repayable in equal monthly installments of $194 over 10 years, with the balance payable at the maturity date of October 6, 2030. The interest rate under the Financing is fixed at 3.44%. The Financing is guaranteed by our principal owner, who is also the sole equity member of the VIE.

The Financing includes a financial covenant that requires our VIE to maintain a debt service coverage ratio of at least 1.2 to 1.0. The debt service coverage ratio included in the loan agreement is defined as (A) underwritable cash flow to (B) the aggregate amount of debt service which would be due for the 12-month period immediately preceding the date of calculation. Underwritable cash flow is equal to the sum of gross rents we are paying to the VIE plus the trailing 12 months operating income, less the trailing 12 months operating expenses. The Financing also includes a financial covenant for CMI to maintain an EBITDAR ratio of at least 5.0 to 1.0. EBITDAR is the quotient (calculated based on a trailing 12-month basis) of (i) our annual earnings before interest, taxes, depreciation, amortization and restructuring or rent costs, divided by (ii) the amount of gross rents we pay. The loan agreement contains covenants, including restrictions on indebtedness, liens, mergers, investments, acquisitions, disposition of assets, and transactions with affiliates, and requirements to provide quarterly and annual financial information for us and our VIE and to maintain a manager for the property. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of certain covenants, default to material indebtedness, bankruptcy, material judgments, and change in control.

The Financing is secured by a security interest in the land and building which was the subject of the sale-leaseback transaction (see Note 14, Related Party Transactions – Sale-Leaseback Transaction).

Our VIE incurred third-party transaction costs of $65, which are recognized as debt issuance costs and are amortizing as additional interest expense over the life of the Financing. We incurred additional third-party transaction costs of $3,487, which are recognized as debt issuance costs and are amortizing as additional interest expense over the life of the Financing.

PAYCHECK PROTECTION PROGRAM

On April 18, 2020, we received proceeds of $6,453 pursuant to a loan from TCF Bank under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and administered by the U.S. Small Business Association, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, failure to make payment, bankruptcy, breaches of representations and material adverse effects.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that we will obtain forgiveness of the PPP loan in whole or in part. The PPP loan bears interest at a rate of 1% per annum. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties.

LINE OF CREDIT

On October 23, 2018, we entered into a revolving credit agreement (“Line of Credit”) up to $20,000 that replaced the prior secured asset-based revolving credit agreement (the “Prior ABL”). Under the agreement, the facility was available on a revolving basis, subject to availability under a borrowing base consisting of 85% to 90% of eligible accounts receivable and 65% of eligible inventory. The Line of Credit could be repaid and borrowed again at any time without penalty or premium until the maturity date of October 23, 2021. The Line of Credit was available for issuance of letters of credit to a specified limit of $10,000. The interest rate on the Line of Credit as of

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

December 29, 2019 was 6.25%. We also paid a commitment fee equal to 0.25% to 0.375% of the average commitment not utilized, depending on the amount not utilized. Interest payments were due monthly.

In connection with the Revolver as noted above, amounts owed under our Line of Credit totaling $2,752 of principal and accrued interest were rolled over into the Revolver and our Line of Credit was discontinued. We accounted for the amendment of our Line of Credit as a modification with the remaining unamortized debt issuance costs of $175 recognized as debt issuance costs of our Revolver.

TERM LOAN

On October 23, 2018, we entered into a $36,500 new term loan agreement (“Term Loan”) that replaced the prior senior secured term note facility. Subject to satisfaction of certain conditions, we could increase the amount of the revolving loans available under the Term Loan in an amount not to exceed an incremental $6,000 in the aggregate. In March 2019 and July 2019, we borrowed an additional $4,000 and $1,472, respectively.

The Term Loan was repayable in equal quarterly installments, with the balance payable at the maturity date of October 23, 2021. We were required to make principal prepayments to the lender for certain proceeds of disposition of assets and for extraordinary receipts. We could prepay the loan at any time, subject to a prepayment penalty of 3% in the first year of the loan, 2% in the second year and 1% in the final year.

Under the Term Loan agreement, interest was due based on three-month LIBOR plus applicable margins. The interest rate as of December 29, 2019 was 5.4% on the first $7,500 borrowed and 11.4% on the remaining balance.

The Line of Credit and Term Loan were secured by a security interest in substantially all of our assets.

In connection with the sale-leaseback transaction on September 29, 2020 as more fully described in Note 14, Related Party Transactions, we were required by the conditions of our Term Loan to amend the Term Loan agreement and make a prepayment of principal amounting to $6,348 resulting from the reduction in our borrowing base. We also incurred expenses of $182 to finalize the amendment. We accounted for the prepayment as a partial extinguishment of our Term Loan and recognized a loss of $223 in our consolidated statement of operations consisting of a partial write-off of unamortized debt issuance costs and fees paid to our lender.

In connection with the Revolver as noted above, we repaid all outstanding amounts owed under our Term Loan totaling $27,774 of principal, $161 of accrued interest and incurred $278 of prepayment penalties. We accounted for the repayment of our Term Loan as an extinguishment and recognized a loss of $1,211 in our consolidated statement of operations consisting of a write-off of unamortized debt issuance costs of $933 and the prepayment penalties paid to our Term Loan lender.

COVENANTS

As of January 3, 2021, we were not in compliance with the fixed charge coverage ratio and leverage ratio covenants related to the Revolver. On March 19, 2021, we were granted a waiver from the lender related to these financial covenants. The amendment modified those ratios and we are no longer in an event of default. Based on these modifications, we are in full compliance with the Revolver covenant requirements. Our VIE was in compliance with the financial covenants related to the Financing. No financial covenants exist related to the PPP loan.

MATURITIES

As of January 3, 2021, the Revolver is due in December 2025. The Financing is repayable in equal monthly installments of $194 over 10 years, with the balance payable at the maturity date of October 6, 2030. If we are required to repay the PPP loan, monthly principal and interest payments of $363 begin in August 2021 and

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

continue until July 2023. Future principal payments of our Revolver, PPP loan and consolidated VIE’s Financing, excluding unamortized debt issuance costs, are as follows:

 

 

 

2021		$	2,772
2022			5,333
2023			1,422
2024			1,094
2025			33,440
Thereafter			33,534
Total		$	77,595

 

 

Historically, we have addressed our liquidity needs (including funds required to make scheduled principal and interest payments, refinance debt and fund working capital, and planned capital expenditures) with operating cash flows, borrowings under credit facilities, and proceeds from the term loans. Our ability to execute our operating strategy is dependent on our ability to continue to access capital through our Revolver and other sources of financing and if we were unable to obtain financing on reasonable terms, this may impact our ability to execute our operating strategy.

Note 7 INCOME TAXES

The components of income tax (benefit) expense are as follows:

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
Current:
Federal		$	1,499			$	252
State			1,033				24
Total current tax expense			2,532				276
Deferred:
Federal			2,777				(3,604	)
State			(390	)			(231	)
Total deferred tax benefit			2,387				(3,835	)
Income tax expense (benefit)		$	4,919			$	(3,559	)

 

 

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

A reconciliation between the income tax provision and the amount computed by applying the statutory federal tax rate to loss before income taxes is as follows:

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
Taxes at U.S. statutory tax rate		$	(3,107	)		$	(4,249	)
State income taxes, net of federal income tax benefit			(297	)			(309	)
Permanent differences			(97	)			1,042
Federal tax credits			(281	)			(281	)
Remeasurement of deferred tax assets and liabilities			(58	)			35
Change in valuation allowance			1,609				—
Equity-based compensation			(1,196	)			—
Disallowed loss on sale-leaseback transaction			8,208				—
Non-controlling interest			(190	)			—
Other			328				203
Income tax expense (benefit)		$	4,919			$	(3,559	)

 

 

The significant components of deferred tax assets and liabilities are reflected in the following table:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Deferred tax assets:
Deferred compensation & accrued vacation		$	787			$	2,007
Foundry services obligation			—				91
Interest expense carry-over			—				2,382
Deferred revenue			16,198				451
Financing lease			7,689				—
Net operating loss and credit carryforwards			38				378
Other			552				71
Total deferred tax assets			25,264				5,380
Deferred tax liabilities:
Property & equipment			(31,713	)			(10,765	)
Intangible asset			—				(162	)
Other			—				(124	)
Total deferred tax liabilities			(31,713	)			(11,051	)
Net deferred tax liability			(6,449	)			(5,671	)
Valuation allowance			(1,609	)			—
Net deferred tax liability after valuation allowance		$	(8,058	)		$	(5,671	)

 

 

Our federal net operating loss carryforwards do not expire. Federal net operating loss carryforwards are subject to limitation of 80% of taxable income in any given tax year beginning after December 31, 2020. Our state net operating loss carryforwards will expire in 2042 and are not subject to the aforementioned limitation. Section 163(j) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) limits our ability to deduct interest accrued or paid on indebtedness. The interest expense carry-over deferred tax asset does not expire but is subject to the

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

section 163(j) limit on an annual basis. Management assesses the available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations, to estimate whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. On the basis of this evaluation, a valuation allowance of $1,609 has been recorded as of January 3, 2021. No valuation allowance was recorded as of December 29, 2019.

On March 27, 2020, the CARES Act was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act made various tax law charges, including among other things: (i) modification to the federal net operating loss rules, including permitting federal net operating losses incurred in 2018, 2019 and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes; (ii) enhanced recoverability of AMT tax credit carryforwards; (iii) delayed payment of employer payroll taxes; (iv) increased the limitation on business interest expenses under IRC Section 163(j) for the 2019 and 2020 tax years to permit additional expensing of interest; and (v) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k). We have included the income tax impact of certain provisions of the CARES Act in the current year tax provision and balance sheet accounts.

We are not currently under examination by the Internal Revenue Service or in any state jurisdictions, but we may be subject to examination in these jurisdictions in the future. Our tax returns are open to examination for the years 2018 through 2020. We have analyzed our filing position with the Internal Revenue Service and all state tax jurisdictions where we file tax returns. We believe our income tax filing positions and deductions will be sustained on examination and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations or cash flows. Pursuant to FASB authoritative guidance regarding accounting for tax uncertainties, no liability has been recorded for uncertain tax positions. As allowed under this guidance, we would accrue, if applicable, income tax related interest and penalties in income tax expense in our consolidated statement of operations. No interest and penalties were incurred during the years ended January 3, 2021 and December 29, 2019.

Note 8 WARRANT LIABILITY

We issued a warrant on March 1, 2017 to the lender in connection with a prior term loan. The warrant entitled the holder to purchase Class A Preferred Units representing ten percent of our outstanding units on the date of any exercise, with an exercise price of $0.01 per unit. The warrant was exercisable from the date of issuance through March 1, 2027. Upon full repayment of the Term Loan outstanding, the holder could tender the warrant and receive cash from us for the fair value of the warrant. Accordingly, we accounted for the fair value of the warrant as a liability, with the change in fair value during each reporting period being recognized under the caption Change in fair value of warrant liability in other income (expense) in our consolidated statements of operations. We valued the warrant by using 10% of the estimated total fair value of our equity using an option pricing model, deducting the total exercise price at $0.01 per unit, and then deducting a discount for lack of marketability. Our fair value was determined using (1) discounted projected future cash flows, using a weighted average cost of capital, and (2) our EBITDA multiple.

During the years ended January 3, 2021 and December 29, 2019, we recorded income (expense) of $780 and ($4,460), respectively, in our consolidated statements of operations for the change in fair value of the warrant liability. On December 28, 2020, we repurchased the warrant for $14,000.

Note 9 MEMBERS’ EQUITY (DEFICIT)

CLASSES OF EQUITY UNITS

We have three classes of limited liability interests, designated as Class A Preferred Units, Class B Preferred Units, and Common Units (collectively, the “Unit” or “Units”). There are 2,000,000 Class A Preferred Units authorized specifically for issuance upon exercise of warrants, of which none were issued and outstanding at January 3, 2021 and December 29, 2019. There are 18,000,000 Class B Preferred Units authorized, of which 18,000,000 were issued and outstanding at January 3, 2021 and December 29, 2019. There are 5,000,000 Common Units

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

authorized, of which 3,057,344 were issued and 2,107,452 were outstanding as of January 3, 2021. No Common Units were issued and outstanding as of December 29, 2019. Class A Preferred Units and Common Units are non-voting classes, and Class B Preferred Units are a voting class.

The Board has not declared dividends. Future dividends would be allocated as follows: first, to holders of Class A Preferred Units in proportion to their respective number of Class A Preferred Units until the cumulative amount distributed to each Class A Preferred Unit holder equals 10 percent of total distributions; second, to holders of Class B Preferred Units in proportion to their respective number of Class B Preferred Units until the cumulative amount distributed to each Class B Preferred Unit holder equals such holder’s accrued but unpaid preferred return, which is an amount that will accrue cumulatively on a daily basis at 8 percent per annum on the Class B Preferred Unit original issue price ($1 per Unit); third, to Class B Preferred Units in proportion to their respective number of Class B Preferred Units until the cumulative amount distributed to each Class B Preferred Unit holder equals such holder’s Class B Preferred Units multiplied by the Class B Preferred Unit original issue price (total of $18,000 at January 3, 2021 and December 29, 2019); and fourth, to holders of Common Units and Class B Preferred Units in proportion to their respective number of Common Units and Class B Preferred Units. The cumulative preferred return to the holders of the Class B Preferred Units was $5,539 and $4,080 at January 3, 2021 and December 29, 2019, respectively.

COMMON UNITS REPURCHASED

In December 2020, key employees and two directors who were granted Common Unit options in 2017 and 2018 exercised their 3,052,672 options for an equivalent number of Common Units. In connection with the exercise of those options, we agreed to repurchase 949,892 Common Units at $4.28 per Common Unit, including 634,103 Common Units from our two directors. We recorded the cash paid for the repurchase of those Common Units amounting to $4,085 as a reduction to the Common Unit balance in our consolidated balance sheet as of January 3, 2021.

EMPLOYEE UNIT OPTION PLAN

We have an equity plan (the “Plan”) that provides for Common Unit options to be granted to certain of our key employees and directors. The maximum number of authorized Common Units is 5,650,000. Granted Common Unit options have a 10-year term and a two- to three-year cliff-vesting period. In 2017 and 2018, we granted Common Unit options with an exercise price of $0.01. We estimated the fair value of unit-based payment awards on the date of grant using an option-pricing model. The value of the awards was recognized as expense over the requisite service periods, which was the vesting period, in our consolidated statements of operations.

The following is a summary of unit options outstanding and activity under the Plan:

 

 

 

		UNIT OPTIONS				WEIGHTED- AVERAGE EXERCISE PRICE				WEIGHTED- AVERAGE FAIR VALUE
Number outstanding as of December 30, 2018			3,480,000			$	0.01			$	2.25
Granted			—
Exercised			—
Cancelled			(427,328	)		$	0.01			$	2.25
Forfeited			—
Number outstanding as of December 29, 2019			3,052,672			$	0.01			$	2.25
Granted			—
Exercised			(3,052,672	)		$	0.01			$	2.25
Cancelled			—
Forfeited			—
Number outstanding as of January 3, 2021			—

 

 

As of January 3, 2021, 2,170,000 units were available for future grants pursuant to the Plan.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

RESTRICTED COMMON UNITS

On November 1, 2020, we granted 4,672 restricted Common Units to directors. The restricted Common Units vest over a one-year period. We estimated the fair value of the restricted Common Unit awards on the grant date using an option-pricing model. The value of the awards, amounting to $4.28 per restricted Common Unit, will be recognized as expense over the requisite service period, which is the vesting period, in our consolidated statements of operations.

On December 18, 2020, we granted restricted unit units to acquire up to 1,602,588 Common Units to certain key employees. The restricted unit units vest in equal amounts over a three-year period, but only in the event we complete an IPO of our stock or experience a change of control event. These restricted unit units are issued as Common Units upon vesting. The grantee has no rights as a Common Unitholder until the Common Units related to the restricted units have been issued. We estimated the fair value of the awards on the date of grant using an option-pricing model. The value of the awards, amounting to $5.62 per restricted Common Unit, will be recognized as expense over the requisite service period, which is the vesting period, in our consolidated statements of operations, but only after an IPO or change of control event.

Unit-based compensation expense is based on the estimated fair value of the award at the date of grant. The fair value of each award is estimated on the date of grant using the Black-Scholes option-pricing model, requiring the use of subjective assumptions. We used assumptions as follows:

 

 

 

		2020 RESTRICTED COMMON UNIT GRANT
Expected term (years)			1.0
Expected volatility			55.6	%
Expected dividend yield			0.0	%
Risk-free rate of return			0.1	%

 

 

The expected volatility is based upon historical volatility of similar entities whose share prices are publicly available. The expected term is based on the expected holding period of this type of investment until a liquidity event would occur. The risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of the grant.

UNIT-BASED COMPENSATION EXPENSE

Total unit-based compensation expense recorded in General and administrative expenses in our statement of operations related to the unit options and restricted Common Units was $488 and $3,408 for the years ended January 3, 2021 and December 29, 2019, respectively. In 2019, we entered into an agreement that cancelled 427,328 unit options. We accounted for the transaction as a repurchase for no consideration and, accordingly, $68 of unrecognized compensation cost was recorded in compensation expense for the year ended December 29, 2019. As of January 3, 2021, there was $9,027 of unrecognized compensation cost related to the restricted Common Units.

 

Note 10 BENEFIT PLANS

401(k) PLAN

We established a defined contribution plan which qualifies under Section 401(k) of the Code and covers employees who meet certain age and service requirements. Employee contributions are limited to the maximum amount allowed by the Code. We may make discretionary matching contributions or profit-sharing contributions. For the years ended January 3, 2021 and December 29, 2019, we made contributions of $1,005 and $893, respectively.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

LONG-TERM INCENTIVE PLAN

We adopted a long-term incentive plan (“LTIP”) in 2018 for certain key employees. Management determines the key employees who are eligible to participate in the program and the amounts to be awarded to each such employee. The employee generally vests in the deferred compensation 50 percent after three years of service and 100 percent after five years of service. Employees are 100 percent vested in the event of death, disability, retirement or change in control. Amounts awarded are adjusted by the percentage change in our annual appraised value. Awards do not represent units in our company, and vested participant accounts are paid in cash upon separation from service, if a minimum appraised value has been attained.

LTIP compensation expense and liability are based on the estimated fair value of the award at each reporting date. The fair value of each award is estimated using the Black-Scholes option-pricing model, requiring the use of subjective assumptions. We used assumptions as follows:

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Expected term (years)			1.0				3.0
Expected volatility			55.6	%			46.9	%
Expected dividend yield			0.0	%			0.0	%
Risk-free rate of return			0.1	%			1.6	%

 

 

The value of the LTIP award is recognized as expense over the requisite service in our consolidated statements of operations. Total compensation expense related to the LTIP was $2,152 and $766 for the years ended January 3, 2021 and December 29, 2019, respectively.

Note 11 FAIR VALUE MEASUREMENTS

We follow the provisions of FASB’s authoritative guidance regarding fair value measurements. The FASB 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. To determine fair value, we use a fair value hierarchy categorized into three levels based on inputs used. Generally, the three levels are as follows:

 

∎

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.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

Level 3 inputs are used in the valuation of our warrant liability and contingent consideration obligation. The change in level 3 assets measured at fair value on a recurring basis is summarized as follows:

 

 

 

		WARRANT				CONTINGENT CONSIDERATION
Balance at December 30, 2018		$	10,320			$	20,700
Payments			—				(9,871	)
Change in fair value			4,460				9,271
Balance at December 29, 2019			14,780				20,100
Change in fair value			(780	)			2,094
Payments			(14,000	)			(11,294	)
Balance at January 3, 2021		$	—			$	10,900

 

 

The change in fair value is reflected in our consolidated statements of operations.

The fair value of our warrant liability was developed using the approach discussed in Note 8, Warrant Liability. The warrants were revalued at December 29, 2019 based on updated forecasts of our business, and changes in marketplace assumptions including the discount rate, and revenue and earnings multiples of guideline companies. On December 28, 2020, we repurchased the warrants for $14,000.

The fair value of our contingent consideration liability at January 3, 2021 and December 29, 2019 was determined using forecasted receipts of projected future revenues of Advanced Technology Services. The royalty is paid out quarterly through 2021. The forecasted future cash flows were discounted reflecting the risk in estimating future revenues. We expect total future cash payments to be between $11,000 and $12,000.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying values of accounts receivable, accounts payable, accrued liabilities, and other financial working capital items approximate fair values at January 3, 2021 and December 29, 2019 due to the short maturity of these items. The carrying values of our borrowings under our Revolver, Financing, Line of Credit and Term Loan approximate their fair values due to the frequency of the floating interest rate resets on these borrowings. The fair value of the Revolver, Financing, Line of Credit and Term Loan were determined based on inputs that are classified as Level 2 in the fair value hierarchy.

Our non-financial assets such as property and equipment and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. Our FSA obligation was recorded at fair value at the time of the business combination and was not remeasured. As of January 3, 2021 and December 29, 2019, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

Note 12 COMMITMENTS AND CONTINGENCIES

FOUNDRY SERVICES AGREEMENT

Under the FSA which expired in June 2020, we were required to provide semiconductor wafers to our main customer over a 40-month period, beginning March 1, 2017, at contractual rates. As part of the FSA, the customer guaranteed certain levels of purchase orders for wafers. Sales to this customer were $40,632 and $65,519 for the years ended January 3, 2021 and December 29, 2019, respectively.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

SELF INSURANCE

We maintain a self-insurance program for our employees’ health care costs. We are liable for losses on claims up to $175 per individual and $1,000 in total for all individuals for the years ended January 3, 2021 and December 29, 2019. We maintain third party insurance coverage for any losses in excess of such amounts. Self-insurance costs are accrued based on claims reported as of the balance sheet date, as well as an estimated liability for claims incurred but not reported. The accrued liability for self-insurance costs of $404 and $249 as of January 3, 2021 and December 29, 2019, respectively, was recorded in Accrued expenses in our consolidated balance sheets.

LITIGATION

On May 8, 2020, we filed a complaint in the District Court for the Northern District of California against one of our commissioned third-party sales representatives. On June 1, 2020, the sales representative filed an answer and counterclaims. The counterclaims alleged that we breached a consulting agreement, dated May 18, 2018, by failing to pay certain invoiced amounts and failing to deliver certain quarterly reports. The sales representative sought relief in the form of damages, an accounting of all awards received by us, an award of pre-judgement interest, a recovery of costs and attorneys’ fees, and other relief the court deems appropriate. We recorded a liability for the estimated contractual amount owed to our sales representative. On January 12, 2021, we resolved this matter with our sales representative for an amount that did not exceed the total balance previously accrued and adjusted the accrued liability as of January 3, 2021 to the settlement amount.

From time to time, we are involved in legal proceedings and subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the resolution of these ordinary-course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Even if any particular litigation is resolved in a manner that is favorable to our interests, such litigation can have a negative impact on us because of defense and settlement costs, diversion of management resources from our business and other factors.

Note 13 MAJOR CUSTOMERS AND CONCENTRATION RISK

The following customers accounted for 10% or more of sales for the years ended January 3, 2021 and December 29, 2019:

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
Customer A			29	%			48	%
Customer B			16	%			13	%
Customer C			—				11	%
Customer D			14	%			—
			59	%			72	%

 

 

We had four major customers that accounted for 30%, 20%, 19% and 18% of outstanding trade accounts receivable as of January 3, 2021 and three major customers that accounted for 50%, 14%, and 10% of outstanding trade accounts receivable as of December 29, 2019. The loss of a major customer could adversely affect our operating results and financial condition.

Note 14 RELATED PARTY TRANSACTIONS

PROFESSIONAL SERVICES

Oxbow Industries, LLC (“Oxbow”), our principal owner, provides management and financial consulting services to us for an annual management fee not to exceed $700. We incurred $640 and $563 of management fees to Oxbow during the years ended January 3, 2021 and December 29, 2019, respectively, which have been expensed and included in General and administrative expenses in our consolidated statements of operations.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

Members of our board of directors provide legal and professional services to us. We incurred fees of $239 and $180 for the years ended January 3, 2021 and December 29, 2019, respectively, which have been expensed and included in General and administrative expenses in our consolidated statements of operations.

SALE-LEASEBACK TRANSACTION

On September 29, 2020, we entered into an agreement to sell the land and building representing our primary operating location in Bloomington, Minnesota to an entity (“Oxbow Realty”) controlled by our principal owner for $39,000, less applicable third-party transaction costs of $1,494 and fees paid to Oxbow Realty of $1,950, representing expenses incurred to complete the sale, and to our principal owner of $1,950, representing fees to secure a guarantee of Oxbow Realty’s loan from a bank. We subsequently entered into an agreement to lease the land and building 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. Due to our continuing involvement in the property, we accounted for the transactions as a failed sale leaseback (a financing transaction). Under failed sale leaseback accounting, we are deemed the owner of the property, and will continue to recognize the land and building on our consolidated balance sheet, with the proceeds received recorded as a financial obligation. See Note 15, Variable Interest Entities, for further information. Future minimum lease commitments to Oxbow Realty as of January 3, 2021 were as follows (such amounts are eliminated from our consolidated financial statements due to the consolidation of Oxbow Realty):

 

 

 

2021		$	4,741
2022			4,836
2023			4,932
2024			5,031
2025			5,132
Thereafter			89,350
Total lease payments			114,022
Less: imputed interest			(87,005	)
Total		$	27,017

 

 

Note 15 VARIABLE INTEREST ENTITIES

Oxbow Realty was established for the purpose of holding real estate and facilitating real estate transactions. This included facilitating the purchase of our land and building with proceeds from a bank loan and managing the leaseback of the land and building to us. We determined that Oxbow Realty meets the definition of a VIE under Topic 810, Consolidation, because it lacks sufficient equity to finance its activities. We concluded that we are the primary beneficiary of Oxbow Realty as we have the power to direct operation and maintenance decisions during the lease term, which would most significantly affect the VIE’s economic performance. As the primary beneficiary, we consolidate the assets, liabilities and results of operations of Oxbow Realty, eliminate any transactions between us and Oxbow Realty, and record a non-controlling interest for the economic interest in Oxbow Realty not owned by us because the owners of our Class B and Common Units do not legally have rights or obligations to those profits or losses. 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.

 

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Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

The following table shows the carrying amounts of assets and liabilities of Oxbow Realty that are consolidated by us as of January 3, 2021. The assets and liabilities are presented prior to consolidation, and thus a portion of these assets and liabilities are eliminated in consolidation. We have included these amounts, net of eliminations, in the corresponding tables in the notes to our consolidated financial statements.

 

 

 

		ASSETS
Cash and cash equivalents		$	860
Prepaid expenses			99
Finance receivable			36,930
Total assets		$	37,889
		LIABILITIES
Accounts payable		$	672
Accrued expenses			9
Debt			38,776
Total liabilities		$	39,457

 

 

The following table shows the revenue and expenses of Oxbow Realty that are consolidated by us for the period from September 29, 2020 to January 3, 2021, the period subsequent to the sale-leaseback transaction. We have included these amounts, net of eliminations, in the corresponding tables in the notes to our consolidated financial statements.

 

 

 

		REVENUE
Revenue		$	1,345
		EXPENSES
General and administrative expenses		$	213
Interest expense			229
Total expenses		$	442

 

 

 

 

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(in thousands, except unit and per unit data)

 

Note 16 CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

Since the restricted net assets of CMI and its subsidiaries exceed 25% of our consolidated net assets, the accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X. This information should be read in conjunction with our consolidated financial statements.

CMI Acquisition, LLC

(Parent Company Only)

Condensed Balance Sheets

(in thousands, except unit and per unit data)

 

 

 

		JANUARY 3, 2021				DECEMBER 29, 2019
Assets
Current assets:
Cash and cash equivalents		$	—			$	—
Income tax receivable			—				521
Total current assets			—				521
Due from subsidiaries			49,791				79,586
Investment in subsidiaries			(16	)			24,167
Deferred income tax asset			38				2,760
Total assets		$	49,813			$	107,034
Liabilities and members’ equity
Current liabilities:
Current portion of long-term debt		$	1,783			$	4,148
Current portion of contingent consideration			8,904				14,219
Income taxes payable			1,710				—
Total current liabilities			12,397				18,367
Long-term debt, less current portion and unamortized debt issuance costs			35,436				43,839
Contingent consideration, less current portion			1,996				5,881
Warrant liability			—				14,780
Total liabilities			49,829				82,867
Commitments and contingencies
Members’ equity:
Class A Preferred Units (2,000,000 Class A Preferred Units authorized, none issued and outstanding)			—				—
Class B Preferred Units (18,000,000 Class B Preferred Units authorized, 18,000,000 issued and outstanding)			—				—
Common Units (5,000,000 Common Units authorized, 3,057,344 issued and 2,107,452 outstanding at January 3, 2021; none issued and outstanding at December 29, 2019)			3,767				7,333
Retained earnings (deficit)			(3,783	)			16,834
Total members’ equity (deficit)			(16	)			24,167
Total liabilities and members’ equity		$	49,813			$	107,034

 

 

 

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CMI ACQUISITION, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except unit and per unit data)

 

 

CMI Acquisition, LLC

(Parent Company Only)

Condensed Statements of Operations

(in thousands, except per unit data)

 

 

 

		FOR THE YEARS ENDED
		JANUARY 3, 2021				DECEMBER 29, 2019
Revenue		$	—			$	—
Operating expenses			—				—
Operating income			—				—
Other income (expense), net			—				—
Income before income taxes and equity in net loss of subsidiaries			—				—
Benefit for income taxes			—				—
Equity in net loss of subsidiaries			(20,617	)			(16,419	)
Net loss		$	(20,617	)		$	(16,419	)
Net loss per unit, basic and diluted		$	(1.15	)		$	(0.91	)

 

 

BASIS OF PRESENTATION

CMI owns 100% of SkyWater Technology Foundry and SkyWater Federal, our primary operating subsidiaries. CMI was formed October 3, 2016 and became the ultimate parent of SkyWater Technology Foundry through its acquisition of the business from Cypress on March 1, 2017. CMI formed SkyWater Federal on September 25, 2018.

CMI is a holding company with no material operations of its own that conducts substantially all of its activities through its subsidiaries. No investment or noncontrolling interest related to Oxbow Realty is shown in the parent company schedule, as subsidiaries and VIE’s are not consolidated, and the Company does not have rights or obligations to these amounts. CMI has no cash and, as a result, all expenses and obligations of CMI are allocated to and paid by its subsidiaries. CMI issued the warrants discussed in Note 8, Warrant Liability. CMI and SkyWater Technology Foundry are the borrowers under the Revolver, Line of Credit and Term Loan discussed in Note 6, Debt. However, SkyWater Technology Foundry is limited in its ability to declare dividends or make any payment on equity to, directly or indirectly, fund a dividend or other distribution to CMI in connection with those borrowings. Dividends, redemptions and other payments on equity (restricted payments) are limited to (1) restricted payments to the loan parties, (2) declaring and making dividend payments or other distributions payable solely in capital stock, (3) so long as no default or event of default exists or would result therefrom, the loan parties may pay management fees and compensation to our principal shareholder not exceeding an agreed upon amount in any fiscal year, and (4) so long as no default or event of default exists or would result therefrom, the loan parties may redeem up to $5,000 of Class B Preferred Units, $10,200 of Common Units and the warrant liability. Due to the aforementioned restrictions, substantially all of the net assets of CMI’s subsidiaries are restricted.

These condensed financial statements have been presented on a “parent-only” basis. Under a parent-only presentation, CMI’s investment in subsidiaries is presented under the equity method of accounting. A condensed statement of cash flows was not presented because CMI has no cash, and, therefore, no material operating, investing, or financing cash flow activities for the years ended January 3, 2021 and December 29, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. As a result, these parent-only statements should be read in conjunction with the accompanying notes to these consolidated financial statements.

 

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5,800,000 Shares

SkyWater Technology, Inc.

Common Stock

 

 

Prospectus

 

 

 

Jefferies				Cowen

		Piper Sandler

 

 

 

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth all fees and expenses, other than underwriting discounts and commissions, to be paid by us in connection with the issuance and distribution of the common stock being registered hereunder. All amounts shown are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the Financial Industry Regulatory Authority, Inc. filing fee and the listing fee of the Nasdaq Capital Market.

 

 

 

		AMOUNT TO BE PAID
SEC registration fee		$	10,188
Financial Industry Regulatory Authority, Inc. filing fee			14,507
Nasdaq Capital Market listing fee			75,000
Accounting fees and expenses			1,100,000
Legal fees and expenses			2,100,000
Transfer agent and registrar fees and expenses			6,500
Printing expenses			350,000
Miscellaneous			243,805
Total		$	3,900,000

 

 

Item 14. Indemnification of Directors and Officers

The following summarizes arrangements under which controlling persons, directors and officers of the registrant are indemnified against liability which they may incur in their capacities as such.

Delaware General Corporation Law. The registrant plans to convert to a Delaware corporation prior to the effectiveness of this registration statement. As a Delaware corporation, the registrant will be subject to the provisions of the General Corporation Law of the State of Delaware (the “Delaware General Corporation Law”).

Section 145(a) of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

Section 145(b) of the Delaware General Corporation Law states that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against

 

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expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action if the person acted in good faith and in a manner the person reasonably believed was in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the Delaware Court of Chancery or such other court shall deem proper.

Section 145(c) of the Delaware General Corporation Law provides that to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

Section 145(d) of the Delaware General Corporation Law states that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145. Such determination shall be made with respect to a person who is a director or officer at the time of such determination (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (4) by the stockholders.

Section 145(f) of the Delaware General Corporation Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office. A right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by an amendment to the certificate of incorporation or the bylaws after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.

Section 145(g) of the Delaware General Corporation Law provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of Section 145 of the Delaware General Corporation Law.

Section 145(j) of the Delaware General Corporation Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

Certificate of Incorporation. The registrant’s certificate of incorporation, which will be in effect before the closing of the offering described in the prospectus, provides that the registrant’s directors will not be personally liable to the registrant or its stockholders for monetary damages resulting from a breach of their fiduciary duties as directors, except to the extent that the exemption from liability or the limitation of liability is not permitted under the Delaware General Corporation Law. In accordance with the Delaware General Corporation Law, this provision in the registrant’s certificate of incorporation will not eliminate or limit the liability of the registrant’s directors to the

 

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registrant or its stockholders (1) for any breach of the director’s duty of loyalty to the registrant or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law or (4) for any transaction from which the director derived an improper personal benefit.

Bylaws. The registrant’s bylaws, which will be in effect before the closing of the offering described in the prospectus, provide for the indemnification of the officers and directors of the registrant to the fullest extent permitted by applicable law. The bylaws state that each person who was or is made a party to, or is threatened to be made a party to, any civil or criminal action, suit or administrative or investigative proceeding by reason of the fact that such person is or was a director or officer of the registrant or, while a director or officer of the registrant, is or was serving at the request of the registrant as a director, officer, employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust, enterprise or nonprofit or other entity, shall be indemnified and held harmless by the registrant to the fullest extent authorized by the Delaware General Corporation Law against all liability and loss suffered and all expenses (including attorneys’ fees) reasonably incurred by such person in connection therewith.

Indemnification Agreements. The registrant expects to enter into separate indemnification agreements with its directors and officers in addition to the indemnification provided for in its certificate of incorporation and bylaws. These indemnification agreements will provide, among other things, that the registrant will indemnify its directors and officers for certain expenses, including damages, judgments, fines, penalties, settlements and costs and attorneys’ fees and disbursements, incurred by a director or officer in any claim, action or proceeding arising in his or her capacity as a director or officer of the registrant or in connection with service at its request for another corporation or entity. The indemnification agreements also provide for procedures that will apply in the event that a director or officer makes a claim for indemnification.

Other Insurance. The registrant expects to maintain a directors’ and officers’ insurance policy pursuant to which its directors and officers are insured against liability for actions taken in their capacities as directors and officers, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”).

Indemnification Obligations. In any underwriting agreement the registrant enters into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, the registrant, its directors, its officers and persons who control the registrant within the meaning of the Securities Act, against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

The following list sets forth information regarding all unregistered securities sold by the registrant in the past three years. No underwriters were involved in the sales and the certificates representing the securities sold and issued contain legends restricting transfer of the securities without registration under the Securities Act or an applicable exemption from registration.

From July 12, 2017 through the date of this prospectus, the registrant issued to its managers and employees an aggregate of 4,200,000 options to purchase common units under its 2017 Option Incentive Plan, of which 3,052,632 options were exercised in November and December 2020 at an exercise price of $0.01 per unit. In some cases, the holders of such options exercised their options on a net exercise basis to cover the exercise price or the tax withholding payable in connection therewith, or a combination of the foregoing, which resulted in the registrant issuing an aggregate of 2,735,367 common units upon exercise of all such options for aggregate cash proceeds of $17,895. The remainder of the options granted were forfeited or canceled. As of the date of this prospectus, no options to purchase common units remain outstanding.

On November 1, 2020, the registrant issued to its managers an aggregate of 4,672 restricted common units. No purchase price was paid for the restricted common units, which vest according to the vesting criteria specified in the applicable restricted unit agreement.

On December 21, 2020, the registrant issued to its employees an aggregate of 1,602,588 restricted unit units that settle in common units. No purchase price was paid for the restricted unit units, which vest according to the vesting criteria specified in the applicable restricted unit unit agreements.

 

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The foregoing transactions were effected in reliance on the exemption from registration under the Securities Act afforded by Rule 701 thereunder as transactions pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

 

 

 

EXHIBIT NUMBER		DESCRIPTION
1.1		Form of Underwriting Agreement
3.1		Form of Certificate of Incorporation of SkyWater Technology, Inc. (the “Company”) (to be effective before the closing of the offering)
3.2		Form of Bylaws of the Company (to be effective before the closing of the offering)
4.1		Form of Registration Rights Agreement
5.1**		Opinion of Hogan Lovells US LLP regarding validity of the securities being registered
10.1*+		Form of SkyWater Technology, Inc. 2021 Equity Incentive Plan (“2021 Equity Incentive Plan”)
10.2*+		Form of Nonqualified Stock Option Agreement pursuant to 2021 Equity Incentive Plan
10.3*+		Form of Incentive Stock Option Agreement pursuant to 2021 Equity Incentive Plan
10.4*+		Form of Restricted Stock Unit Agreement pursuant to 2021 Equity Incentive Plan
10.4.1**+		Form of Restricted Stock Unit Agreement for Directors pursuant to 2021 Equity Incentive Plan
10.5*+		Form of SkyWater Technology, Inc. 2021 Employee Stock Purchase Plan
10.6†		Process Technology License Agreement, dated as of March 1, 2017, by and between Cypress Semiconductor Corporation and Cypress Semiconductor (Minnesota) Inc.
10.7		Amendment No. 1 to the Process Technology License Agreement, dated as of March  19, 2020, by and between Cypress Semiconductor Corporation and SkyWater Technology Foundry, Inc. (f/k/a Cypress Semiconductor (Minnesota) Inc.)
10.7.1†		Amendment No. 2 to the Process Technology License Agreement, dated as of April 16, 2020, by and between Cypress Semiconductor Corporation and SkyWater Technology Foundry, Inc. (f/k/a Cypress Semiconductor (Minnesota) Inc.)
10.8*		Management Fee Agreement, dated as of March 1, 2017, by and between SkyWater Technology Foundry, Inc. and Oxbow Industries, LLC
10.9*+		Project Patriot Bonus Agreement, dated as of August 28, 2020, by and between SkyWater Technology Foundry, Inc. and Tom Sonderman
10.10*+		Project Patriot Bonus Agreement, dated as of August 28, 2020, by and between SkyWater Technology Foundry, Inc. and Steve Wold
10.11*+		Project Patriot Bonus Agreement, dated as of August 28, 2020, by and between SkyWater Technology Foundry, Inc. and Steve Manko
10.12*+		Form of Restricted Unit Agreement, by and between CMI Acquisition, LLC and certain directors of CMI Acquisition, LLC
10.13*+		Form of Restricted Unit Unit Agreement, by and between CMI Acquisition, LLC and certain officers of CMI Acquisition, LLC
10.14*+		Redemption Agreement, dated as of December 29, 2020, by and between CMI Acquisition, LLC and Thomas Lujan

 

 

 

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10.15*+		Redemption Agreement, dated as of December 29, 2020, by and between CMI Acquisition, LLC and Gary Obermiller
10.16*		Purchase Agreement, dated as of September 29, 2020, by and between SkyWater Technology Foundry, Inc. and Oxbow Realty Partners, LLC
10.17*		Lease, dated as of September  30, 2020, by and between Oxbow Realty Partners, LLC, as landlord, and SkyWater Technology Foundry, Inc., as tenant
10.18*		Amended and Restated Credit Agreement, dated as of December  28, 2020, by and among Wells Fargo Bank, National Association, as administrative agent, lead arranger and book runner, the lenders party thereto, CMI Acquisition, LLC, SkyWater Technology Foundry, Inc. and the other borrowers party thereto
10.19*		Waiver, Consent and First Amendment to Amended and Restated Credit Agreement, dated as of March  19, 2021, by and among Wells Fargo Bank, National Association, as administrative agent, CMI Acquisition, LLC, SkyWater Technology Foundry, Inc. and the other borrowers party thereto
10.20*		Warrant Purchase Agreement, dated as of December 27, 2020, by and between CMI Acquisition, LLC and Gordon Brothers Finance Company
10.21*		Technology and Economic Development Agreement, dated January  25, 2021, by and between Osceola County, Florida and SkyWater Florida, Inc., and joined for limited purposes by ICAMR, Inc.
10.22		Form of Indemnification Agreement
10.23+		SkyWater Technology, Inc. Executive Severance and Change of Control Plan
10.24+		SkyWater Technology, Inc. Non-Employee Director Compensation Policy
21.1*		List of Subsidiaries
23.1		Consent of Deloitte & Touche LLP, independent registered public accounting firm
23.2**		Consent of Hogan Lovells US LLP (included in Exhibit 5.1)

 

 

*

Previously filed.

**

To be filed by amendment.

+

Indicates a management contract or any compensatory plan, contract or arrangement.

†

Certain identified portions of this exhibit have been omitted in accordance with Item 601(b)(10)(iv) of Regulation S-K.

(b) Financial Statement Schedules

All financial statement schedules have been omitted because the information required to be presented in them is not applicable or is shown in the consolidated financial statements or related notes thereto included in the prospectus that forms a part of this registration statement.

Item 17. Undertakings

(h) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(i) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of

 

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prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bloomington, State of Minnesota, on April 12, 2021.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:

 

 

 

SIGNATURE		TITLE		DATE
/s/ Thomas Sonderman Thomas Sonderman		President and Chief Executive Officer and Director (Principal Executive Officer)		April 12, 2021
/s/ Steve Manko Steve Manko		Chief Financial Officer (Principal Financial Officer)		April 12, 2021
/s/ Khoua Yang Khoua Yang		Vice President of Finance (Principal Accounting Officer)		April 12, 2021
* Wendi B. Carpenter		Director		April 12, 2021
* John T. Kurtzweil		Director		April 12, 2021
* Thomas R. Lujan		Director		April 12, 2021
* Gary J. Obermiller		Director		April 12, 2021
* Loren A. Unterseher		Director		April 12, 2021

 

 

 

*By:		/s/ Steve Manko
		Steve Manko Attorney-in-Fact

Exhibit 1.1

[Number of Shares]

SkyWater Technology, Inc.

UNDERWRITING AGREEMENT

[●], 2021

JEFFERIES LLC

COWEN AND COMPANY, LLC

As Representatives of the several Underwriters

c/o JEFFERIES LLC

520 Madison Avenue

New York, New York 10022

Ladies and Gentlemen:

Introductory. SkyWater Technology, Inc., a [Delaware] corporation (the “Company”), proposes to issue and sell to the several underwriters named in Schedule A (the “Underwriters”) an aggregate of [●] shares of its common stock, par value $0.01 per share (the “Shares”). The [●] Shares to be sold by the Company are called the “Firm Shares.” In addition, the Company has granted to the Underwriters an option to purchase up to an additional [●] Shares as provided in Section 2. The additional [●] Shares to be sold by the Company pursuant to such option are collectively called the “Optional Shares.” The Firm Shares and, if and to the extent such option is exercised, the Optional Shares are collectively called the “Offered Shares.” Jefferies LLC (“Jefferies”) and Cowen and Company, LLC (“Cowen”) have agreed to act as representatives of the several Underwriters (in such capacity, the “Representatives”) in connection with the offering and sale of the Offered Shares. To the extent there are no additional underwriters listed on Schedule A, the term “Representatives” as used herein shall mean you, as Underwriters, and the term “Underwriters” shall mean either the singular or the plural, as the context requires.

The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1, File No. 333-254580 which contains a form of prospectus to be used in connection with the public offering and sale of the Offered Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it became effective under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the “Securities Act”), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, is called the “Registration Statement.” Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act in connection with the offer and sale of the Offered Shares is called the “Rule 462(b) Registration Statement,” and from and after the date and time of filing of any such Rule 462(b) Registration Statement the term “Registration Statement” shall include the Rule 462(b) Registration Statement. The prospectus, in the form first used by the Underwriters to confirm sales of the Offered Shares or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act, is called the “Prospectus.” The preliminary prospectus dated [●] describing the Offered Shares and the offering thereof is called the “Preliminary Prospectus,” and the Preliminary Prospectus and any other prospectus in preliminary form that describes

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the Offered Shares and the offering thereof and is used prior to the filing of the Prospectus is called a “preliminary prospectus.” As used herein, “Applicable Time” is [●][a.m.][p.m.] (New York City time) on [●]. As used herein, “free writing prospectus” has the meaning set forth in Rule 405 under the Securities Act, and “Time of Sale Prospectus” means the Preliminary Prospectus together with the free writing prospectuses, if any, identified in Schedule B hereto. As used herein, “Road Show” means a “road show” (as defined in Rule 433 under the Securities Act) relating to the offering of the Offered Shares contemplated hereby that is a “written communication” (as defined in Rule 405 under the Securities Act). As used herein, “Section 5(d) Written Communication” means each written communication (within the meaning of Rule 405 under the Securities Act) that is made in reliance on Section 5(d) of the Securities Act by the Company or any person authorized to act on behalf of the Company to one or more potential investors that are “qualified institutional buyers” (“QIBs”) and/or institutions that are “accredited investors” (“IAIs”), as such terms are respectively defined in Rule 144A and Rule 501(a) under the Securities Act, to determine whether such investors might have an interest in the offering of the Offered Shares; “Section 5(d) Oral Communication” means each oral communication, if any, made in reliance on Section 5(d) of the Securities Act by the Company or any person authorized to act on behalf of the Company made to one or more QIBs and/or one or more IAIs to determine whether such investors might have an interest in the offering of the Offered Shares; “Marketing Materials” means any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Offered Shares, including any roadshow or investor presentations made to investors by the Company (whether in person or electronically); and “Permitted Section 5(d) Communication” means the Section 5(d) Written Communication(s) and Marketing Materials listed on Schedule C attached hereto.

All references in this Agreement to (i) the Registration Statement, any preliminary prospectus (including the Preliminary Prospectus), or the Prospectus, or any amendments or supplements to any of the foregoing, or any free writing prospectus, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) and (ii) the Prospectus shall be deemed to include any “electronic Prospectus” provided for use in connection with the offering of the Offered Shares as contemplated by Section 3(n) of this Agreement.

In the event that the Company has only one subsidiary, then all references herein to “subsidiaries” of the Company shall be deemed to refer to such single subsidiary, mutatis mutandis.

The Company hereby confirms its agreements with the Underwriters as follows:

Section 1. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to each Underwriter, as of the date of this Agreement, as of the First Closing Date (as hereinafter defined) and as of each Option Closing Date (as hereinafter defined), if any, as follows:

(a) Compliance with Registration Requirements. The Registration Statement has become effective under the Securities Act. The Company has complied, to the Commission’s satisfaction with all requests of the Commission for additional or supplemental information, if any. No stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated or threatened by the Commission.

(b) Disclosure. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR, was identical (except as may be permitted by Regulation S-T under the Securities Act) to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Offered Shares. Each of

 

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the Registration Statement and any post-effective amendment thereto, at the time it became or becomes effective, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As of the Applicable Time, the Time of Sale Prospectus (including any preliminary prospectus wrapper) did not, and at the First Closing Date (as defined in Section 2) and at each applicable Option Closing Date (as defined in Section 2), will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Prospectus (including any Prospectus wrapper), as of its date, did not, and at the First Closing Date and at each applicable Option Closing Date, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the three immediately preceding sentences do not apply to statements in or omissions from the Registration Statement or any post-effective amendment thereto, or the Prospectus or the Time of Sale Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with written information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein, it being understood and agreed that the only such information consists of the information described in Section 9(b) below. There are no contracts or other documents required to be described in the Time of Sale Prospectus or the Prospectus or to be filed as an exhibit to the Registration Statement which have not been described or filed as required.

(c) Free Writing Prospectuses; Road Show. As of the determination date referenced in Rule 164(h) under the Securities Act, the Company was not, is not or will not be (as applicable) an “ineligible issuer” in connection with the offering of the Offered Shares pursuant to Rules 164, 405 and 433 under the Securities Act. Each free writing prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of Rule 433 under the Securities Act, including timely filing with the Commission, retention and legending, as applicable, and each such free writing prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Offered Shares did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, the Prospectus or any preliminary prospectus unless such information has been superseded or modified as of such time. The representations and warranties set forth in the three immediately preceding sentences do not apply to statements in or omissions from the Registration Statement or any post-effective amendment thereto, or the Prospectus or the Time of Sale Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with written information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein, it being understood and agreed that the only such information consists of the information described in Section 9(b) below. Except for the free writing prospectuses, if any, identified in Schedule B, and electronic road shows, if any, furnished to you before first use, the Company has not prepared, used or referred to, and will not, without your prior written consent, prepare, use or refer to, any free writing prospectus. Each Road Show, when considered together with the Time of Sale Prospectus, did not, as of the Applicable Time, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(d) Distribution of Offering Material By the Company. Prior to the later of (i) the expiration or termination of the option granted to the several Underwriters in Section 2, (ii) the completion of the Underwriters’ distribution of the Offered Shares and (iii) the expiration of 25 days after the date of the Prospectus, the Company has not distributed and will not distribute any offering material in connection

 

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with the offering and sale of the Offered Shares other than the Registration Statement, the Time of Sale Prospectus, the Prospectus or any free writing prospectus reviewed and consented to by the Representatives, the free writing prospectuses, if any, identified on Schedule B hereto and any Permitted Section 5(d) Communications.

(e) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by the Company.

(f) Authorization of the Offered Shares. The Offered Shares have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company against payment therefor pursuant to this Agreement, will be validly issued, fully paid and nonassessable, and the issuance and sale of the Offered Shares is not subject to any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase the Offered Shares.

(g) No Applicable Registration or Other Similar Rights. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement.

(h) No Material Adverse Change. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement, the Time of Sale Prospectus and the Prospectus: (i) there has been no material adverse change, or any development that would reasonably be expected to result in a material adverse change, in (A) the condition, financial or otherwise, or in the earnings, business, properties, operations, operating results, assets or liabilities, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity or (B) the ability of the Company to consummate the transactions contemplated by this Agreement or perform its obligations hereunder (any such change being referred to herein as a “Material Adverse Change”); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, including without limitation any losses or interference with their business from fire, explosion, flood, earthquakes, accident or other calamity, whether or not covered by insurance, or from any strike, labor dispute or court or governmental action, order or decree, that are material, individually or in the aggregate, to the Company and its subsidiaries, considered as one entity, and have not entered into any material transactions not in the ordinary course of business; and (iii) there has not been any material decrease in the capital stock or any material increase in any short-term or long-term indebtedness of the Company or its subsidiaries and there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, by any of the Company’s subsidiaries on any class of capital stock, or any repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock.

(i) Independent Accountants. Deloitte & Touche LLP, which has expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement, the Time of Sale Prospectus and the Prospectus, is (i) an independent registered public accounting firm as required by the Securities Act and the rules of the Public Company Accounting Oversight Board (“PCAOB”), (ii) in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X under the Securities Act and (iii) a registered public accounting firm as defined by the PCAOB whose registration has not been suspended or revoked and who has not requested such registration to be withdrawn.

 

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(j) Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement, the Time of Sale Prospectus and the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of the dates indicated and the results of their operations, changes in stockholders’ equity and cash flows for the periods specified.    Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States (“U.S. GAAP”) applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement, the Time of Sale Prospectus or the Prospectus. The financial data set forth in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus under the captions “Prospectus Summary—Summary Consolidated Financial Data,” “Capitalization,” and “Selected Consolidated Financial Data” fairly present, in all material respects, the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus. All disclosures contained in the Registration Statement, any preliminary prospectus or the Prospectus and any free writing prospectus, that constitute non-GAAP financial measures (as defined by the rules and regulations under the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) comply with Regulation G under the Exchange Act and Item 10 of Regulation S-K under the Securities Act, to the extent applicable. To the Company’s knowledge, no person who has been suspended or barred from being associated with a registered public accounting firm, or who has failed to comply with any sanction pursuant to Rule 5300 promulgated by the PCAOB, has participated in or otherwise aided the preparation of, or audited, the financial statements, supporting schedules or other financial data filed with the Commission as a part of the Registration Statement, the Time of Sale Prospectus and the Prospectus.

(k) Company’s Accounting System. The Company and each of its subsidiaries make and keep books and records that are accurate in all material respects and maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(l) Disclosure Controls and Procedures; Deficiencies in or Changes to Internal Control Over Financial Reporting. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, the Company has established and maintains disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act), which (i) are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s principal executive officer and its principal financial officer by others within those entities, particularly during the periods in which the periodic reports required under the Exchange Act are being prepared and (ii) are effective in all material respects to perform the functions for which they were established. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) since the end of the Company’s most recent audited fiscal year, there have been no significant deficiencies or material weaknesses in the Company’s internal control over financial reporting (whether or not remediated) and no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting and (ii) the Company is not aware of any change in its internal control over financial reporting that has occurred during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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(m) Incorporation and Good Standing of the Company. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and to enter into and perform its obligations under this Agreement. The Company is duly qualified to transact business and is in good standing in the State of Minnesota and each other jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or in good standing would not reasonably be expected to result in a Material Adverse Change.

(n) Subsidiaries. Each of the Company’s “subsidiaries” (for purposes of this Agreement, as defined in Rule 405 under the Securities Act) has been duly incorporated or organized, as the case may be, and is validly existing as a corporation, partnership or limited liability company, as applicable, in good standing under the laws of the jurisdiction of its incorporation or organization and has the power and authority (corporate or other) to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus. Each of the Company’s subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to result in a Material Adverse Change. All of the issued and outstanding capital stock or other equity or ownership interests of each of the Company’s subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or adverse claim. None of the outstanding capital stock or equity interest in any subsidiary was issued in violation of preemptive or similar rights of any security holder of such subsidiary. The constitutive or organizational documents of each of the subsidiaries comply in all material respects with the requirements of applicable laws of its jurisdiction of incorporation or organization and are in full force and effect. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement.

(o) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Capitalization” (other than for subsequent issuances, if any, pursuant to employee benefit plans, or upon the exercise of outstanding options or warrants, in each case described in the Registration Statement, the Time of Sale Prospectus and the Prospectus). The Shares (including the Offered Shares) conform in all material respects to the description thereof contained in the Time of Sale Prospectus. All of the issued and outstanding Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws. None of the outstanding Shares was issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those described in the Registration Statement, the Time of Sale Prospectus and the Prospectus. The descriptions of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus accurately and fairly presents, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights.

(p) Stock Exchange Listing. The Offered Shares have been approved for listing on The NASDAQ Capital Market (the “NASDAQ”), subject only to official notice of issuance.

 

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(q) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws, partnership agreement or operating agreement or similar organizational documents, as applicable, or is in default (or, with the giving of notice or lapse of time, would be in default) (“Default”) under any indenture, loan, credit agreement, note, lease, license agreement, contract, franchise or other instrument (including, without limitation, any pledge agreement, security agreement, mortgage or other instrument or agreement evidencing, guaranteeing, securing or relating to indebtedness) to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of their respective properties or assets are subject (each, an “Existing Instrument”), except for such Defaults as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change. The Company’s execution, delivery and performance of this Agreement, consummation of the transactions contemplated hereby and by the Registration Statement, the Time of Sale Prospectus and the Prospectus and the issuance and sale of the Offered Shares (including the use of proceeds from the sale of the Offered Shares as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Use of Proceeds”) (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or by-laws, partnership agreement or operating agreement or similar organizational documents, as applicable, of the Company or any subsidiary (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other party to, any Existing Instrument and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any of its subsidiaries, except in the case of clauses (ii) and (iii) as would not be reasonably expected, individually or in the aggregate, to result in a Material Adverse Change. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Registration Statement, the Time of Sale Prospectus and the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act and such as may be required under applicable state securities or blue sky laws or the Financial Industry Regulatory Authority, Inc. (“FINRA”). As used herein, a “Debt Repayment Triggering Event” means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries.

(r) Compliance with Laws. The Company and its subsidiaries have been and are in compliance with all applicable laws, rules and regulations, except where failure to be so in compliance would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change.

(s) No Material Actions or Proceedings. There is no action, suit, proceeding, inquiry or investigation brought by or before any legal or governmental entity now pending or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, which would reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change. No material labor dispute with the employees of the Company or any of its subsidiaries, or with the employees of any principal supplier, manufacturer, customer or contractor of the Company, exists or, to the knowledge of the Company, is threatened or imminent.

(t) Intellectual Property Rights. The Company and its subsidiaries own, or have obtained valid and enforceable licenses for or rights to use, the inventions, patent applications, patents, trademarks, trade names, service names, copyrights, trade secrets and other intellectual property rights that are described in the Registration Statement, the Time of Sale Prospectus and the Prospectus as being owned by

 

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or licensed to them or which are necessary for the conduct of their respective businesses as currently conducted (collectively, “Intellectual Property Rights”), and the conduct of their respective businesses does not infringe, misappropriate or otherwise violate in any material respect any such Intellectual Property Rights of others, except where the failure to own, possess, or acquire rights in, or the infringement, misappropriation, or violation of, such Intellectual Property Rights would not reasonably be expected to result in a Material Adverse Change. Since March 1, 2017, the Intellectual Property Rights owned or purported to be owned by the Company (“Company Intellectual Property Rights”), have not been adjudged by a court of competent jurisdiction to be invalid or unenforceable, in whole or in part, except for any such judgment that would not reasonably be expected to result in a Material Adverse Change. To the Company’s knowledge, there is no infringement by third parties of any Company Intellectual Property Rights that would reasonably be expected to result in a Material Adverse Change. There is no pending or, to the Company’s knowledge, written threat of action, suit, proceeding or claim against the Company by others: (A) challenging the Company’s ownership rights in or to any Company Intellectual Property Rights and the Company is unaware of any facts which would form a reasonable basis for any such action, suit, proceeding or claim; (B) challenging the validity, enforceability or scope of any Company Intellectual Property Rights; or (C) asserting that the Company or any of its subsidiaries infringes or otherwise violates, or would, upon the commercialization of any product or service described in the Registration Statement, the Time of Sale Prospectus or the Prospectus as under development, infringe or violate, any patent, trademark, trade name, service name, copyright, trade secret or other proprietary rights of others, in each case except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus, and the Prospectus and except as would not reasonably be expected to result in a Material Adverse Change. The Company and its subsidiaries have complied with the terms of each material agreement pursuant to which Intellectual Property Rights have been licensed to the Company or any subsidiary as specified in the Registration Statement, the Time of Sale Prospectus and the Prospectus, and all such agreements are in full force and effect, in each case except for any failure to comply or failure to be in force and effect that would not reasonably be expected to result in a Material Adverse Change. To the Company’s knowledge, the Company and its subsidiaries have taken reasonable steps to protect, maintain and safeguard the material trade secrets included in the Company Intellectual Property Rights, including the execution of reasonable nondisclosure, confidentiality agreements and invention assignment agreements with their employees, except where a failure to take such a step would not reasonably be expected to result in a Material Adverse Change. To the Company’s knowledge, none of the Company Intellectual Property Rights employed by the Company or its subsidiaries have been obtained or are being used by the Company or its subsidiaries in violation of any contractual obligation binding on the Company or its subsidiaries, except for any violation that would not reasonably be expected to result in a Material Adverse Change.

(u) All Necessary Permits, etc. The Company and its subsidiaries possess such valid and current certificates, authorizations or permits required by state, federal or foreign regulatory agencies or bodies to conduct their respective businesses as currently conducted and as described in the Registration Statement, the Time of Sale Prospectus or the Prospectus (“Permits”), except where failure to possess such certificates, authorizations and permits would not reasonably be expected to result in a Material Adverse Change. Neither the Company nor any of its subsidiaries is in violation of, or in default under, any of the Permits or has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit, except as would not reasonably be expected to result in a Material Adverse Change.

(v) Title to Properties. The Company and its subsidiaries have good and marketable title to all of the real property owned by them and valid marketable rights to use all personal property (other than intellectual property, which is the subject of Section 1(t) above) owned by them, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, adverse claims and other defects, except as would not reasonably be expected, individually or in the aggregate, to materially affect the value of such property or materially interfere with the use thereof. Except as otherwise disclosed in the

 

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Registration Statement and the exhibits thereto, the real property, improvements, equipment and personal property held under lease by the Company or any of its subsidiaries are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary.

(w) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns or have properly requested extensions thereof and have paid all income and material taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them except as may be being contested in good faith and by appropriate proceedings. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(j) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined.

(x) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any of its subsidiaries will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has been denied any insurance coverage which it has sought or for which it has applied.

(y) Compliance with Environmental Laws. Except as would not be reasonably expected, individually or in the aggregate, to result in a Material Adverse Change: (i) neither the Company nor any of its subsidiaries is in violation of any applicable federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any applicable judicial or administrative interpretation thereof, including any applicable judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”); (ii) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements; (iii) there are no pending or, to the Company’s knowledge, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries; and (iv) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.

(z) ERISA Compliance. Except as would not reasonably be expected to result in a Material Adverse Change, the Company and its subsidiaries and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company, its

 

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subsidiaries or their “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company or any of its subsidiaries, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company or such subsidiary is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No “employee benefit plan” established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Except as would not reasonably be expected to result in a Material Adverse Change, neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. The form of each employee benefit plan established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code has received a determination, advisory or opinion letter from the Internal Revenue Service and nothing has occurred, whether by action or failure to act, which would reasonably be expected to cause the loss of such qualification.

(aa) Company Not an “Investment Company.” The Company is not, and will not be, either after receipt of payment for the Offered Shares or after the application of the proceeds therefrom as described under “Use of Proceeds” in the Registration Statement, the Time of Sale Prospectus or the Prospectus, required to register as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

(bb) No Price Stabilization or Manipulation; Compliance with Regulation M. Neither the Company nor any of its subsidiaries has taken, directly or indirectly, any action designed to or that would reasonably be expected to cause or result in stabilization or manipulation of the price of the Shares or of any “reference security” (as defined in Rule 100 of Regulation M under the Exchange Act (“Regulation M”)) with respect to the Shares, whether to facilitate the sale or resale of the Offered Shares or otherwise, and has taken no action which would directly or indirectly violate Regulation M.

(cc) Related-Party Transactions. There are no business relationships or related-party transactions involving the Company or any of its subsidiaries or any other person required to be described in the Registration Statement, the Time of Sale Prospectus or the Prospectus that have not been described as required.

(dd) FINRA Matters. All of the information provided to the Underwriters or to counsel for the Underwriters by the Company, its counsel, its officers and directors and, to the Company’s knowledge, the holders of any securities (debt or equity) or options to acquire any securities of the Company in connection with the offering of the Offered Shares is true, complete, correct and compliant in all material respects with FINRA’s rules and any letters, filings or other supplemental information provided to FINRA pursuant to FINRA Rules or NASD Conduct Rules is true, complete and correct in all material respects.

(ee) Parties to Lock-Up Agreements. The Company has furnished to the Underwriters a letter agreement in the form attached hereto as Exhibit A (the “Lock-up Agreement”) from each of the persons listed on Exhibit B. Such Exhibit B lists under an appropriate caption the directors and officers of the Company. If any additional persons shall become directors or officers of the Company prior to the end of the Company Lock-up Period (as defined below), the Company shall cause each such person, prior to or contemporaneously with their appointment or election as a director or officer of the Company, to execute and deliver to Jefferies a Lock-up Agreement.

 

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(ff) Statistical and Market-Related Data. All statistical, industry and market-related data included in the Registration Statement, the Time of Sale Prospectus or the Prospectus are based on or derived from sources that the Company believes, after reasonable inquiry, to be reasonably reliable and accurate in all material respects. To the Company’s knowledge, it does not require consent of any third party for the use of any such data except as already obtained.

(gg) Sarbanes-Oxley Act. There is, and has been, no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply with any applicable provision of the Sarbanes-Oxley Act of 2002, as amended and the rules and regulations promulgated in connection therewith, including Section 402 related to loans and Sections 302 and 906 related to certifications.

(hh) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the Company’s knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any applicable law required to be disclosed in the Registration Statement, the Time of Sale Prospectus or the Prospectus.

(ii) Anti-Corruption and Anti-Bribery Laws. Neither the Company nor any of its subsidiaries nor any director, officer, or employee of the Company or any of its subsidiaries, nor to the knowledge of the Company, any agent, affiliate or other person acting on behalf of the Company or any of its subsidiaries has in the past five years, in the course of its actions for, or on behalf of, the Company or any of its subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made or taken any act in furtherance of an offer, promise, or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or public international organization, or any political party, party official, or candidate for political office; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the UK Bribery Act 2010, or any other applicable anti-bribery or anti-corruption law; or (iv) made, offered, authorized, requested, or taken an act in furtherance of any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment or benefit. The Company and its subsidiaries and, to the knowledge of the Company, the Company’s affiliates have conducted their respective businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(jj) Money Laundering Laws. The operations of the Company and its subsidiaries are, and have been conducted at all times, in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar applicable rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(kk) Sanctions. Neither the Company nor any of its subsidiaries, directors, officers, or employees, nor, to the knowledge of the Company, after due inquiry, any agent, affiliate or other person acting on behalf of the Company or any of its subsidiaries is currently the subject or the target of any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) or the U.S. Department of State, the United Nations Security Council, the European Union, Her Majesty’s Treasury of the United Kingdom, or other relevant sanctions authority (collectively,

 

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“Sanctions”); nor is the Company or any of its subsidiaries located, organized or resident in a country or territory that is the subject or the target of Sanctions, including, without limitation, Crimea, Cuba, Iran, North Korea, and Syria; and the Company will not directly or indirectly use the proceeds of this offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, or any joint venture partner or other person or entity, for the purpose of financing the activities of or business with any person, or in any country or territory, that at the time of such financing, is the subject or the target of Sanctions or in any other manner that will result in a violation by any person (including any person participating in the transaction whether as underwriter, advisor, investor or otherwise) of applicable Sanctions. For the past five years, the Company and its subsidiaries have not knowingly engaged in and are not now knowingly engaged in any dealings or transactions with any person that at the time of the dealing or transaction is or was the subject or the target of Sanctions or with any Sanctioned Country.

(ll) Brokers. Except pursuant to this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder’s fee or other fee or commission as a result of any transactions contemplated by this Agreement.

(mm) Forward-Looking Statements. Each financial or operational projection or other “forward-looking statement” (as defined by Section 27A of the Securities Act or Section 21E of the Exchange Act) contained in the Registration Statement, the Time of Sale Prospectus or the Prospectus (i) was so included by the Company in good faith and with reasonable basis after due consideration by the Company of the underlying assumptions, estimates and other applicable facts and circumstances and (ii) is accompanied by meaningful cautionary statements identifying those factors that could cause actual results to differ materially from those in such forward-looking statement. No such statement was made with the knowledge of an executive officer or director of the Company that it was false or misleading.

(nn) No Outstanding Loans or Other Extensions of Credit. The Company does not have any outstanding extension of credit, in the form of a personal loan, to or for any director or executive officer (or equivalent thereof) of the Company except for such extensions of credit as are expressly permitted by Section 13(k) of the Exchange Act.

(oo) Cybersecurity. The Company and its subsidiaries’ information technology assets and equipment, computers, systems, networks, hardware, software, websites, applications, and databases (collectively, “IT Systems”) are adequate for the operation of the Company and its subsidiaries and are free and clear of all material bugs, errors, defects, Trojan horses, time bombs, malware and other corruptants. The Company and its subsidiaries have implemented and maintained commercially reasonable physical, technical and administrative controls, policies, procedures, and safeguards to maintain and protect their material confidential information and the integrity, continuous operation, redundancy and security of all IT Systems and all “Personal Data,” and all confidential and proprietary information used in connection with their businesses. “Personal Data” means all information that is defined as “personal data,” “personally identifiable information” or “personal information” under applicable Privacy Laws (as defined below). There have been no breaches, violations, outages or unauthorized uses and/or access to Personal Data, except for those that have been remedied without material cost or liability or the duty to notify any other person, nor any incidents under internal review or investigations relating to the same.

(pp) Compliance with Data Privacy Laws. The Company and its subsidiaries are, and at all prior times were, in material compliance with all applicable state and federal data privacy and security laws and regulations (collectively, the “Privacy Laws”). To ensure compliance with the Privacy Laws, the Company and its subsidiaries have in place, comply with and take appropriate steps reasonably designed to ensure compliance in all material respects with their policies and procedures relating to data privacy and security and the collection, storage, use, disclosure, handling and analysis of Personal Data (the “Policies”). None of the disclosures made or contained in any Policy have, to the knowledge of the

 

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Company, been inaccurate or in violation of any applicable laws and regulatory rules or requirements in any material respect. Neither the Company nor any subsidiary: (i) has received notice of any actual or potential liability under or relating to, or actual or potential violation of, any of the Privacy Laws, and has no knowledge of any event or condition that would reasonably be expected to result in any such notice; (ii) is currently conducting or paying for, in whole or in part, any investigation, remediation, or other corrective action pursuant to any Privacy Law; or (iii) is a party to any order, decree, or agreement that imposes any obligation or liability under any Privacy Law.

(qq) Emerging Growth Company Status. From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged in any Section 5(d) Written Communication or any Section 5(d) Oral Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”).

(rr) Communications. The Company (i) has not alone engaged in communications with potential investors in reliance on Section 5(d) of the Securities Act other than Permitted Section 5(d) Communications with the consent of the Representatives with entities that are QIBs or IAIs and (ii) has not authorized anyone other than the Representatives to engage in such communications; the Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Marketing Materials, Section 5(d) Oral Communications and Section 5(d) Written Communications; as of the Applicable Time, each Permitted Section 5(d) Communication, when considered together with the Time of Sale Prospectus, did not, as of the Applicable Time, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Permitted Section 5(d) Communication, if any, does not, as of the date hereof, conflict with the information contained in the Registration Statement, the Preliminary Prospectus and the Prospectus; and the Company has filed publicly on EDGAR at least 15 calendar days prior to any “road show” (as defined in Rule 433 under the Act), any confidentially submitted registration statement and registration statement amendments relating to the offer and sale of the Offered Shares.

(ss) No Rights to Purchase Preferred Stock. The issuance and sale of the Offered Shares as contemplated hereby will not cause any holder of any shares of capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Company to have any right to acquire any shares of preferred stock of the Company.

(tt) No Contract Terminations. Neither the Company nor any of its subsidiaries has sent or received any communication regarding termination of, or intent not to renew, any of the material contracts or agreements referred to or described in any preliminary prospectus, the Prospectus or any free writing prospectus, or referred to or described in, or filed as an exhibit to, the Registration Statement, and no such termination or non-renewal has been threatened by the Company or any of its subsidiaries or, to the Company’s knowledge, any other party to any such contract or agreement, which threat of termination or non-renewal has not been rescinded as of the date hereof.

(uu) Dividend Restrictions. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, no subsidiary of the Company is prohibited or restricted, directly or indirectly, from paying dividends to the Company, or from making any other distribution with respect to such subsidiary’s equity securities or from repaying to the Company or any other subsidiary of the Company any amounts that may from time to time become due under any loans or advances to such subsidiary from the Company or from transferring any property or assets to the Company or to any other subsidiary.

 

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(vv) Export and Import Laws. Each of the Company and its subsidiaries, and, to the Company’s knowledge, each of their affiliates and any director, officer, agent or employee of the Company has within the past five years acted in compliance with applicable Export and Import Laws (as defined below) and there are no claims, complaints, charges, investigations or proceedings pending or expected or, to the knowledge of the Company, threatened between the Company or any of the subsidiaries and any governmental authority under any applicable Export or Import Laws. The term “Export and Import Laws” means the Arms Export Control Act, the International Traffic in Arms Regulations, the Export Administration Act of 1979, as amended, the Export Administration Regulations, and all other laws and regulations of the United States government regulating the provision of services to non-U.S. parties or the export and import of articles or information from and to the United States of America, and all similar laws and regulations of any foreign government applicable to the Company that regulate the provision of services to parties not of the foreign country or the export and import of articles and information from and to the foreign country to parties not of the foreign country.

(ww) Additional Regulations. Each of the Company and its subsidiaries, and, to the Company’s knowledge, each of their affiliates and any director, officer, agent or employee of the Company has within the past five years acted in compliance with applicable Regulatory Laws (as defined below) and there are no claims, complaints, charges, investigations or proceedings pending or, to the knowledge of the Company, threatened between the Company or any of the subsidiaries and any governmental authority under any Regulatory Laws. The term “Regulatory Laws” means the DMEA Trust Accreditation process, labor requirements, pricing justifications, cybersecurity requirements and other federal contractor requirements imposed by the Federal Acquisition Regulation, or FAR, the Defense FAR Supplement, registration with the Directorate of Defense Trade Controls, and all other laws and regulations of the United States government regulating similar matters, and all similar laws and regulations of any foreign government applicable to the Company.

(xx) Defense Contract Audit Agency. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, to the Company’s knowledge, there is no outstanding allegation of improper or illegal activities arising from any government audit or non-audit review, including without limitation, by the Defense Contract Audit Agency, of the Company or any of its subsidiaries or work performed by the Company or any of its subsidiaries that would have a Material Adverse Effect. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, there are no civil or criminal penalties or administrative sanctions that have been imposed upon the Company or any of its subsidiaries, or to the Company’s knowledge, are pending or threatened, arising from a government audit or non-audit review of the Company or any of its subsidiaries or work performed by the Company or any of its subsidiaries, including, but not limited to, termination of contracts, forfeiture of profits, suspension of payments, fines, or suspension or debarment from doing business with the United States Government or any agency thereof that would have a Material Adverse Effect.

(yy) Termination for Cause. The Company and its subsidiaries have not received any written notice of termination for cause, “show cause” or cure notice (that has resulted in a termination for cause) pertaining to any Government Contract; provided that this clause (yy) shall not apply to any notice received more than three years prior to the date hereof.

(zz) No Debarment or Suspension. None of the Company nor, to Company’s knowledge, any of its officers, employees, agents, nor any “Principal” (as defined in FAR 52.209-5) of the Company has been debarred, or suspended from participation in the award of contracts with any Governmental Authority, or been the subject of a debarment, suspension or exclusion from participation in programs funded by any Governmental Authority, nor to the Company’s knowledge has any such debarment, suspension or exclusion proceeding been initiated in the past three years. The Company is not, nor has it

 

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ever been, suspended or debarred from doing business with any Governmental Authority or, to the Company’s knowledge, proposed for suspension or debarment by an Governmental Authority and has not been the subject of a finding of non-responsibility or ineligibility for contracting with any Governmental Authority. “Governmental Authority” means any federal, state, local or foreign court or tribunal, governmental, judicial, arbitral, legislative, executive or regulatory body (or subdivision thereof), administrative agency, self-regulatory authority, instrumentality, agency commission or other governmental authority or body.

Any certificate signed by any officer of the Company or any of its subsidiaries and delivered to any Underwriter or to counsel for the Underwriters in connection with the offering, or the purchase and sale, of the Offered Shares shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby.

The Company has a reasonable basis for making each of the representations set forth in this Section 1. The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 6 hereof, counsel to the Company and counsel to the Underwriters, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.

Section 2. Purchase, Sale and Delivery of the Offered Shares.

(a) The Firm Shares. Upon the terms herein set forth, the Company agrees to issue and sell to the several Underwriters an aggregate of [●] Firm Shares. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price per Firm Share to be paid by the several Underwriters to the Company shall be $[●] per share.

(b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Goodwin Procter LLP (or such other place as may be agreed to by the Company and the Representatives) at 9:00 a.m. New York City time, on [●], or such other time and date not later than 1:30 p.m. New York City time on [●] as the Representatives shall designate by notice to the Company (the time and date of such closing are called the “First Closing Date”). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are not limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 11.

(c) The Optional Shares; Option Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of [●] Optional Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder may be exercised at any time and from time to time in whole or in part upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Shares as to which the Underwriters are exercising the option and (ii) the time, date and place at which the Optional Shares will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in the event that such time and date are simultaneous with the First Closing Date, the term “First Closing Date” shall refer to the time and date of delivery of the Firm Shares and such Optional Shares). Any such time and date of delivery, if subsequent to the First Closing Date, is called an “Option Closing Date,” and shall be determined by the Representatives and shall not be earlier than two or later than five full business days

 

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after delivery of such notice of exercise. If any Optional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company.

(d) Public Offering of the Offered Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, initially on the terms set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus, their respective portions of the Offered Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable.

(e) Payment for the Offered Shares. (i)Payment for the Offered Shares shall be made at the First Closing Date (and, if applicable, at each Option Closing Date) by wire transfer of immediately available funds to the order of the Company.

(ii) It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Optional Shares the Underwriters have agreed to purchase. Each of Jefferies and Cowen, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Offered Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the applicable Option Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement.

(f) Delivery of the Offered Shares. The Company shall deliver, or cause to be delivered to the Representatives for the accounts of the several Underwriters the Firm Shares at the First Closing Date, against release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered to the Representatives for the accounts of the several Underwriters, the Optional Shares the Underwriters have agreed to purchase at the First Closing Date or the applicable Option Closing Date, as the case may be, against the release of a wire transfer of immediately available funds for the amount of the purchase price therefor. If Jefferies so elects, delivery of the Offered Shares may be made by credit to the accounts designated by Jefferies through The Depository Trust Company’s full fast transfer or DWAC programs. If Jefferies so elects, the certificates for the Offered Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested in writing at least two full business days prior to the First Closing Date (or the applicable Option Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the applicable Option Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters.

Section 3. Additional Covenants. The Company further covenants and agrees with each Underwriter as follows:

(a) Delivery of Registration Statement, Time of Sale Prospectus and Prospectus. The Company shall furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period when a prospectus relating to the Offered Shares is required by the Securities Act to be delivered (whether physically or

 

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through compliance with Rule 172 under the Securities Act or any similar rule) in connection with sales of the Offered Shares, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.

(b) Representatives’ Review of Proposed Amendments and Supplements. During the period when a prospectus relating to the Offered Shares is required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule), the Company (i) will furnish to the Representatives for review, a reasonable period of time prior to the proposed time of filing of any proposed amendment or supplement to the Registration Statement, a copy of each such amendment or supplement and (ii) will not amend or supplement the Registration Statement without the Representatives’ prior written consent. Prior to amending or supplementing any preliminary prospectus, the Time of Sale Prospectus or the Prospectus, the Company shall furnish to the Representatives for review, a reasonable amount of time prior to the time of filing or use of the proposed amendment or supplement, a copy of each such proposed amendment or supplement. The Company shall not file or use any such proposed amendment or supplement without the Representatives’ prior written consent. The Company shall file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.

(c) Free Writing Prospectuses. The Company shall furnish to the Representatives for review, a reasonable amount of time prior to the proposed time of filing or use thereof, a copy of each proposed free writing prospectus or any amendment or supplement thereto prepared by or on behalf of, used by, or referred to by the Company, and the Company shall not file, use or refer to any proposed free writing prospectus or any amendment or supplement thereto without the Representatives’ prior written consent. The Company shall furnish to each Underwriter, without charge, as many copies of any free writing prospectus prepared by or on behalf of, used by or referred to by the Company as such Underwriter may reasonably request. If at any time when a prospectus is required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) in connection with sales of the Offered Shares (but in any event if at any time through and including the First Closing Date) there occurred or occurs an event or development as a result of which any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at such time, not misleading, the Company shall promptly amend or supplement such free writing prospectus to eliminate or correct such conflict or so that the statements in such free writing prospectus as so amended or supplemented will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at such time, not misleading, as the case may be; provided, however, that prior to amending or supplementing any such free writing prospectus, the Company shall furnish to the Representatives for review, a reasonable amount of time prior to the proposed time of filing or use thereof, a copy of such proposed amended or supplemented free writing prospectus, and the Company shall not file, use or refer to any such amended or supplemented free writing prospectus without the Representatives’ prior written consent.

(d) Filing of Underwriter Free Writing Prospectuses. The Company shall not take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of such Underwriter that such Underwriter otherwise would not have been required to file thereunder.

(e) Amendments and Supplements to Time of Sale Prospectus. If the Time of Sale Prospectus is being used to solicit offers to buy the Offered Shares at a time when the Prospectus is not yet available to prospective purchasers, and any event shall occur or condition exist as a result of which it is

 

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necessary to amend or supplement the Time of Sale Prospectus so that the Time of Sale Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances when delivered to a prospective purchaser, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, the Company shall (subject to Section 3(b) and Section 3(c) hereof) promptly prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances when delivered to a prospective purchaser, not misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the information contained in the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.

(f) Certain Notifications and Required Actions. After the date of this Agreement, the Company shall promptly advise the Representatives in writing of: (i) the receipt of any comments of, or requests for additional or supplemental information from, the Commission; (ii) the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus or the Prospectus; (iii) the time and date that any post-effective amendment to the Registration Statement becomes effective; and (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or any amendment or supplement to any preliminary prospectus, the Time of Sale Prospectus or the Prospectus or of any order preventing or suspending the use of any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Shares from any securities exchange upon which they are listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order as promptly as reasonably practicable. Additionally, the Company agrees that it shall comply with all applicable provisions of Rule 424(b), Rule 433 and Rule 430A under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under Rule 424(b) or Rule 433 were received in a timely manner by the Commission.

(g) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus so that the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with applicable law, the Company agrees (subject to Section 3(b) and Section 3(c) hereof) to promptly prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) to a purchaser, not misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law. Neither the Representatives’ consent to, nor delivery of, any such amendment or supplement shall constitute a waiver of any of the Company’s obligations under Section 3(b) and Section 3(c).

 

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(h) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Offered Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or Canadian provincial securities laws (or other foreign laws) of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Offered Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Offered Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof as promptly as reasonably practicable.

(i) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Offered Shares sold by it in the manner described under the caption “Use of Proceeds” in the Registration Statement, the Time of Sale Prospectus and the Prospectus.

(j) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Shares.

(k) Earnings Statement. The Company will make generally available to its security holders (which may be satisfied by filing with the Commission on EDGAR) and to the Representatives as soon as practicable an earnings statement (which need not be audited) covering a period of at least twelve months beginning with the first fiscal quarter of the Company commencing after the date of this Agreement that will satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder.

(l) Continued Compliance with Securities Laws. The Company will comply with the Securities Act and the Exchange Act so as to permit the completion of the distribution of the Offered Shares as contemplated by this Agreement, the Registration Statement, the Time of Sale Prospectus and the Prospectus. Without limiting the generality of the foregoing, the Company will, during the period when a prospectus relating to the Offered Shares is required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule), file on a timely basis with the Commission and the NASDAQ all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds from the issuance of the Offered Shares as may be required under Rule 463 under the Securities Act.

(m) Listing. The Company will use its best efforts to list, subject to notice of issuance, the Offered Shares on the NASDAQ.

(n) Company to Provide Copy of the Prospectus in Form That May be Downloaded from the Internet. If requested by the Representatives, the Company shall cause to be prepared and delivered, at its expense, within one business day from the effective date of this Agreement, to the Representatives an “electronic Prospectus” to be used by the Underwriters in connection with the offering and sale of the Offered Shares. As used herein, the term “electronic Prospectus” means a form of Prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to the Representatives, that may be transmitted electronically by the

 

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Representatives and the other Underwriters to offerees and purchasers of the Offered Shares; (ii) it shall disclose the same information as the paper Prospectus, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic Prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to Jefferies, that will allow investors to store and have continuously ready access to the Prospectus at any future time, without charge to investors (other than any fee charged for subscription to the Internet as a whole and for on-line time).

(o) Agreement Not to Offer or Sell Additional Shares. During the period commencing on and including the date hereof and continuing through and including the 180^th day following the date of the Prospectus (such period, as extended as described below, being referred to herein as the “Lock-up Period”), the Company will not, without the prior written consent of Jefferies (which consent may be withheld in its sole discretion), directly or indirectly: (i) sell, offer to sell, contract to sell or lend any Shares or Related Securities (as defined below); (ii) effect any short sale, or establish or increase any “put equivalent position” (as defined in Rule 16a-1(h) under the Exchange Act) or liquidate or decrease any “call equivalent position” (as defined in Rule 16a-1(b) under the Exchange Act) of any Shares or Related Securities; (iii) pledge, hypothecate or grant any security interest in any Shares or Related Securities; (iv) in any other way transfer or dispose of any Shares or Related Securities; (v) enter into any swap, hedge or similar arrangement or agreement that transfers, in whole or in part, the economic risk of ownership of any Shares or Related Securities, regardless of whether any such transaction is to be settled in securities, in cash or otherwise; (vi) announce the offering of any Shares or Related Securities; (vii) submit or file any registration statement under the Securities Act in respect of any Shares or Related Securities (other than as contemplated by this Agreement with respect to the Offered Shares); (viii) effect a reverse stock split, recapitalization, share consolidation, reclassification or similar transaction affecting the outstanding Shares; or (ix) publicly announce the intention to do any of the foregoing; provided, however, that the Company may (A) effect the transactions contemplated hereby and (B) issue Shares, options to purchase Shares, or restricted stock units or other awards convertible into Shares upon exercise of options or vesting of restricted stock units or other awards, pursuant to any stock option, stock bonus or other stock plan or equity-based awards pursuant to the Company’s equity incentive award plans or other arrangement described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, (C) file a registration statement on Form S-8 relating to the shares of common stock granted or underlying awards granted, or options to purchase pursuant to, or reserved for issuance under, the Company’s equity incentive award plans described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, and (D) sell or issue any Shares or other securities or enter into an agreement to sell or issue Shares or other securities, in connection with an acquisition by the Company or any subsidiary thereof of the securities, business, property, products, technologies or other assets of another person or entity (including pursuant to any employee benefit plan assumed by the Company or any subsidiary in connection with any such acquisition) or in connection with any joint venture, commercial relationship or other strategic transaction; provided that the aggregate number of Shares or securities convertible into or exercisable for Shares (on an as-converted or as-exercised basis, as the case may be) that the Company may sell or issue or agree to sell or issue pursuant to this clause (D) shall not exceed 5% of the total number of Shares issued and outstanding immediately following the completion of the transactions contemplated by this Agreement, and provided that prior to any such grant or issuance pursuant to clause (B) or (D), the Company shall cause each such recipient of such securities to execute and deliver to the Representatives a Lock-up Agreement substantially in the form of Exhibit A . For purposes of the foregoing, “Related Securities” shall mean any options or warrants or other rights to acquire Shares or any securities exchangeable or exercisable for or convertible into Shares, or to acquire other securities or rights ultimately exchangeable or exercisable for, or convertible into, Shares.

 

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(p) Future Reports to the Representatives. During the period of five years hereafter, the Company will furnish to the Representatives, c/o Jefferies, at 520 Madison Avenue, New York, New York 10022, Attention: Global Head of Syndicate: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders’ equity and cash flows for the year then ended and the opinion thereon of the Company’s independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, FINRA or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company furnished or made available generally to holders of its capital stock; provided, however, that the requirements of this Section 3(p) shall be satisfied to the extent that such reports, statement, communications, financial statements or other documents are available on EDGAR.

(q) Investment Limitation. The Company shall not invest or otherwise use the proceeds received by the Company from its sale of the Offered Shares in such a manner as would require the Company or any of its subsidiaries to register as an investment company under the Investment Company Act.

(r) No Stabilization or Manipulation; Compliance with Regulation M. The Company will not take, and will ensure that no affiliate of the Company will take, directly or indirectly, any action designed to or that might cause or result in stabilization or manipulation of the price of the Shares or any reference security with respect to the Shares, whether to facilitate the sale or resale of the Offered Shares or otherwise, and the Company will, and shall cause each of its affiliates to, comply with all applicable provisions of Regulation M.

(s) Enforce Lock-Up Agreements. During the Lock-up Period, the Company will enforce all agreements between the Company and any of its securityholders that restrict or prohibit, expressly or in operation, the offer, sale or transfer of Shares or Related Securities or any of the other actions restricted or prohibited under the terms of the form of Lock-up Agreement. In addition, the Company will direct the transfer agent to place stop transfer restrictions upon any such securities of the Company that are bound by such “lock-up” agreements for the duration of the periods contemplated in such agreements, including, without limitation, “lock-up” agreements entered into by the Company’s officers, directors and securityholders pursuant to Section 6(h) hereof.

(t) Company to Provide Interim Financial Statements. Prior to the First Closing Date and each applicable Option Closing Date, the Company will furnish the Underwriters, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus, provided that the requirements of this Section 3(t) shall be deemed satisfied to the extent such financial statements are available on EDGAR.

(u) Amendments and Supplements to Permitted Section 5(d) Communications. If at any time following the distribution of any Permitted Section 5(d) Communication, there occurred or occurs an event or development as a result of which such Permitted Section 5(d) Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such Permitted Section 5(d) Communication to eliminate or correct such untrue statement or omission.

 

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(v) Emerging Growth Company Status. The Company will promptly notify the Representatives if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) the time when a prospectus relating to the Offered Shares is not required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) and (ii) the expiration of the Lock-Up Period (as defined herein).

(w) Announcement Regarding Lock-ups. The Company agrees to announce the Underwriters’ intention to release any director or “officer” (within the meaning of Rule 16a-1(f) under the Exchange Act) of the Company from any of the restrictions imposed by any Lock-Up Agreement, by issuing, through a major news service, a press release in form and substance satisfactory to the Representatives or, if consented to by the Representatives, in a registration statement that is publicly filed in connection with a secondary offering of the Company’s shares promptly following the Company’s receipt of any notification from the Representatives in which such intention is indicated, but in any case not later than the close of the third business day prior to the date on which such release or waiver is to become effective; provided, however, that nothing shall prevent the Representatives, on behalf of the Underwriters, from announcing the same through a major news service, irrespective of whether the Company has made the required announcement; and provided, further, that no such announcement shall be made of any release or waiver granted solely to permit a transfer of securities that is not for consideration and where the transferee has agreed in writing to be bound by the terms of a Lock-Up Agreement in the form set forth as Exhibit A hereto.

The Representatives, on behalf of the several Underwriters, may, in their sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance.

Section 4. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Offered Shares (including all printing costs), (ii) all fees and expenses of the registrar and transfer agent of the Shares, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Offered Shares to the Underwriters, (iv) all fees and expenses of the Company’s counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), the Time of Sale Prospectus, the Prospectus, each free writing prospectus prepared by or on behalf of, used by, or referred to by the Company, and each preliminary prospectus, each Permitted Section 5(d) Communication, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees and the reasonable and documented attorneys’ fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Offered Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, and the reasonable and documented costs of preparing and printing a “Blue Sky Survey” or memorandum and a “Canadian wrapper”, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) all filing fees and up to $50,000 in respect of the reasonable and documented legal fees of, and disbursements by, counsel to the Underwriters incurred by the Underwriters in connection with determining their compliance with the rules and regulations of FINRA related to the Underwriters’ participation in the offering and distribution of the Offered Shares, (viii) the costs and expenses of the Company relating to investor presentations on any “road show”, any Permitted Section 5(d) Communication or any Section 5(d) Oral Communication undertaken in connection with the offering of the Offered Shares, including, without limitation, expenses associated with the preparation or dissemination of any electronic road show, expenses associated with the production of road show slides

 

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and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives, employees and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (ix) the fees and expenses associated with listing the Offered Shares on the NASDAQ, and (x) all other fees, costs and expenses of the nature referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4 or in Section 7, Section 9 or Section 10 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Offered Shares by them.

Section 5. Covenant of the Underwriters. Each Underwriter severally and not jointly covenants with the Company not to take any action that would result in the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not, but for such actions, be required to be filed by the Company under Rule 433(d).

Section 6. Conditions of the Obligations of the Underwriters. The respective obligations of the several Underwriters hereunder to purchase and pay for the Offered Shares as provided herein on the First Closing Date and, with respect to the Optional Shares, each Option Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Shares, as of each Option Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions:

(a) Comfort Letter. On the date hereof, the Representatives shall have received from Deloitte & Touche LLP, independent registered public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant’s “comfort letters” to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus, and each free writing prospectus, if any.

(b) Compliance with Registration Requirements; No Stop Order; No Objection from FINRA. For the period from and after the date of this Agreement and through and including the First Closing Date and, with respect to any Optional Shares purchased after the First Closing Date, each Option Closing Date:

(i) The Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective.

(ii) No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment to the Registration Statement shall be in effect, and no proceedings for such purpose shall have been instituted or threatened by the Commission.

(iii) FINRA shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.

 

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(c) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and through and including the First Closing Date and, with respect to any Optional Shares purchased after the First Closing Date, each Option Closing Date:

(i) in the judgment of the Representatives there shall not have occurred any Material Adverse Change; and

(ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any securities of the Company or any of its subsidiaries by any “nationally recognized statistical rating organization” as that term is used in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act.

(d) Opinion of Counsel for the Company. On each of the First Closing Date and each Option Closing Date the Representatives shall have received the opinion and negative assurance letter of Hogan Lovells US LLP, counsel for the Company, in form and substance reasonably satisfactory to the Underwriters dated as of such date.

(e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and each Option Closing Date the Representatives shall have received the opinion and negative assurance letter of Goodwin Procter LLP, counsel for the Underwriters in connection with the offer and sale of the Offered Shares, in form and substance satisfactory to the Underwriters, dated as of such date.

(f) Officers’ Certificate. On each of the First Closing Date and each Option Closing Date, the Representatives shall have received a certificate executed by the Chief Executive Officer or President of the Company and the Chief Financial Officer of the Company, dated as of such date, to the effect set forth in Section 6(b)(ii) and further to the effect that:

(i) for the period from and including the date of this Agreement through and including such date, there has not occurred any Material Adverse Change;

(ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such date; and

(iii) the Company has complied with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such date.

(g) Bring-down Comfort Letter. On each of the First Closing Date and each Option Closing Date the Representatives shall have received from Deloitte & Touche LLP, independent registered public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, which letter shall: (i) reaffirm the statements made in the letter furnished by them pursuant to Section 6(a), except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or the applicable Option Closing Date, as the case may be; and (ii) cover certain financial information contained in the Prospectus.

(h) Lock-Up Agreements. On or prior to the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit A hereto from each of the persons listed on Exhibit B hereto, and each such agreement shall be in full force and effect on each of the First Closing Date and each Option Closing Date.

 

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(i) Rule 462(b) Registration Statement. In the event that a Rule 462(b) Registration Statement is filed in connection with the offering contemplated by this Agreement, such Rule 462(b) Registration Statement shall have been filed with the Commission on the date of this Agreement and shall have become effective automatically upon such filing.

(j) Approval of Listing. At the First Closing Date, the Offered Shares shall have been approved for listing on the NASDAQ, subject only to official notice of issuance.

(k) CFO Certificate. On the date of this Agreement and on the First Closing Date or the applicable Option Closing Date, as the case may be, the Company shall have furnished to the Representatives a certificate, dated the respective dates of delivery thereof and addressed to the Underwriters, of its Chief Financial Officer with respect to the accuracy of certain financial data contained in the Time of Sale Prospectus and the Prospectus, providing “management comfort” with respect to such information, in form and substance reasonably satisfactory to the Representatives.

(l) Additional Documents. On or before each of the First Closing Date and each Option Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably request for the purposes of enabling them to pass upon the issuance and sale of the Offered Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Offered Shares as contemplated herein and in connection with the other transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters.

If any condition specified in this Section 6 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice from Jefferies to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Shares, at any time on or prior to the applicable Option Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 7, Section 9 and Section 10 shall at all times be effective and shall survive such termination.

Section 7. Reimbursement of Underwriters’ Expenses. If this Agreement is terminated by the Representatives pursuant to Section 6, Section 11 or Section 12, or if the sale to the Underwriters of the Offered Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all documented out-of-pocket expenses of the type described in Section 4 above that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Offered Shares, including, but not limited to, the reasonably incurred and documented fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges, in each case to the extent described in Section 4 above.

Section 8. Effectiveness of this Agreement. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

 

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Section 9. Indemnification.

(a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, directors, officers, employees and agents, and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such affiliate, director, officer, employee, agent or controlling person may become subject, under the Securities Act, the Exchange Act, other federal or state statutory law or regulation, or the laws or regulations of foreign jurisdictions where Offered Shares have been offered or sold or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus that the Company has used, referred to or filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, any Marketing Material, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement to the foregoing), or the omission or alleged omission to state therein a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading; or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above; and to reimburse each Underwriter and each such affiliate, director, officer, employee, agent and controlling person for any and all reasonable and documented expenses (including the reasonable and documented fees and disbursements of counsel) as such expenses are incurred by such Underwriter or such affiliate, director, officer, employee, agent or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company by the Representatives in writing expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any such free writing prospectus, any Marketing Material, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement thereto), it being understood and agreed that the only such information consists of the information described in Section 9(b) below. The indemnity agreement set forth in this Section 9(a) shall be in addition to any liabilities that the Company may otherwise have.

(b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus, that the Company has used, referred to or filed, or is required to file, pursuant to Rule 433 of the Securities Act, any Section 5(d) Written Communication or the Prospectus (or any such amendment or supplement) or the omission or alleged omission to state therein a material fact

 

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necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such preliminary prospectus, the Time of Sale Prospectus, such free writing prospectus, such Section 5(d) Written Communication or the Prospectus (or any such amendment or supplement), in reliance upon and in conformity with information relating to such Underwriter furnished to the Company by the Representatives in writing expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any and all reasonable and documented expenses (including the reasonable and documented fees and disbursements of counsel) as such expenses are incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Representatives have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement to the foregoing) are the statements set forth in the third and fourth paragraphs under the caption “Underwriting” in the Preliminary Prospectus and the Prospectus, the statements set forth in the first paragraph under the caption “Underwriting—Commission and Expenses” in the Preliminary Prospectus and the Prospectus, the statements set forth under the caption “Underwriting—Stabilization” in the Preliminary Prospectus and the Prospectus, and the statements set forth under the caption “Underwriting—Other Activities and Relationships” in the Preliminary Prospectus and the Prospectus. The indemnity agreement set forth in this Section 9(b) shall be in addition to any liabilities that each Underwriter may otherwise have.

(c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 9, notify the indemnifying party in writing of the commencement thereof, but the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party to the extent the indemnifying party is not materially prejudiced as a proximate result of such failure and shall not in any event relieve the indemnifying party from any liability that it may have otherwise than on account of this indemnity agreement. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party’s election to so assume the defense of such action and approval by the indemnified party of counsel, such approval not to be unreasonably withheld or delayed, the indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the fees and expenses of more than one separate counsel (together with local counsel), representing the indemnified

 

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parties who are parties to such action), which counsel (together with one local counsel in each relevant jurisdiction) for the indemnified parties shall be selected by Jefferies (in the case of counsel for the indemnified parties referred to in Section 9(a) above) or by the Company (in the case of counsel for the indemnified parties referred to in Section 9(b) above)) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party and shall be paid as they are incurred.

(d) Settlements. The indemnifying party under this Section 9 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for the reasonable and documented fees and expenses of counsel as contemplated by Section 9(c) hereof, the indemnifying party shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and does not include an admission of fault or culpability or a failure to act by or on behalf of such indemnified party.

Section 10. Contribution. If the indemnification provided for in Section 9 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, from the offering of the Offered Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Offered Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Offered Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth on the front cover page of the Prospectus, bear to the aggregate initial public offering price of the Offered Shares as set forth on such cover. The relative fault of the Company, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

 

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The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 9(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 9(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 10; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 9(c) for purposes of indemnification.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 10.

Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions received by such Underwriter in connection with the Offered Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to this Section 10 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their respective names on Schedule A. For purposes of this Section 10, each affiliate, director, officer, employee and agent of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company.

Section 11. Default of One or More of the Several Underwriters. If, on the First Closing Date or any Option Closing Date any one or more of the several Underwriters shall fail or refuse to purchase Offered Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Offered Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Offered Shares to be purchased on such date, the Representatives may make arrangements satisfactory to the Company for the purchase of such Offered Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such date, the other Underwriters shall be obligated, severally and not jointly, in the proportions that the number of Firm Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Offered Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or any Option Closing Date any one or more of the Underwriters shall fail or refuse to purchase Offered Shares and the aggregate number of Offered Shares with respect to which such default occurs exceeds 10% of the aggregate number of Offered Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Offered Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 7, Section 9 and Section 10 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the applicable Option Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected.

 

29

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As used in this Agreement, the term “Underwriter” shall be deemed to include any person substituted for a defaulting Underwriter under this Section 11. Any action taken under this Section 11 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

Section 12. Termination of this Agreement. Prior to the purchase of the Firm Shares by the Underwriters on the First Closing Date, this Agreement may be terminated by Jefferies and Cowen by notice given to the Company if at any time: (i) trading or quotation in any of the Company’s securities shall have been suspended or materially limited by the Commission or by the NASDAQ, or trading in securities generally on either the NASDAQ or the New York Stock Exchange shall have been suspended or materially limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges; (ii) a general banking moratorium shall have been declared by any of federal, New York, or Minnesota authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States’ or international political, financial or economic conditions, as in the judgment of Jefferies and Cowen is material and adverse and makes it impracticable to market the Offered Shares in the manner and on the terms described in the Time of Sale Prospectus or the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of Jefferies and Cowen there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of Jefferies and Cowen may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 12 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Section 4 or Section 7 hereof or (b) any Underwriter to the Company; provided, however, that the provisions of Section 9 and Section 10 shall at all times be effective and shall survive such termination.

Section 13. No Advisory or Fiduciary Relationship. The Company acknowledges and agrees that (a) the purchase and sale of the Offered Shares pursuant to this Agreement, including the determination of the public offering price of the Offered Shares and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering contemplated hereby and the process leading to such transaction, each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company, its stockholders, or its creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company on other matters) and no Underwriter has any obligation to the Company with respect to the offering contemplated hereby except the obligations expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and (e) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering contemplated hereby and the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.

Section 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and, anything herein to the contrary notwithstanding, will survive delivery of and payment for the Offered Shares sold hereunder and any termination of this Agreement.

 

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Section 15. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows:

 

If to the Representatives:		Jefferies LLC
		520 Madison Avenue
		New York, NY 10022
		Facsimile: (646) 619-4437
		Attention: General Counsel
		Cowen and Company, LLC
		599 Lexington Avenue
		20th Floor
		New York, NY 10022
with a copy to:		Goodwin Procter LLP
		601 Marshall Street
		Redwood City, CA 94063
		Attention: Heidi Mayon
If to the Company:		SkyWater Technology, Inc.
		2401 E 86th St
		Bloomington, MN 55425
		Attention: Steve Manko, Chief Financial Officer; Jason Stokes, General Counsel
with a copy to:		Hogan Lovells US LLP
		8350 Broad St.
		17th Floor
		Tysons, VA 22102
		Attention: Kevin Greenslade

Any party hereto may change the address for receipt of communications by giving written notice to the others.

Section 16. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 11 hereof, and to the benefit of the affiliates, directors, officers, employees, agents and controlling persons referred to in Section 9 and Section 10, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term “successors” shall not include any purchaser of the Offered Shares as such from any of the Underwriters merely by reason of such purchase.

Section 17. Partial Unenforceability. The invalidity or unenforceability of any section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other section, paragraph or provision hereof. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.

 

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Section 18. Recognition of the U.S. Special Resolution Regimes.

(a) In the event that any Underwriter that is a Covered Entity becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer from such Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.

(b) In the event that any Underwriter that is a Covered Entity or a BHC Act Affiliate of such Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under this Agreement that may be exercised against such Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.

For purposes of this Agreement, (A) “BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 1841(k); (B) “Covered Entity” means any of the following: (i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b); (ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or (iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b); (C) “Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable; and (D) “U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.

Section 19. Governing Law Provisions. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in the federal courts of the United States of America located in the Borough of Manhattan in the City of New York or the courts of the State of New York in each case located in the Borough of Manhattan in the City of New York (collectively, the “Specified Courts”), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court, as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party’s address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum.

Section 20. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.

 

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Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 9 and the contribution provisions of Section 10, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Section 9 and Section 10 hereof fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, each free writing prospectus and the Prospectus (and any amendments and supplements to the foregoing), as contemplated by the Securities Act and the Exchange Act.

 

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If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.

 

Very truly yours,
SkyWater Technology, Inc.
By:
		Name:
		Title:

The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in New York, New York as of the date first above written.

 

JEFFERIES LLC
COWEN AND COMPANY, LLC.
Acting individually and as Representatives
of the several Underwriters named in
the attached Schedule A.
JEFFERIES LLC
By:
		Name:
		Title:
COWEN AND COMPANY, LLC
By:
		Name:
		Title:

 

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Schedule A

 

Underwriters		Number of Firm Shares to be Purchased
Jefferies LLC		[●]
Cowen and Company LLC		[●]
Piper Sandler & Co.		[●]
Total		[●]

 

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Exhibit A

Form of Lock-up Agreement

[Date]

Jefferies LLC

Cowen and Company, LLC

As Representatives of the Several Underwriters

c/o Jefferies LLC

520 Madison Avenue

New York, New York 10022

and

Cowen and Company, LLC

599 Lexington Avenue

20^th Floor

New York, NY 10022

Ladies & Gentlemen:

The undersigned understands that Jefferies LLC (“Jefferies”) and Cowen and Company, LLC (“Cowen” and together with Jefferies, the “Representatives”) propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with CMI Acquisition, LLC, a Delaware limited liability company, or any successor entity thereto, including, without limitation, SkyWater Technology, Inc., a Delaware corporation (collectively, the “Company”), providing for the public offering (the “Offering”) by the several underwriters, including the Representatives (the “Underwriters”), of shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”). The undersigned is an owner of [common][preferred] units of the Company (the “Units” and together with the Common Stock, the “Shares”) or of securities convertible into or exchangeable or exercisable for Units or Common Stock. The undersigned recognizes that the Offering will benefit each of the Company and the undersigned. The undersigned acknowledges that the Underwriters are relying on the representations and agreements of the undersigned contained in this letter agreement in conducting the Offering and, at a subsequent date, in entering into the Underwriting Agreement and other underwriting arrangements with the Company with respect to the Offering.

Annex A sets forth definitions for capitalized terms used in this letter agreement that are not defined in the body of this agreement. Those definitions are a part of this agreement.

In consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees that, during the Lock-up Period, the undersigned will not (and, if the undersigned is a natural person, will cause any Family Member not to), without the prior written consent of Jefferies, which may withhold its consent in its sole discretion:

 

•

Sell or Offer to Sell any Shares or Related Securities currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the undersigned or such Family Member,

 

•

enter into any Swap,

 

•

make any demand for, or exercise any right with respect to, the registration under the Securities Act of the offer and sale of any Shares or Related Securities, or cause to be filed a registration statement, prospectus or prospectus supplement (or an amendment or supplement thereto) with respect to any such registration, or

 

A-1

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•

publicly announce any intention to do any of the foregoing.

The foregoing will not apply to the registration of the offer and sale of the Shares, and the sale of the Shares to the Underwriters, in each case as contemplated by the Underwriting Agreement. In addition, the foregoing restrictions shall not apply to:

 

a.

the transfer of Shares or Related Securities

 

i.

as a bona fide gift or charitable contribution,

 

ii.

by will or intestacy,

 

iii.

to any trust or other entities formed for the direct or indirect benefit of the undersigned or a Family Member of the undersigned,

 

iv.

to any Family Member,

 

v.

if the undersigned is a trust, to a trustor, trustee or beneficiary of the trust or to the estate of a beneficiary of such trust,

 

vi.

to a corporation, partnership, limited liability company or other entity of which the undersigned or any Family Member is the legal and beneficial owner of all of the outstanding equity securities or similar interests,

 

vii.

if the undersigned is a corporation, partnership, limited liability company, trust or other business entity, (A) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act) of the undersigned (including, for the avoidance of doubt, any wholly-owned direct or indirect subsidiary of the undersigned or to the immediate or indirect parent entity of the undersigned), or to any investment fund or other entity controlling, controlled by, managing or managed by or under common control with the undersigned (including, for the avoidance of doubt, where the undersigned is a partnership, to its general partner or a successor partnership or fund, or any other funds managed by such partnership), or (B) as part of a distribution, transfer or other disposition by the undersigned to its stockholders, partners, members or other equity holders,

 

viii.

that the undersigned may purchase in open market transactions on or after the date set forth on the cover of the Prospectus (as defined in the Underwriting Agreement),

 

ix.

by operation of law pursuant to an order of a court or regulatory agency,

 

x.

in connection with the exercise, settlement, conversion or exchange with the Company of equity awards granted under a stock incentive plan or other employee benefit plan, provided that any Shares or Related Securities received as a result of such exercise, vesting or settlement shall remain subject to the terms of this letter agreement,

 

xi.

to the Company (A) in connection with the “net” or “cashless” exercise of options or other rights to purchase Shares or Related Securities from the Company (including any transfer to the Company for the payment of tax withholdings or remittance payments due as a result of

 

A-2

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such exercise) and (B) in connection with the vesting or settlement of equity awards, for the payment of tax withholdings or remittance payments due as a result of the vesting or settlement of such equity awards, in all such cases, pursuant to equity awards granted under a stock incentive plan or other employee benefit plan, provided that any Shares or Related Securities received as a result of such exercise, vesting or settlement shall remain subject to the terms of this letter agreement,

 

xii.

pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by the Board of Directors of the Company and made to all holders of the Company’s capital stock involving a Change of Control of the Company, provided that in the event that such tender offer, merger, consolidation or other similar transaction is not completed, the undersigned’s Shares and Related Securities shall remain subject to the provisions of this letter agreement,

 

xiii.

pursuant to the conversion or reclassification of the outstanding Units (or Related Securities) into Common Stock (or Related Securities) as disclosed in the Prospectus, provided that any such Common Stock or Related Securities received upon such conversion shall be subject to the terms of this letter agreement,

 

xiv.

not involving a change in beneficial ownership, or

 

xv.

to the Company pursuant to any contractual arrangement that provides for the repurchase by the Company or forfeiture to the Company of the undersigned’s Shares or Related Securities upon termination of the undersigned’s employment or service with the Company;

provided, however, that in any such case, it shall be a condition to such transfer that:

 

•

in the case of any transfer pursuant to clauses (i) through (vii) above, each transferee executes and delivers to the Representatives a lock-up letter in the form of this letter agreement,

 

•

in the case of any transfer pursuant to clauses (i) and (iii) through (vii) above, no public disclosure or filing shall be required, or made voluntarily, during the Lock-up Period reporting a change in beneficial ownership of Shares or Related Securities in connection with such transfer,

 

•

in the case of any transfer pursuant to clauses (ii), (ix), (x), (xi) and (xv) above, no public disclosure or filing reporting a change in beneficial ownership of Shares or Related Securities shall be made voluntarily during the Lock-up Period, and if the undersigned is required to file a report under Section 16 of the Exchange Act reporting a change in beneficial ownership of Shares or Related Securities during the Lock-up Period, the undersigned shall include a statement in such report to the effect that such transfer relates to the circumstances described in the applicable clause, and

 

•

in the case of any transfer pursuant to clauses (i) through (vii) above, such transfer shall not involve a disposition for value;

 

b.

required filings by the undersigned on a Schedule 13D or Schedule 13G under the Exchange Act during the Lock-up Period; provided that any such filings are not made in connection with transfers of Shares or Related Securities; or

 

c.

dispositions or transfers to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clause (a) above.

 

A-3

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Furthermore, notwithstanding the restrictions imposed by this letter agreement, the undersigned may establish a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Shares or Related Securities, provided that such plan does not provide for any transfers of Shares or Related Securities during the Lock-up Period and to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of Shares or Related Securities may be made under such plan during the Lock-up Period.

If the undersigned is an officer or director of the Company, (i) Jefferies agrees that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Shares or Related Securities, Jefferies will notify the Company of the impending release or waiver, and (ii) the Company (in accordance with the provisions of the Underwriting Agreement and unless otherwise agreed with Jefferies) will announce the impending release or waiver by press release through a major news service or, if consented to by Jefferies, in a registration statement that is publicly filed in connection with a secondary offering of Shares or Related Securities at least two business days before the effective date of the release or waiver. Any release or waiver granted by Jefferies hereunder to any such officer or director shall only be effective two business days after the publication date of such press release or registration statement. The provisions of this paragraph will not apply if both (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter agreement that are applicable to the transferor to the extent and for the duration that such terms remain in effect at the time of the transfer.

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of Shares or Related Securities held by the undersigned and, if the undersigned is a natural person, the undersigned’s Family Members, if any, except in compliance with the foregoing restrictions.

With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of the offer and sale of any Shares and/or any Related Securities owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering.

Whether or not the Offering occurs as currently contemplated or at all depends on market conditions and other factors. The Offering will only be made pursuant to the Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Notwithstanding anything to the contrary contained herein, this letter agreement will automatically terminate and the undersigned shall be released from all obligations under this letter agreement upon the earliest to occur, if any, of (i) the Company advising the Representatives in writing that it has determined not to proceed with the Offering, (ii) the Company filing an application with the Securities and Exchange Commission to withdraw the registration statement related to the Offering, (iii) the Underwriting Agreement being terminated following execution of the Underwriting Agreement (other than the provisions thereof which survive termination) prior to payment for and delivery of the Shares to be sold thereunder or (iv) June 30, 2021 if the Underwriting Agreement has not been executed by such date; provided, however, that the Company may, by written notice to the undersigned prior to such date, extend such date for a period of up to three additional months.

The undersigned hereby represents and warrants that the undersigned has full power, capacity and authority to enter into this letter agreement. This letter agreement is irrevocable and will be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned. This letter agreement may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com or www.echosign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

 

A-4

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This letter agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

Signature

Printed Name of Person Signing

(Indicate capacity of person signing if

signing as custodian or trustee, or on behalf

of an entity)

 

A-5

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Annex A

Certain Defined Terms

Used in Lock-up Agreement

For purposes of the letter agreement to which this Annex A is attached and of which it is made a part:

 

•

“Call Equivalent Position” shall have the meaning set forth in Rule 16a-1(b) under the Exchange Act.

 

•

“Change of Control” shall mean the transfer (whether by tender offer, merger, consolidation or other similar transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than any Underwriters pursuant to the Offering), of the Company’s voting securities if, after such transfer, such person or group of affiliated persons would hold more than 50% of the outstanding voting securities of the Company (or the surviving entity).

 

•

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

•

“Family Member” shall mean the spouse of the undersigned, an immediate family member of the undersigned or an immediate family member of the undersigned’s spouse, in each case living in the undersigned’s household or whose principal residence is the undersigned’s household (regardless of whether such spouse or family member may at the time be living elsewhere due to educational activities, health care treatment, military service, temporary internship or employment or otherwise). “Immediate family member” as used above shall have the meaning set forth in Rule 16a-1(e) under the Exchange Act.

 

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“Lock-up Period” shall mean the period beginning on the date hereof and continuing through the close of trading on the date that is 180 days after the date of the Prospectus (as defined in the Underwriting Agreement).

 

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“Put Equivalent Position” shall have the meaning set forth in Rule 16a-1(h) under the Exchange Act.

 

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“Related Securities” shall mean any options or warrants or other rights to acquire Shares or any securities exchangeable or exercisable for or convertible into Shares, or to acquire other securities or rights ultimately exchangeable or exercisable for or convertible into Shares.

 

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“Securities Act” shall mean the Securities Act of 1933, as amended.

 

•

“Sell or Offer to Sell” shall mean to:

 

•

sell, offer to sell, contract to sell or lend,

 

•

effect any short sale or establish or increase a Put Equivalent Position or liquidate or decrease any Call Equivalent Position

 

•

pledge, hypothecate or grant any security interest in, or

 

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in any other way transfer or dispose of,

in each case whether effected directly or indirectly.

 

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•

“Swap” shall mean any swap, hedge or similar arrangement or agreement that transfers, in whole or in part, the economic risk of ownership of Shares or Related Securities, regardless of whether any such transaction is to be settled in securities, in cash or otherwise.

Capitalized terms not defined in this Annex A shall have the meanings given to them in the body of this lock-up agreement or in the Underwriting Agreement.

 

A-7

Exhibit 3.1

CERTIFICATE OF INCORPORATION

OF

SKYWATER TECHNOLOGY, INC.

The undersigned, for the purpose of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, does execute this Certificate of Incorporation and does hereby certify that:

ARTICLE I

NAME

The name of the corporation is SkyWater Technology, Inc. (the “Corporation”).

ARTICLE II

REGISTERED OFFICE AND REGISTERED AGENT

The address of the Corporation’s registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.

ARTICLE III

PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as amended from time to time (the “Delaware General Corporation Law”). The Corporation is being incorporated in connection with the conversion of CMI Acquisition, LLC, a Delaware limited liability company (the “Converting Entity”), to the Corporation and this Certificate of Incorporation is being filed simultaneously with the Certificate of Conversion of the Converting Entity to the Corporation (the “Certificate of Conversion”).

ARTICLE IV

CAPITAL STOCK

The total number of shares of all classes of capital stock that the Corporation is authorized to issue is 280,000,000 shares, consisting of (1) 200,000,000 shares of common stock, par value $0.01 per share (the “Common Stock”), and (2) 80,000,000 shares of preferred stock, par value $0.01 per share (the “Preferred Stock”). Except as otherwise provided in any Certificate of Designation (as defined below) relating to any series of Preferred Stock then outstanding, the number of authorized shares of any of the Common Stock or the Preferred Stock may be increased or decreased (but not below the number of shares of the Common Stock or the Preferred Stock, as the case may be, then outstanding) by the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority in voting power of the outstanding capital stock entitled to vote on such increase or decrease irrespective of the provisions of Section 242(b)(2) of the Delaware General Corporation Law, and no vote of the holders of any of the Common Stock or the Preferred Stock voting separately as a class shall be required therefor. Upon the effectiveness of the Certificate of Conversion and this Certificate of Incorporation (the “Effective Time”), without any action required on the part of the Converting Entity, the Corporation or any former holder of limited liability company interests of the Converting Entity, (i) each Common Unit of the Converting Entity issued and outstanding immediately prior to the Effective Time will be converted into, and shall be deemed to be, 1.45320 issued and outstanding, fully paid and nonassessable shares of Common Stock and (ii) each Class B Preferred Unit of the Converting Entity issued and outstanding immediately prior to the Effective Time will be converted into, and shall be deemed to be, 1.55530 issued and outstanding, fully paid and nonassessable shares of Common Stock; provided, that in connection with the foregoing, the aggregate number of shares of Common Stock issued to each such former holder of Common Units or Class B Preferred Units, as applicable, will be rounded down to the nearest whole share of Common Stock.

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Section A. Common Stock.

1. Ranking. The voting, dividend, liquidation and other rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of any outstanding series of Preferred Stock.

2. Voting. Except as otherwise required by law and subject to the rights of the holders of any outstanding series of Preferred Stock, the holders of outstanding shares of Common Stock shall have the exclusive right to vote on the election and removal of directors and on all other matters submitted to a vote of the stockholders. Each share of Common Stock shall be entitled to one (1) vote. Notwithstanding any other provision of this Certificate of Incorporation to the contrary, the holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designation) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other outstanding series of Preferred Stock, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designation) or the Delaware General Corporation Law.

3. Dividends. Subject to applicable law and the rights of the holders of any outstanding series of Preferred Stock, dividends in securities, cash or other property of the Corporation may be declared and paid on the Common Stock out of the assets or funds of the Corporation lawfully available therefor, at the times and in the amounts as the Board in its discretion may determine, to the holders of the outstanding shares of Common Stock ratably in proportion to the number of shares of Common Stock.

4. Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and of the preferential and other amounts, if any, to which the holders of Preferred Stock are entitled, if any, the holders of all outstanding shares of Common Stock will be entitled to receive, pari passu, the remaining assets of the Corporation available for distribution ratably in proportion to the number of shares of Common Stock.

Section B. Preferred Stock.

Shares of Preferred Stock may be issued from time to time in one or more series. The Board is hereby authorized, subject to any limitations prescribed by law but to the fullest extent permitted by law, to provide by resolution or resolutions from time to time for the issuance, out of the unissued shares of Preferred Stock, of one or more series of Preferred Stock, without stockholder approval, by filing a certificate pursuant to the applicable law of the State of Delaware (a “Certificate of Designation”) setting forth such resolution or resolutions and, with respect to each such series, establishing the number of shares to be included in such series, and fixing the voting powers, full or limited, or no voting power, of the shares of such series, and the designation, preferences and relative, participating, optional or other special rights, if any, of the shares of each such series, and any qualifications, limitations or restrictions thereof. The powers, designation, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.

Without limiting the generality of the foregoing, the resolution or resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior to, rank equally with or be junior to any other series of Preferred Stock to the extent permitted by law.

Any shares of any series of Preferred Stock that may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law or by the terms of any Certificate of Designation for such series of Preferred Stock.

 

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ARTICLE V

BOARD OF DIRECTORS

Section A. Management of Business and Affairs of the Corporation.

The business and affairs of the Corporation shall be managed by or under the direction of the Board. In addition to the powers and authority herein or by statute expressly conferred upon them, the directors are hereby empowered to exercise all powers and do all acts and things as may be exercised or done by the Corporation, subject to the provisions of the Delaware General Corporation Law, this Certificate of Incorporation and the Bylaws of the Corporation (the “Bylaws”).

Section B. Election.

Elections of the members of the Board of Directors shall be held annually at the annual meeting of stockholders and each director shall be elected for a term commencing on the date of such director’s election and ending on the earlier of (1) the date such director’s successor is elected and qualified and (2) the date of such director’s death, resignation, retirement, disqualification or removal. The directors of the Corporation shall not be required to be elected by written ballot unless the Bylaws so provide.

Section C. Newly-Created Directorships; Vacancies.

Subject to the rights of the holders of any outstanding series of Preferred Stock to elect additional directors, any newly-created directorship that results from an increase in the number of directors and any vacancy on the Board resulting from death, resignation, retirement, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board, or by the sole remaining director. Any director elected to fill a newly-created directorship or vacancy shall hold office until the expiration of the term for which such director is elected and until a successor to such newly-elected director is duly elected and qualified or until such newly-elected director’s earlier death, resignation, retirement, disqualification or removal. No decrease in the number of directors shall shorten the term of any incumbent director.

Section D. Directors Elected by Holders of Preferred Stock.

Notwithstanding the foregoing provisions of this Article V, whenever, pursuant to the provisions of Article IV, the holders of any one or more series of Preferred Stock shall have the right, voting separately as a series or together with the holders of one or more other series of Preferred Stock, to elect directors, the election, term of office, filling of newly-created directorships or vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation (including the terms of any Certificate of Designation relating to any such series of Preferred Stock).

Section E. Number of Directors Constituting the Board.

Except as otherwise required by law and subject to the rights of the holders of any outstanding series of Preferred Stock to elect additional directors, the total number of directors constituting the entire Board shall be not fewer than three (3) nor more than eleven (11), with the then-authorized number of directors being fixed from time to time exclusively by a resolution adopted by the affirmative vote of a majority of the authorized number of directors (without regard to vacancies). During any period in which the holders of any one or more series of Preferred Stock have the right to elect additional directors pursuant to the provisions of this Certificate of Incorporation (including any Certificate of Designation), then upon commencement and for the duration of the period during which such right continues (1) the then-otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to such provisions, and (2) each such additional director shall serve until such director’s successor shall have been duly elected and qualified, or until such director’s right to hold such office terminates pursuant to such provisions, whichever occurs earlier subject to such director’s earlier death, resignation, retirement, disqualification or removal. Except as otherwise provided by this Certificate of Incorporation (including any Certificate of Designation), whenever the

 

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holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of this Certificate of Incorporation (including any Certificate of Designation), the terms of office of all such additional directors elected by the holders of such series, or elected to fill any vacancies resulting from the death, resignation, retirement, disqualification or removal of such additional directors, shall forthwith terminate, such additional directors shall automatically cease to be qualified and the total and authorized number of directors of the Corporation shall be reduced accordingly.

Section F. Removal.

Any or all of the directors (other than the directors elected by the holders of any series of Preferred Stock, voting separately as a series or together with the holders of one or more other series of Preferred Stock, as the case may be) may be removed at any time, with or without cause, only by the affirmative vote of the holders of shares of capital stock of the Corporation representing at least seventy-five percent (75%) of the voting power of the outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class.

ARTICLE VI

STOCKHOLDER ACTION

Section A. No Stockholder Action by Consent.

Subject to the rights of the holders of any outstanding series of Preferred Stock, from and after the date of closing of the Corporation’s initial underwritten public offering of its Common Stock, no action shall be taken by the stockholders of the Corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and applicable law, and no action shall be taken by the stockholders by consent.

Section B. Special Meetings of Stockholders.

Subject to the rights of the holders of any outstanding series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by (1) the Chairperson of the Board, (2) the Chief Executive Officer of the Corporation or (3) the Board or the Secretary of the Corporation pursuant to a resolution adopted by the affirmative vote of a majority of the directors then in office. No business other than that stated in the notice of a special meeting of stockholders shall be transacted at such special meeting.

Section C. No Cumulative Voting.

No stockholder will be permitted to cumulate votes at any election of directors.

ARTICLE VII

DIRECTOR LIABILITY

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law. If the Delaware General Corporation Law is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. No modification or repeal of the provisions of this Article VII shall adversely affect any right or protection of any director of the Corporation existing at the date of such modification or repeal or create any liability or adversely affect any such right or protection for any acts or omissions of such director occurring prior to such modification or repeal.

 

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ARTICLE VIII

CORPORATE OPPORTUNITY

Section A. Certain Acknowledgement.

In recognition and anticipation that (1) certain managers, principals, officers, employees and/or other representatives of Oxbow Industries, LLC (the “Sponsor”) and its Affiliates may serve as directors, officers, employees or agents of the Corporation, (2) the Sponsor and its Affiliates may now engage and may continue to engage in the same or similar activities or related lines of business as those in which the Corporation and its Affiliates, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which the Corporation and its Affiliates, directly or indirectly, may engage, and (3) members of the Board who are not employees of the Corporation (“Non-Employee Directors”) and their respective Affiliates may now engage and may continue to engage in the same or similar activities or related lines of business as those in which the Corporation, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which the Corporation, directly or indirectly, may engage, the provisions of this Article VIII are set forth to regulate and define the conduct of certain affairs of the Corporation with respect to certain classes or categories of business opportunities as they may involve any of the Sponsor, the Non-Employee Directors or their respective Affiliates and the powers, rights, duties and liabilities of the Corporation and its directors, officers and stockholders in connection therewith.

Section B. Competition and Corporate Opportunities; Renouncement.

None of (1) the Sponsor or any of its Affiliates or (2) any Non-Employee Director or his or her Affiliates (the Persons identified in (1) and (2) above being referred to, collectively, as “Identified Persons” and, individually, as an “Identified Person”) shall, to the fullest extent permitted by law, have any duty to refrain from directly or indirectly (i) engaging in the same or similar business activities or lines of business in which the Corporation or any of its Affiliates now engages or proposes to engage or (ii) otherwise competing with the Corporation or any of its Affiliates, and, to the fullest extent permitted by law, no Identified Person shall be liable to the Corporation or its stockholders or to any Affiliate of the Corporation for breach of any fiduciary duty solely by reason of the fact that such Identified Person engages in any such activities. To the fullest extent permitted by law, the Corporation hereby renounces, pursuant to Section 122(17) of the Delaware General Corporation Law, any interest or expectancy in, or right to be offered an opportunity to participate in, any business opportunity which may be a corporate opportunity for an Identified Person and the Corporation or any of its Affiliates, except as provided in Section C of this Article VIII. Subject to Section C of this Article VIII, in the event that any Identified Person acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself, herself or himself and the Corporation or any of its Affiliates, such Identified Person shall, to the fullest extent permitted by law, have no duty to communicate or offer such transaction or other business opportunity to the Corporation or any of its Affiliates and, to the fullest extent permitted by law, shall not be liable to the Corporation or its stockholders or to any Affiliate of the Corporation for breach of any fiduciary duty as a stockholder or director of the Corporation solely by reason of the fact that such Identified Person pursues or acquires such corporate opportunity for itself, herself or himself, or communicates, offers or directs such corporate opportunity to another Person.

Section C. Allocation of Corporate Opportunities.

The Corporation does not renounce its interest in any corporate opportunity offered to any Identified Person if such opportunity is expressly offered to such person solely in such person’s capacity as a director or officer of the Corporation, and the provisions of Section B of this Article VIII hereof shall not apply to any such corporate opportunity.

Section D. Certain Matters Deemed Not Corporate Opportunities.

In addition to and notwithstanding the foregoing provisions of this Article VIII, a corporate opportunity shall not be deemed to be a corporate opportunity for the Corporation or any of its Affiliates if it is a business opportunity that (1) neither the Corporation nor any of its Affiliates, as applicable, is financially or legally able, or contractually permitted to undertake, (2) from its nature, is not in the line of business of the Corporation or any of its

 

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Affiliates or is of no practical advantage to the Corporation or any of its Affiliates or (3) is one in which neither the Corporation nor any of its Affiliates has any interest or reasonable expectancy.

Section E. Notice.

To the fullest extent permitted by law, any Person purchasing or otherwise acquiring or holding any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article VIII.

ARTICLE IX

EXCLUSIVE FORUM

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the Corporation, (2) any action (including a class action) asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any present or former director, officer, agent, employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, creditors or other constituents, (3) any action (including a class action) asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, this Certificate of Incorporation or the Bylaws (as either may be amended and/or restated from time to time) or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, (4) any action to interpret, apply, enforce or determine the validity of this Certificate of Incorporation or the Bylaws (including any right, obligation, or remedy thereunder) or (5) any action asserting a claim governed by the internal affairs doctrine or any other “internal corporate claim” as such term is defined in Section 115 of the Delaware General Corporation Law, in each case subject to such court’s having personal jurisdiction over the indispensable parties named as defendants. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. This Article IX shall not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934 or any other claim for which the federal courts of the United States of America have exclusive jurisdiction. Any person purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article IX.

ARTICLE X

AMENDMENT OF CERTIFICATE OF INCORPORATION

The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed in this Certificate of Incorporation or the Delaware General Corporation Law, and all rights herein conferred upon the stockholders, directors or other person by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to such reservation.

ARTICLE XI

BYLAWS

In furtherance and not in limitation of the powers conferred upon the Board by the Delaware General Corporation Law, the Bylaws may be altered, amended or repealed, and new Bylaws may be made, by the Board. The Bylaws also may be altered, amended or repealed, and new Bylaws may be made, by the stockholders of the Corporation by the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of the outstanding capital stock of the Corporation entitled to vote thereon, voting together as a single class; provided, however, that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted.

 

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ARTICLE XII

SEVERABILITY

To the fullest extent permitted by applicable law, if any provision of this Certificate of Incorporation becomes or is declared on any ground by a court of competent jurisdiction to be illegal, unenforceable or void, portions of any provision, or any provision in its entirety, to the extent necessary shall be severed from this Certificate of Incorporation, and the court will replace the illegal, void or unenforceable provision of this Certificate of Incorporation with a valid and enforceable provision that most accurately reflects the Corporation’s intent, in order to achieve, to the maximum extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. To the fullest extent permitted by applicable law, the balance of this Certificate of Incorporation shall be enforceable in accordance with its terms.

ARTICLE XIII

DEFINITIONS

Except as otherwise defined in this Certificate of Incorporation, the following terms shall have the meanings ascribed to them below:

A. “Affiliate” means, (1) in respect of any Sponsor, any Person that, directly or indirectly, is controlled by the Sponsor, controls the Sponsor or is under common control with the Sponsor and shall include any principal, member, director, partner, stockholder, officer, employee or other representative of any of the foregoing (other than the Corporation and any entity controlled by the Corporation), (2) in respect of any Non-Employee Director, any Person that, directly or indirectly, is controlled by the Non-Employee Director (other than the Corporation and any entity controlled by the Corporation) and (3) in respect of the Corporation, any Person that, directly or indirectly, is controlled by the Corporation.

B. “Beneficial ownership” (or words or phrases of similar import) shall have the meaning given to such term in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended.

C. “Person” shall mean a natural person, corporation, partnership, limited liability company, trust, joint venture, association or other legal entity of any kind.

D. “Subsidiary” shall mean, with respect to any Person, any other Person of which at least 50% of the outstanding Voting Interests are owned, directly or indirectly, by such first Person.

E. “Voting Interests” shall mean, with respect to any legal entity, capital stock, partnership interests, limited liability company interests or other ownership interests entitled generally to vote on the election of directors, managers or other voting members of the governing body of such legal entity.

For purpose of the foregoing definitions, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a legal entity, whether through the ownership of Voting Interests, by contract, or otherwise.

ARTICLE XIV

INCORPORATOR

The incorporator of the Corporation is Jason Stokes, whose mailing address is 2401 East 86th Street, Bloomington, Minnesota 55425.

 

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ARTICLE XV

INITIAL BOARD OF DIRECTORS

The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware. The names of the persons who are to serve as the initial directors of the Corporation until the annual meeting of stockholders of the Corporation at which their terms expire, or until their successors are duly elected and qualified, are:

Wendi B. Carpenter

John T. Kurtzweil

Thomas R. Lujan

Gary J. Obermiller

Thomas Sonderman

Loren A. Unterseher

The address of each of the initial directors set forth above is 2401 East 86th Street, Bloomington, Minnesota 55425.

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The undersigned incorporator has executed this Certificate of Incorporation on this [___] day of [____], 2021.

 

By:

Name:		Jason Stokes

Incorporator

 

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Exhibit 3.2

BYLAWS

OF

SKYWATER TECHNOLOGY, INC.

(THE “CORPORATION”)

ARTICLE I

OFFICES

Section 1. Registered Office. The address of the Corporation’s registered office and the name of the Corporation’s registered agent are as set forth in the Certificate of Incorporation of the Corporation (as amended from time to time, including the terms of any applicable certificate of designation relating to a series of preferred stock of the Corporation, the “Certificate of Incorporation”).

Section 2. Other Offices. The Corporation may have other offices at such other places both within and outside the State of Delaware as the Board of Directors may determine from time to time or as may be necessary or useful in connection with the business of the Corporation.

ARTICLE II

STOCKHOLDERS MEETINGS

Section 1. Place of Meetings. All meetings of stockholders shall be held at such place or places within or outside the State of Delaware as shall be designated from time to time by the Board of Directors, the Chair of the Board, the Chief Executive Officer or the President, and stated in the notice of meeting or waiver of notice thereof, subject to any provisions of law. Notwithstanding the foregoing, the Board of Directors, in its sole discretion, may determine that the meeting shall not be held at any place, but may instead be held by means of remote communication in accordance with applicable law.

Section 2. Annual Meetings. If required by law, the Corporation shall hold a meeting of its stockholders each year for the election of directors and the transaction of such other business as may properly come before the meeting at such date and time as may be designated by the Board of Directors, the Chair of the Board, the Chief Executive Officer or the President. Unless otherwise provided by law, the Certificate of Incorporation or these Bylaws, notice of the time and place (if any) of the annual meeting, and the means of remote communication (if any) by which stockholders and proxyholders may be deemed present in person and vote at such meeting, shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days prior to the date of such meeting. The Corporation may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled.

Section 3. Special Meetings. Except as otherwise provided in the Certificate of Incorporation, a special meeting of the stockholders of the Corporation may be called at any time only by (a) the Chair of the Board, (b) the Chief Executive Officer of the Corporation or (c) the Board of Directors or the Secretary of the Corporation pursuant to a resolution adopted by the affirmative vote of a majority of the directors then in office, but such special meeting may not be called by any other person or persons. Notice of the date, time, place (if any), the means of remote communication (if any) by which stockholders and proxyholders may be deemed present in person and vote at such meeting, and the purpose or purposes for which such special meeting is called shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days prior to the date of such meeting unless otherwise provided by law, the Certificate of Incorporation or these Bylaws. Business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in such notice. The Corporation may postpone, reschedule or cancel any special meeting of stockholders previously scheduled.

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Section 4. Voting. Except as otherwise provided by or pursuant to the provisions of the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. If authorized by the Board of Directors, in its sole discretion, and subject to such guidelines as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may participate in a meeting of stockholders by means of remote communication and be deemed present in person and vote at such meeting whether such meeting is held at a designated place or solely by means of remote communication, provided that (a) the Corporation implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (b) the Corporation implements reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (c) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action is maintained by the Corporation, or as may otherwise be required by applicable law.

Section 5. Proxies. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting of stockholders and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a subsequent duly executed proxy.

Section 6. Quorum; Required Vote. Except as otherwise provided by the Certificate of Incorporation, these Bylaws or law, at any annual or special meeting of stockholders, the holders of shares of stock representing a majority in voting power of the shares of stock outstanding and entitled to vote at such meeting, present in person or represented by proxy at such meeting, shall constitute a quorum. If a separate vote by class or series or classes or series of stock is required with respect to any matter brought before any annual or special meeting of stockholders, the holders of shares representing a majority in voting power of the shares of such class or series or classes or series outstanding and entitled to vote with respect to such matter, present in person or represented by proxy at such meeting, shall constitute a quorum entitled to take action with respect to such vote on such matter. In the absence of a quorum, the chair of the meeting or the stockholders so present, by a majority of the voting power thereof, may adjourn the meeting from time to time in the manner provided in Section 11 of this Article II until a quorum is present. When a quorum is present at any meeting of stockholders, and except as set forth below in this Section 6, the affirmative vote of the holders of shares of stock representing a majority in voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on such matter shall decide such matter, unless such matter is one upon which a different or minimum vote is required by express provision of the Certificate of Incorporation, these Bylaws, the rules or regulations of any securities exchange applicable to the Corporation, or any law or regulation applicable to the Corporation or its securities, in which case such different or minimum vote shall be the applicable vote on the matter. Except as otherwise required by the Certificate of Incorporation or law, directors shall be elected at any meeting of stockholders by a plurality of the votes cast of the shares present in person or represented by proxy at the meeting.

Section 7. Inspectors of Election. In advance of any meeting of stockholders, the Corporation may appoint, and if required by law shall appoint, one or more inspectors of election (“inspectors”), which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at a meeting

 

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of stockholders or any adjournment thereof and make a written report thereof. One or more persons may be designated as alternative inspectors to replace any inspector who fails so to act. If no inspector or alternate has been appointed so to act, or if all inspectors or alternates who have been appointed are unable so to act, the chair of the meeting shall appoint one or more inspectors to act at such meeting. Each inspector, before entering upon the discharge of the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector or inspectors so appointed or designated shall (a) ascertain the number of shares of stock of the Corporation outstanding and the voting power of each such share, (b) determine the shares of stock of the Corporation represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and (e) certify the determination by such inspector or inspectors of the number of shares of stock of the Corporation represented at the meeting and the count by such inspector or inspectors of all votes and ballots. Such certification and report shall specify such other information as may be required by law or as may be requested by the chair of the meeting. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders, the inspectors may consider such information as is permitted by law. No person who is a candidate for an office at an election may serve as an inspector at such election.

Section 8. List of Stockholders. At least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (or, if the record date for determining the stockholders entitled to vote at the meeting is less than 10 days before the meeting date, a complete list of the stockholders entitled to vote at the meeting as of the 10th day before the meeting date), arranged in alphabetical order and showing the address and the number of shares registered in the name of each stockholder, shall be prepared by the Corporation. Such list shall be open for examination by any stockholder, for any purpose germane to the meeting, for a period of at least 10 days prior to the meeting as required by law. If the meeting is to be held at a place, such list shall be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present at such meeting. If the meeting is to be held solely by means of remote communication, such list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to persons who are the stockholders entitled to examine the list of stockholders or to vote in person or by proxy at the meeting.

Section 9. Conduct of Meetings. The Chair of the Board (when present) shall preside as chair of the meeting at each meeting of stockholders and shall ensure that all orders and resolutions of the stockholders are carried into effect, provided that the Chair of the Board may designate, or in the absence of any such designation, the Board may designate, any other director or any officer or representative of the Corporation to act as chair of the meeting for any meeting of stockholders. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting of stockholders shall be announced at the meeting by the chair of the meeting. To the extent not prohibited by law, the Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chair of the meeting shall have the right and authority to convene and (for any or no reason) to recess or adjourn such meeting and to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of the chair of the meeting, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, to the extent not prohibited by law, may include, without limitation, the following: (a) the establishment of an agenda or order of

 

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business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present at the meeting; (c) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine may attend or participate in the meeting; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants in the meeting. In addition to making any other determinations that may be appropriate to the conduct of the meeting, if the facts so warrant, the chair of the meeting shall determine and declare to the meeting that a matter or business was not properly brought before the meeting and, if the chair of the meeting shall so determine and declare, any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

Section 10. Notice of Stockholder Business and Nominations.

(a) Annual Meetings of Stockholders.

(1) Nominations of persons for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders only (i) pursuant to the Corporation’s notice of meeting (or any supplement thereto), (ii) by or at the direction of the Board of Directors or any duly authorized committee thereof or (iii) by any stockholder of the Corporation who was a stockholder of record of the Corporation at the time the notice provided for in this Section 10 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10.

(2) For nominations of persons for election to the Board of Directors or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and any such proposed business other than the nominations of persons for election to the Board of Directors must constitute a proper matter for stockholder action. To be timely, a stockholder’s notice must be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than 5:00 p.m. Eastern Time on the 90th day nor earlier than the 120th day prior to the first anniversary of the preceding year’s annual meeting (provided that if the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the 120th day prior to such annual meeting and not later than 5:00 p.m. Eastern Time on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation). In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. The number of nominees a stockholder may nominate for election at the annual meeting (or in the case of a stockholder giving the notice on behalf of a beneficial owner, the number of nominees a stockholder may nominate for election at the annual meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such annual meeting. Such stockholder’s notice must set forth: (i) as to each person whom the stockholder proposes to nominate for election to the Board of Directors, (A) all information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, and (B) such person’s written consent to be named as a nominee in the proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting and to serve as a director if elected; (ii) as to any other business which the stockholder proposes to bring before the meeting, a brief description of the

 

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business proposed to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend these Bylaws, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, of stock of the Corporation (a “beneficial owner”) on whose behalf the proposal or business is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (A) the name and address of such stockholder, as they appear on the Corporation’s books, and the name and address of such beneficial owner, (B) the class or series and number of shares of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (C) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder and/or such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing (including their names), including, in the case of a nomination, the nominee, (D) a description of any agreement, arrangement or understanding (including any derivative instruments, swaps or short positions, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder’s notice by, or on behalf of, such stockholder and such beneficial owner, whether or not any such instrument or right shall be subject to settlement in underlying shares of stock of the Corporation, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner, with respect to securities of the Corporation, (E) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, (F) a representation whether such stockholder or such beneficial owner intends or is part of a group which intends (y) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding stock required to approve or adopt the proposal or elect the nominee and/or (z) otherwise to solicit proxies or votes from stockholders in support of such proposal or nomination, and (G) any other information relating to such stockholder and such beneficial owner required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in an election contest pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. Any such stockholder who has provided the stockholder’s notice required by this paragraph (a)(2) shall further update and supplement such notice, if necessary, so that the stockholder’s notice provided or required to be provided by this paragraph (a)(2) shall be true and correct as of the record date for the annual meeting at which such proposal or business is to be considered and such update and supplement to such notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than five business days after the record date for such meeting. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. Notwithstanding the foregoing, the foregoing notice requirements of this Section 10 shall be deemed satisfied by a stockholder with respect to business other than a nomination of a person for election to the Board of Directors if the stockholder has notified the Corporation of the stockholder’s intention to present a proposal at an annual meeting in compliance with applicable rules and regulations promulgated under the Exchange Act and such stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. For purposes of the first annual meeting following the adoption of these Bylaws, the date of the first anniversary of the preceding year’s annual meeting shall be deemed to be June 1, 2022.

(3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 10 to the contrary, in the event that the number of directors to be elected to the Board of Directors at an annual meeting is increased effective after the time period for which nominations would otherwise

 

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be due under paragraph (a)(2) of this Section 10 and there is no public announcement by the Corporation naming the nominees for the additional directorships at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 10 shall also be considered timely, but only with respect to nominees for the additional directorships, if such notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than 5:00 p.m. Eastern Time on the 10th day following the day on which such public announcement is first made by the Corporation.

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting in accordance with the Certificate of Incorporation and these Bylaws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting only (i) by or at the direction of the Board of Directors or any committee thereof or (ii) provided that the Board of Directors shall have determined that directors shall be elected at such meeting, by any stockholder of the Corporation who was a stockholder of record at the time the notice provided for in paragraph (a)(2) of this Section 10 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and on such election and who complies with the notice procedures set forth in this Section 10. The number of nominees a stockholder may nominate for election at the special meeting (or in the case of a stockholder giving the notice on behalf of a beneficial owner, the number of nominees a stockholder may nominate for election at the special meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such special meeting. If the Corporation calls a special meeting of stockholders for the purpose of electing one or more members to the Board of Directors, any such stockholder entitled to vote on such election of directors may nominate a person or persons (as the case may be) for such election as specified in the Corporation’s notice of meeting, if the same stockholder’s notice as is required by paragraph (a)(2) of this Section 10 with respect to an annual meeting of stockholders shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the 120th day prior to such special meeting and not later than 5:00 p.m. Eastern Time on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made by the Corporation of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting; provided, that such stockholder’s notice and any information required to be furnished by or with respect to any proposed nominee for election to the Board of Directors shall be subject to all provisions of paragraph (a)(2) of this Section 10 as if such provisions were set forth in this paragraph (b), mutatis mutandis. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(c) General.

(1) Except as otherwise expressly provided in any applicable rule or regulation promulgated under the Exchange Act, only such persons who are nominated in accordance with the procedures set forth in this Section 10 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10. Except as otherwise provided by law, the chair of the meeting shall have the power and duty (i) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by clause (iii)(F) of paragraph (a)(2) of this Section 10) and

 

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(ii) if any proposed nomination or business was not made or proposed in compliance with this Section 10, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 10, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders, and such person must produce such writing or electronic transmission, or a reliable reproduction of such writing or electronic transmission, at the meeting of stockholders.

(2) For purposes of this Section 10, “public announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

(3) Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 10; provided that any references in these Bylaws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to, and shall not, limit any requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 10, and compliance with this Section 10 shall be the exclusive means for a stockholder to make nominations or submit other business (other than, as provided in the penultimate sentence of paragraph (a)(2) of this Section 10, business other than nominations brought properly under and in compliance with Rule 14a-8 under the Exchange Act, as may be amended from time to time). Nothing in this Section 10 shall be deemed to affect any rights of (i) stockholders to request inclusion of proposals or nominations in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act or (ii) the holders of any series of preferred stock of the Corporation to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.

Section 11. Adjournments. Any annual or special meeting of stockholders may be adjourned from time to time to reconvene at the same or some other place (if any), and, except as provided in the following sentence, notice need not be given of any such adjourned meeting if the time and place (if any) thereof, and the means of remote communication (if any) by which stockholders and proxyholders may be deemed present in person and vote at such adjourned meeting, are announced at the meeting at which the adjournment is taken. If the adjournment is for more than 30 days, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix as the record date for determining stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for the determination of stockholders entitled to vote at the adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record as of the record date so fixed for notice of such adjourned meeting. At any adjourned meeting any business may be transacted that could have been transacted at the original meeting.

Section 12. No Stockholder Action By Consent Without A Meeting. From and after the date of closing of the Corporation’s initial underwritten public offering of its common stock, and subject to the rights of the holders of any outstanding series of preferred stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent by such stockholders.

 

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Section 13. Delivery to the Corporation. Whenever Section 10 of this Article II requires one or more persons (including a record or beneficial owner of stock of the Corporation) to deliver a document or information to the Corporation or any officer, employee or agent thereof (including any notice, request, questionnaire, revocation, representation or other document or agreement), such document or information shall be in writing exclusively (and not in an electronic transmission) and shall be delivered exclusively by hand (including, without limitation, overnight courier service) or by certified or registered mail, return receipt requested and the Corporation shall not be required to accept delivery of any document not in such written form or so delivered. For the avoidance of doubt, with respect to any notice from any stockholder of record or beneficial owner of the Corporation’s capital stock pursuant to Section 10 of this Article II, to the fullest extent permitted by law, the Corporation expressly opts out of Section 116 of the General Corporation Law of the State of Delaware.

ARTICLE III

BOARD OF DIRECTORS

Section 1. Number and Qualification. The authorized number of directors that shall constitute the entire Board of Directors of the Corporation shall be fixed from time to time as provided in or in the manner provided for in the Certificate of Incorporation. Directors need not be stockholders of the Corporation to be qualified for election or service as a director.

Section 2. Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which shall have all the powers authorized by the laws of the State of Delaware, subject to such limitations as may be provided for in the Certificate of Incorporation.

Section 3. Compensation. The Board of Directors may from time to time by resolution authorize the payment of fees or other compensation to the directors for service as such to the Corporation, including, but not limited to, fees for attendance at meetings of the Board of Directors or committees thereof, and determine the amount of such fees and other compensation. Nothing in these Bylaws shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor in amounts authorized or otherwise approved from time to time by the Board of Directors.

Section 4. Quorum; Required Vote. At all meetings of the Board of Directors, a majority of the authorized number of directors (without regard to vacancies) shall constitute a quorum. If a quorum shall not be present at any meeting of the Board of Directors, the directors present at such meeting may adjourn the meeting to another place, date or time, without notice other than announcement at the meeting, until a quorum shall be present. Except as otherwise expressly provided for in these Bylaws or in the Certificate of Incorporation or as required by law, the vote of the majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

Section 5. Meetings. Meetings of the Board of Directors may be held either within or outside the State of Delaware. Regular meetings of the Board of Directors may be held on the date and at such time and at such place as shall from time to time be established by the Board of Directors and publicized among all directors. No notice of a regular meeting the date of which has been so publicized shall be required. Notice of the place, date and time of each special meeting of the Board of Directors shall be given to each director at least 24 hours before the meeting either (a) orally in person or by telephone or (b) in writing delivered by hand, courier, facsimile transmission, e-mail or other means of electronic

 

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transmission. The notice of a special meeting need not describe the purpose of the meeting. Unless otherwise stated in the notice thereof, any and all business may be transacted at a special meeting. Special meetings of the Board of Directors may be called by the Chair of the Board, the Chief Executive Officer or the President and shall be called by the President or the Secretary upon the request of two or more directors. The Board of Directors shall appoint a Chair of the Board from among its members. The Chair of the Board (when present) shall preside at all meetings of the Board of Directors and shall have such other duties as prescribed by the Board from time to time.

Section 6. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation, with such lawfully delegable powers and duties as the Board of Directors thereby confers, to serve at the pleasure of the Board of Directors, and may appoint such officers, agents or employees of the Corporation to assist such committees as the Board of Directors deems necessary and appropriate. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or upon the disqualification of a member of any committee, the member or members of such committee present at any meeting thereof and not disqualified from voting thereat, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided for in the resolution of the Board of Directors designating the committee and subject to the provisions of law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Unless otherwise specified in the resolution of the Board of Directors designating a committee or in the procedural rules for conducting its business established by such committee, all provisions of these Bylaws relating to meetings of the Board of Directors, including provisions relating to notice, quorum and voting requirements, shall also apply to such committee and the members thereof. Each committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as otherwise provided for in the Certificate of Incorporation, these Bylaws or the resolution of the Board of Directors designating a committee, a committee may create one or more subcommittees, each subcommittee to consist of one or more members of the committee, and may delegate to a subcommittee any or all of the powers and authority of the committee.

Section 7. Participation in Meetings by Conference Telephone or Other Communications Equipment. Any one or more members of the Board of Directors or any committee designated by the Board of Directors may, in accordance with applicable law, participate in meetings of the Board of Directors or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

Section 8. Action Without Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent to such action in writing or by electronic transmission. After an action is taken, such consent or consents relating thereto shall be filed with the minutes of proceedings of the Board of Directors, in the same paper or electronic form as such minutes are maintained.

Section 9. Resignations. Any director may resign at any time by giving notice of such resignation in writing or by electronic transmission to the Board of Directors, the Chief Executive Officer, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time of such resignation is not specified, upon receipt thereof, and, unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective.

 

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Section 10. Newly-Created Directorships; Vacancies. Any newly-created directorship that results from any increase in the authorized number of directors and any vacancy on the Board of Directors resulting from the death, resignation, retirement, disqualification, removal or other cause shall be filled in the manner specified in the Certificate of Incorporation.

Section 11. Removal. Directors shall be removed as specified in the Certificate of Incorporation.

ARTICLE IV

OFFICERS

Section 1. Positions. The officers of the Corporation shall be appointed by, and shall hold office at the pleasure of, the Board of Directors, except that an officer may appoint officers and prescribe the duties thereof if so authorized by these Bylaws or the Board of Directors. The officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Financial Officer, a Secretary and a Treasurer, and such other officers as the Board of Directors (or an officer so authorized) from time to time may appoint, including one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer shall exercise such powers and perform such duties as shall be set forth in these Bylaws and such other powers and duties as from time to time may be specified by the Board of Directors or by any officer authorized by these Bylaws or the Board of Directors to prescribe the duties of such other officers. Any number of offices may be held by the same person.

Section 2. Duties. The following officers shall have the following powers and duties:

(a) Chief Executive Officer. In the absence of the Chair of the Board, or if no Chair of the Board has been appointed, the Chief Executive Officer (when present) shall preside at all meetings of the Board of Directors (so long as the Chief Executive Officer is also a director) ,and shall ensure that all orders and resolutions of the Board of Directors and stockholders are carried into effect. The Chief Executive Officer shall be the chief executive officer of the Corporation and, subject to the provisions of these Bylaws and to the direction of the Board of Directors, shall have the responsibility for the general management and supervision of the business and affairs of the Corporation and shall exercise the powers and authority and perform all of the duties commonly incident to such office and shall perform such other duties as the Board of Directors shall specify from time to time.

(b) President. Subject to the authority of the Chief Executive Officer (if other than the President), the President shall exercise the powers and authority and perform all of the duties commonly incident to such office and shall perform such other duties as the Board of Directors or the Chief Executive Officer shall specify from time to time.

(c) Chief Financial Officer. The Chief Financial Officer shall have overall responsibility and authority for the management of the financial operations of the Corporation, subject to the authority of the Chief Executive Officer and the Board of Directors.

(d) Vice President. The Vice President or Vice Presidents, if any, shall perform such duties as may be assigned to each of them from time to time by the Board of Directors or by the Chief Executive Officer if the Board of Directors does not do so. In the absence of the President or in the event of the President’s inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all of the restrictions upon, the President.

 

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(e) Secretary. The Secretary, or in the Secretary’s absence, an Assistant Secretary shall have charge of the corporate books, keep the minutes of all meetings of stockholders and of the Board of Directors, give and serve all notices on the Board of Directors and stockholders, attend to such correspondence as may be assigned to such officer, keep in safe custody the seal of the Corporation, and affix such seal to all such instruments properly executed as may require it, and shall have such other duties and powers as may be prescribed or determined from time to time by the Board of Directors or by the Chief Executive Officer if the Board of Directors does not do so.

(f) Treasurer. The Treasurer, subject to the order of the Board of Directors or, in the Treasurer’s absence, an Assistant Treasurer shall have the care and custody of the moneys, funds, valuable papers and documents of the Corporation, and shall have, under the supervision of the Board of Directors, all the powers and duties commonly incident to such office. The Treasurer shall render to the Board of Directors and the Chief Executive Officer or the President of the Corporation, whenever they may require it, an account of all transactions and of the financial condition of the Corporation. In addition to the foregoing, the Treasurer shall have such duties as may be prescribed or determined from time to time by the Board of Directors or by the Chief Executive Officer if the Board of Directors does not do so.

(g) Delegation of Authority. The Board of Directors at any time may delegate the powers and duties of any officer to any other officer, director or employee.

Section 3. Resignations. Any officer may resign at any time by giving notice of such resignation in writing or by electronic transmission to the Board of Directors, the Chief Executive Officer, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time of such resignation is not specified, upon receipt thereof, and, unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective.

Section 4. Removal; Vacancies. The Board of Directors may remove any officer of the Corporation at any time, with or without cause. Unless otherwise specified by the Board of Directors, an officer that has duly appointed another officer of the Corporation in accordance with these Bylaws may remove such officer at any time, with or without cause. The Board of Directors and any officer so authorized may fill any vacancy among the officers of the Corporation at any time or from time to time.

ARTICLE V

STOCK

Section 1. Certificates of Stock. The shares of the Corporation shall be represented by certificates; provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of the Corporation’s stock shall be uncertificated shares. Every holder of shares represented by certificates shall be entitled to a certificate or certificates in such form as may be prescribed or authorized by the Board of Directors, duly numbered and setting forth the number and kind of shares represented thereby. Such certificates shall be signed by any two authorized officers of the Corporation (it being understood that each of the Chief Executive Officer, the President, a Vice President, the Treasurer, an Assistant Treasurer, by the Secretary or an Assistant Secretary shall be an authorized officer for such purpose). Any or all of such signatures may be in facsimile if and to the extent authorized under the laws of the State of Delaware. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before such certificate has been issued, such certificate may nevertheless be issued and delivered by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

 

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Section 2. Transfer of Stock. If represented by certificates, shares of the stock of the Corporation shall be transferable only upon the books of the Corporation upon the surrender of the certificate or certificates properly assigned and endorsed for transfer. If uncertificated, shares of capital stock of the Corporation shall be transferable only upon delivery of a duly executed instrument of transfer. If the Corporation has a transfer agent or agents or transfer clerk and registrar of transfers acting on its behalf, the signature of any officer or representative thereof may be in facsimile. The Board of Directors may appoint a transfer agent and one or more co-transfer agents and a registrar and one or more co-registrars of transfer and may make or authorize the transfer agents to make all such rules and regulations, subject to applicable law, deemed expedient concerning the issue, transfer and registration of shares of stock.

Section 3. Record Dates.

(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date, unless otherwise required by law, shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which such meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than 60 days prior to such action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 4. Lost Certificates. In the event of the loss, theft, mutilation or destruction of a stock certificate, as applicable, a duplicate certificate may be issued upon such terms as may be determined or authorized by the Board of Directors or by the Chief Executive Officer or the President if the Board of Directors does not do so. When authorizing such issuance of a new certificate, the Board of Directors or any such officer may, as a condition precedent to the issuance thereof, require the owner of such lost, stolen, mutilated or destroyed certificate or certificates, or such owner’s legal representative, to advertise the same in such manner as the Board of Directors or such officer shall require and/or to give the Corporation a bond or indemnity, in such sum or on such terms and conditions as the Board of Directors or such officer may direct, as indemnity against any claim that may be made against the Corporation on account of the certificate alleged to have been lost, stolen, mutilated or destroyed or on account of the issuance of such new certificate or uncertificated shares.

 

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Section 5. Stockholders of Record. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to receive notifications, to vote as such owner, and to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise may be provided by the General Corporation Law of the State of Delaware.

ARTICLE VI

FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC.

Section 1. Fiscal Year. The fiscal year of the Corporation shall commence or end at such time as the Board of Directors may designate.

Section 2. Deposits, Checks, Etc. The funds of the Corporation shall be deposited in the name of the Corporation or of any division thereof in such banks, trust companies or other institutions in the United States or elsewhere as may be designated from time to time by the Board of Directors, or by such officer or officers as the Board of Directors may authorize to make such designations. All checks, drafts or other orders for the withdrawal of funds from any account maintained at an approved institution shall be signed by such person or persons as may be designated from time to time by the Board of Directors. The signatures on checks, drafts or other orders for the withdrawal of funds may be in facsimile if authorized in the designation.

ARTICLE VII

BOOKS AND RECORDS

Unless otherwise expressly required by law, the books and records of the Corporation may be kept outside of the State of Delaware.

ARTICLE VIII

NOTICES

Section 1. Manner of Notice to Stockholders. Except as otherwise provided in these Bylaws or permitted by law, notices to stockholders shall be in writing and delivered personally, mailed to the stockholders at their addresses appearing on the books of the Corporation or delivered by courier service. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at the address of such stockholder as it appears on the records of the Corporation. If delivered by courier service, such notice shall be deemed to be given on the earlier of when the notice is received or left at the stockholder’s address as it appears on the records of the Corporation. Notwithstanding the foregoing, any notice to stockholders may be given by electronic transmission to the extent permitted by law.

Section 2. Waivers. Any waiver of notice, given by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business thereat because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in a waiver of notice.

 

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Section 3. Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the Corporation or its transfer agent appointed with respect to the class of stock affected, or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.

Section 4. Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.

Section 5. Notice to Stockholders Sharing an Address. Except as otherwise prohibited under the General Corporation Law of the State of Delaware, any notice given under the provisions of such General Corporation Law, the Certificate of Incorporation or these Bylaws shall be effective if given by a single notice in writing or by electronic transmission to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the Corporation within 60 days of having been given notice by the Corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the Corporation.

ARTICLE IX

SEAL

The corporate seal of the Corporation, if any, shall be in such form as the Board of Directors shall approve. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.

ARTICLE X

POWERS OF ATTORNEY

The Board of Directors may authorize one or more of the officers of the Corporation to execute powers of attorney delegating to named representatives or agents the power to represent or act on behalf of the Corporation, with or without power of substitution. In the absence of any action by the Board of Directors, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Corporation may execute for and on behalf of the Corporation waivers of notice of meetings of stockholders and proxies for such meetings in any entity in which the Corporation may hold voting securities.

ARTICLE XI

INDEMNIFICATION AND ADVANCMENT OF EXPENSES

Section 1. Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust, enterprise or nonprofit or other entity, including service with respect to employee benefit plans, against all liability and loss suffered and

 

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expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except as otherwise provided in Section 3 of this Article XI, the Corporation shall be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized by the Board of Directors.

Section 2. Right to Advancement of Expenses. The Corporation shall, to the fullest extent permitted by law, pay the expenses (including attorneys’ fees) incurred by a Covered Person in defending any proceeding in advance of its final disposition; provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced if it should be ultimately determined that the Covered Person is not entitled to be indemnified under this Article XI or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 1 and 2 of this Article XI shall be contract rights which shall continue as to a Covered Person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such Covered Person’s heirs, executors and administrators.

Section 3. Claims. If a claim for indemnification under this Article XI (following the final disposition of any applicable proceeding) is not paid in full within 60 days after the Corporation has received a claim therefor by the Covered Person, or if a claim for any advancement of expenses under this Article XI is not paid in full within 30 days after the Corporation has received a statement or statements requesting such amounts to be advanced, the Covered Person shall thereupon (but not before) be entitled to file suit to recover the unpaid amount of such claim. If successful in whole or in part, the Covered Person shall be entitled to be paid the expense of prosecuting such claim to the fullest extent permitted by law. In any such action, the Corporation shall have the burden of proving that the Covered Person is not entitled to the requested indemnification or advancement of expenses under law.

Section 4. Non-exclusivity of Rights. The rights conferred on any Covered Person by this Article XI shall not be exclusive of any other rights which such Covered Person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or of disinterested directors, these Bylaws or otherwise.

Section 5. Other Sources. The Corporation’s obligation, if any, to indemnify or to advance expenses to any Covered Person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, enterprise or nonprofit or other entity shall be reduced by any amount such Covered Person may collect as indemnification or advancement of expenses from such other corporation, partnership, limited liability company, joint venture, trust, enterprise or nonprofit or other entity. The Corporation shall not be liable under this Article XI to make any payment in connection with any claim made against a Covered Person to the extent such Covered Person has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder.

Section 6. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection hereunder of any Covered Person in respect of any act or omission occurring prior to the time of such repeal or modification.

Section 7. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust, enterprise or nonprofit or other entity, against any liability asserted against such person or incurred by such person in any such capacity, or arising out of such person’s status as such, and related expenses, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of law, these Bylaws or otherwise.

 

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Section 8. Other Indemnification and Prepayment of Expenses. This Article XI shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Covered Persons when and as authorized by appropriate corporate action.

Section 9. Severability. If this Article XI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this section that shall not have been invalidated, or by any other applicable law.

ARTICLE XII

AMENDMENTS

In furtherance and not in limitation of the powers conferred upon the Board of Directors by the General Corporation Law of the State of Delaware, these Bylaws may be altered, amended or repealed, and new Bylaws may be made, by the Board of Directors. These Bylaws may also be altered, amended or repealed, and new Bylaws may be made, by the stockholders of the Corporation by the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of the Corporation’s outstanding capital stock entitled to vote thereon, voting together as a single class; provided, that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted.

 

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Exhibit 4.1

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of                  , 2021 (the “Effective Date”), is made by and between SkyWater Technology, Inc., a Delaware corporation (together with any successor thereto, the “Company”), CMI Oxbow Partners, LLC, a Delaware limited liability company (together with any successors thereto, “Oxbow”) and the individuals identified on Schedule A hereto.

WHEREAS, on the date hereof, the Company has sold shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”) in an initial public offering (the “IPO”);

WHEREAS, as of the date hereof, Oxbow owns                  shares of Common Stock; and

WHEREAS, in connection with the IPO, the Company has agreed to provide the Holders (as defined herein) with the registration rights set forth herein with respect to the shares of Common Stock held by such stockholders.

NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

“Adverse Offering Effect” has the meaning specified in Section 6(a).

“Affiliate” means, with respect to any specified Person, (a) any Person that directly or through one or more intermediaries controls or is controlled by or is under common control with the specified Person or (b) any Person who is a general partner, member, managing director, manager, officer, director or principal of the specified Person; provided, in each case, that no Person will be deemed an Affiliate of Oxbow solely by reason of being an employee or consultant of the Company or any of its Subsidiaries.

“Agreement” has the meaning specified in the preamble hereto.

“Amendment” has the meaning specified in Section 19(a).

“beneficial owner” and to “beneficially own” have the same meanings as in Rule 13d-3 promulgated under the Exchange Act as in effect on the date hereof.

“Blackout Period” has the meaning specified in Section 9.

“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York are authorized or obligated by law or other governmental actions to close.

“Closing Date” means the date on which the sale of the Common Stock in the IPO is consummated by the Company and the underwriters of the IPO.

“Common Stock” has the meaning specified in the recitals hereof.

“Company” has the meaning specified in the preamble hereto.

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“Company Securities” means (a) the Common Stock and (b) all rights, warrants, options, convertible securities or indebtedness, exchangeable securities or indebtedness, or other rights, in each case convertible into or exercisable or exchangeable for, directly or indirectly, shares of Common Stock, whether at the time of issue or upon the passage of time or the occurrence of a future event.

“control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a legal entity, whether through the ownership of voting interests, by contract or otherwise.

“Demand Notice” has the meaning specified in Section 3(b).

“Demand Registrable Securities” means any Registrable Securities requested to be included in a Demand Registration by a Holder pursuant to Section 3.

“Demand Registration” means any registration of Registrable Securities effected pursuant to Section 3.

“Demand Registration Notice” has the meaning specified in Section 3(a).

“Demand Registration Offer Notice” has the meaning specified in Section 3(a)(i).

“Demand Registration Statement” has the meaning specified in Section 3(a).

“Demand Registration Threshold” has the meaning specified in Section 3(a).

“Effective Date” has the meaning specified in the preamble hereto.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor federal statute, as the same shall be in effect from time to time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include reference to the comparable section, if any, of any such successor federal statute.

“Excluded Registration” means (a) a registration of Common Stock under the Securities Act pursuant to a registration statement filed (i) on Form S-4 or Form S-8 under the Securities Act (or any successor registration forms), (ii) in connection with dividend reinvestment plans, direct stock purchase plans or similar plans or (iii) in connection with a registration pursuant to which the Company offers to exchange its own securities for other securities, or (b) a Rule 144A Resale Shelf Registration.

“FINRA” means the Financial Industry Regulatory Authority, Inc.

“Form S-3” means Form S-3 under the Securities Act (or any successor registration form).

“Form S-3 Eligible” means, as of any date of determination, the Company’s eligibility as of such date under SEC rules to register Registrable Securities pursuant to a Shelf Registration Statement on Form S-3 for offering and sale thereunder.

“Free Writing Prospectus” means a free writing prospectus, as defined in Rule 433 under the Securities Act, relating to an offer of Registrable Securities.

 

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“Holders” means each Person holding Class B preferred units or common units in CMI Acquisition, LLC, a Delaware limited liability company, which units will convert into shares of Common Stock upon the Company’s conversion into the Company in connection with the IPO, and each transferee of such shares of Common Stock in compliance with Section 17 of this Agreement.

“Initiating Demand Holders” has the meaning specified in Section 3(a).

“IPO” has the meaning specified in the recitals hereof.

“Lock-up Letter Transactions” means (a) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any Company Securities (including Company Securities that may be deemed to be beneficially owned by the applicable Person), (b) entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (a) above or this clause (b) is to be settled by delivery of Common Stock or other Company Securities, in cash or otherwise, (c) making any demand that would require the filing during the lock-up period of any registration statement, including any amendments thereto, with respect to the registration of any Company Securities, or (d) publicly disclosing any intention or arrangement to do any of the foregoing; but excludes, if the Holder is a corporation, partnership, limited liability company, trust or other business entity, any transfer (a) to another corporation, partnership, limited liability company, trust or other business entity that is an Affiliate of the Holder (including, for the avoidance of doubt, any wholly-owned direct or indirect Subsidiary of the Holder or to the immediate or indirect parent entity of such Holder), or to any investment fund or other entity controlling, controlled by, managing or managed by or under common control with the Holder (including, for the avoidance of doubt, where the Holder is a partnership, to its general partner or a successor partnership or fund, or any other funds managed by such partnership), or (b) as part of a distribution, transfer or other disposition by the Holder to its stockholders, partners, members or other equity holders.

“Losses” has the meaning specified in Section 13(a).

“Oxbow” has the meaning specified in the preamble hereto.

“Oxbow Affiliated Fund” means each corporation, trust, limited liability company, general or limited partnership or other entity under common control with Oxbow.

“Person” means an individual, partnership, limited partnership, joint venture, association, corporation, trust, estate, limited liability company, limited liability partnership, unincorporated entity of any kind, governmental entity, or any other legal entity.

“Prospectus” means the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by any Registration Statement, and by all other amendments and supplements to such prospectus, including post-effective amendments and all material incorporated by reference into such prospectus.

“Registrable Securities” means, with respect to any Holder, the shares of Common Stock held by such Holder, including any shares of Common Stock paid, issued or distributed by way of stock dividend or distribution or stock split, or in connection with a combination of shares, recapitalization, reorganization, merger, consolidation or otherwise, and held by such Holder. Securities shall cease to be Registrable Securities in accordance with Section 2(b).

 

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“Registration Expenses” means any and all expenses incident to the Company’s performance of its registration obligations under this Agreement, including: (a) all SEC registration and filing fees and expenses incurred in connection with the preparation, printing and distribution of each Registration Statement and Prospectus and any other document or amendment thereto and the mailing and delivery of copies thereof to each Holder and any underwriters or dealers; (b) fees and expenses of counsel to the Company; (c) fees and expenses incident to any filing with FINRA or to securing any required review by FINRA of the terms of the sale of Registrable Securities; (d) fees and expenses in connection with the qualification of Registrable Securities for offering and sale under state securities laws (including fees and expenses incurred in connection with blue sky qualifications of the Registrable Securities and including all reasonable fees and expenses of counsel in connection with any survey of state securities or blue sky laws and the preparation of any memorandum with respect thereto); (e) fees and expenses incurred in connection with the listing of Registrable Securities on any securities exchange in accordance with this Agreement; (f) the internal expenses of the Company (including all salaries and expenses of its officers and employees performing legal or accounting duties); (g) in connection with any registration, up to $40,000 of the reasonable fees and expenses of a single counsel for the Holders selected by the Holders of a majority of the Registrable Securities that have Registrable Securities registered in connection with such registration; and (h) with respect to each registration, the fees and expenses of all independent public accountants (including the expenses of any audit and “comfort” letters) and the fees and expenses of other persons, including experts, retained by the Company, but excluding (x) any underwriting, discounts, commissions and fees, brokerage and sales commissions, and transfer and documentary stamp taxes, if any, relating to the sale or disposition of the Registrable Securities and (y) any fees or expenses of counsel for the Holders, other than the fees and expenses referred to in clause (g) above.

“Registration Statement” means any registration statement of the Company filed with the SEC and referred to in Section 3 or Section 4, including any Prospectus, amendments and supplements to any such registration statement, including post-effective amendments thereto, and all exhibits and all material incorporated by reference in any such registration statement.

“Rule 144” means Rule 144 (or any similar rule then in effect) promulgated by the SEC under the Securities Act.

“Rule 144A Resale Shelf Registration” means a registration under the Securities Act of convertible notes, convertible preferred stock or Common Stock warrants and the underlying Common Stock for resale of such securities by the purchasers thereof acquired in an offering under the Securities Act made to one or more investment banking firms as initial purchasers for reoffering by such initial purchasers to “qualified institutional buyers” (as defined in Rule 144A), to other institutional “accredited investors” (as defined in Rule 501(a) under the Securities Act), or to investors outside the United States in compliance with Regulation S under the Securities Act.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, or any successor federal statute, as the same shall be in effect from time to time. Reference to a particular section of the Securities Act of 1933, as amended, shall include reference to the comparable section, if any, of any such successor federal statute.

 

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“Shelf Registration Demand Notice” has the meaning specified in Section 3(b).

“Shelf Registration Offer Notice” has the meaning specified in Section 3(a)(i).

“Shelf Registration Period” has the meaning specified in Section 3(b)(ii).

“Shelf Registration Statement” means a Registration Statement for an offering of securities to be made on a delayed or continuous basis, which covers Registrable Securities, on Form S-3 or other appropriate form under Rule 415 of the Securities Act, or any similar rule that may be adopted by the SEC.

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association or business entity of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (b) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of limited liability company interests, partnership interests, or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons will be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity (other than a corporation) if such Person or Persons will be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or will be or control any of the board of managers, general partner or other similar body of such limited liability company, partnership, association or other business entity.

“Third-Party Security Holder” means any holder (other than a Holder) of Common Stock or other equity securities of the Company that exercises contractual rights to participate in a registered offering of securities of the Company pursuant to an agreement other than this Agreement.

“Underwritten Offering” means an underwritten offering in which securities are sold to one or more underwriters, on a firm commitment basis, for reoffering to the public or pursuant to a “block trade” or “bought deal.”

“voting interests” means, with respect to any legal entity, capital stock, partnership interests, limited liability company interests or other ownership interests entitled generally to vote on the election of directors, managers or other voting members of the governing body of such legal entity.

2. Securities Subject to this Agreement.

(a) The Registrable Securities held in the name of any Holder are the sole securities entitled to the benefits of this Agreement.

(b) Registrable Securities held by any Holder shall cease to be Registrable Securities (and such Holder shall cease to have any registration rights with respect thereto under this Agreement) on the date and to the extent that (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) such Registrable Securities have been sold or transferred in accordance with the requirements of Rule 144, (iii) such Registrable Securities have been

 

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otherwise transferred or disposed of, the Company shall have delivered the Registrable Securities either in certificated form without any legend restricting further transfer or disposition thereof or in book-entry form on the stock transfer records of the Company without notation as to any restrictions on further transfer or disposition thereof and, at such time, subsequent transfer or disposition of such securities shall not require registration of such securities under the Securities Act, (iv) all Registrable Securities then held in the name of such Holder may be sold or transferred by such Holder pursuant to Rule 144 without limitation or restriction under any of the requirements of Rule 144 (as determined by the Company in good faith) or (v) such Registrable Securities have ceased to be outstanding.

3. Demand Registration Rights.

(a) Demand Rights. At any time, and from time to time, after the nine-month anniversary of the Effective Date, Holders holding at least 20% of the Registrable Securities then outstanding (the “Initiating Demand Holders”) may deliver to the Company a written notice (a “Demand Registration Notice”) requesting that the Company effect the registration under the Securities Act of Registrable Securities held by such Holders having a reasonably anticipated net aggregate offering price (after deduction of underwriter discounts and commissions and offering expenses) of at least $20 million (or, if such Registrable Securities constitute all remaining Registrable Securities beneficially owned by the Initiating Demand Holders that initiated the applicable registration, of at least $10 million) (the “Demand Registration Threshold”) as determined in good faith by the Company at the time of its receipt of the Demand Registration Notice, which Demand Registration Notice shall specify the aggregate number of Registrable Securities requested to be registered and the proposed method of distribution thereof. Upon receipt of the Demand Registration Notice, subject to Section 3(d), the Company will use its reasonable efforts to cause to be filed with the SEC as soon as reasonably practicable after receiving the Demand Registration Notice, but in no event more than 60 days following receipt of such notice (or, if the Company shall be legally prohibited from making such a filing, as soon thereafter as is legally permissible), a Registration Statement and related Prospectus that complies as to form and substance in all material respects with applicable SEC rules providing for the sale by the Initiating Demand Holders and the Holders that elect to register their Registrable Securities as provided below, of all of the Registrable Securities requested to be registered by such Holders (the “Demand Registration Statement”), and agrees (subject to Section 8, Section 9 and Section 11) to use reasonable efforts to cause the Demand Registration Statement to be declared effective by the SEC as soon as practicable following the filing thereof.

(i) Within ten Business Days after its receipt of a Demand Registration Notice pursuant to Section 3(a), the Company shall give written notice of the proposed filing of the Demand Registration Statement under this Section 3(a) or a Shelf Registration Statement under Section 3(b) to each Holder that is not an Initiating Demand Holder (other than any Holder that has provided written notice to the Company that such Holder elects not to receive notices from the Company pursuant to this Section 3), and the notice shall offer such Holders the opportunity to participate in the Demand Registration Statement under this Section 3(a)(i) (the “Demand Registration Offer Notice”) or to participate in the Shelf Registration Statement under Section 3(b) (the “Shelf Registration Offer Notice”) and to register the number of Registrable Securities as each such Holder may request. Holders who wish to include their Registrable Securities in the Demand Registration Statement under this Section 3(a)(i) or in the Shelf Registration Statement under Section 3(b) must notify the Company in writing within ten days of receiving the Demand Registration Offer Notice or the Shelf Registration Offer Notice and include in the written notice the information requested by the Company in the Demand Registration Offer Notice or the Shelf Registration Offer Notice.

(ii) Subject to Section 11, in the case of a Demand Registration that does not contemplate an Underwritten Offering, the Company agrees to use reasonable efforts to keep the Demand Registration Statement continuously effective (including the preparation and filing of any amendments and supplements necessary for that purpose) until the earliest of (i) the date on which all of the Registrable Securities held by the Holders that are registered for resale under the Demand Registration Statement are eligible for immediate sale in a single transaction pursuant to Rule 144 (or any successor provision) under the Securities Act, (ii) the date on which the Holders consummate the sale of all of the Registrable Securities registered for resale under the Demand Registration Statement and (iii) the one-year anniversary of the effectiveness of the Demand Registration Statement.

 

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(b) Shelf Registration Demand Rights. If at any time, and from time to time, when the Company is Form S-3 Eligible, and subject to the requirements of Section 3(a), the Company receives a written notice (a “Shelf Registration Demand Notice” and together with a Demand Registration Notice under Section 3(a), a “Demand Notice”) from an Initiating Demand Holder that the Company file a Shelf Registration Statement with respect to outstanding Registrable Securities of such Initiating Demand Holder having a reasonably anticipated net aggregate offering price which satisfies the Demand Registration Threshold as determined in good faith by the Company at the time of its receipt, which Shelf Registration Demand Notice shall specify the aggregate number of Registrable Securities requested to be registered in the Shelf Registration Statement and the proposed method of distribution thereof, the Company shall, subject to Section 3(d), use its reasonable efforts to cause to be filed with the SEC as soon as reasonably practicable, but in no event more than 45 days following receipt of such notice (or, if the Company shall be legally prohibited from making such a filing, as soon thereafter as is legally permissible), a Shelf Registration Statement and related Prospectus that complies as to form and substance in all material respects with applicable SEC rules providing for the sale by the Initiating Demand Holders (and the Holders that elect to register their Registrable Securities as provided below) of all of the Registrable Securities requested to be registered by such Holders. The Company agrees (subject to Section 8, Section 9 and Section 11) to use reasonable efforts to cause the Shelf Registration Statement to be declared effective by the SEC as soon as practicable following the filing thereof.

(i) In connection with the receipt of any Shelf Registration Demand Notice, the Company shall comply with the requirements of Section 3(a)(i).

(ii) Subject to Section 11, the Company agrees to use reasonable efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of 180 days or such shorter period that will terminate when all the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, the “Shelf Registration Period”), subject to the requirements of Section 3(e). The Company shall be deemed not to have used reasonable efforts to keep the Shelf Registration Statement effective during the Shelf Registration Period if it voluntarily takes any action that would result in the Holders not being able to offer and sell their Registrable Securities during that period, unless the action is (i) required by applicable law, or (ii) taken by the Company in good faith and for valid business reasons (not including avoidance of the Company’s obligation hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with any notice requirements related thereto.

(c) Underwritten Offering. If Initiating Demand Holders intend to distribute the Registrable Securities covered by their Demand Notice by means of an Underwritten Offering, they shall so advise the Company as a part of their Demand Notice, in which case the provisions of Section 5, Section 6 and Section 7 shall apply with respect to such Underwritten Offering.

(d) Notwithstanding the provisions of Section 3(a) and Section 3(b), the Company shall not be required to take any action with respect to a registration requested pursuant to this Section 3:

(i) if at the time of its receipt of the Demand Notice for such requested registration (other than a request for an Underwritten Offering made in accordance with this Section 3) the Company shall have effective under the Securities Act a Shelf Registration Statement pursuant to which the Holders could effect the disposition of their Registrable Securities according to their proposed method of distribution;

 

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(ii) if, within the 120-day period immediately preceding delivery of the Demand Notice for such requested registration, the Initiating Demand Holders shall have consummated a Demand Registration; or

(iii) during the pendency of any Blackout Period;

provided, however, that the Company shall be permitted to satisfy its obligations under Section 3(a) or Section 3(b) by amending (to the extent permitted by applicable law) within 30 days after a written request for registration thereunder, any Registration Statement previously filed by the Company under the Securities Act so that such Registration Statement (as so amended) shall permit the disposition (in accordance with the intended methods of disposition, including, without limitation, an Underwritten Offering, specified by the Holders as aforesaid) of all of the Registrable Securities for which a Demand Registration has been made pursuant to Section 3(a) or Section 3(b). If the Company shall so amend a previously filed Registration Statement, it shall be deemed to have effected a registration for purposes of Section 3(a) and Section 3(b).

(e) Subject to Section 3(f), a Demand Registration shall not be deemed to be effected for purposes of this Section 3 or Section 8: (i) if the Registration Statement for such Demand Registration has not been declared effective by the SEC or become effective in accordance with the Securities Act and the rules and regulations thereunder; (ii) in the case of a Demand Registration that does not contemplate an Underwritten Offering, if the Registration Statement therefor does not remain effective for at least the period set forth in Section 3(a) or Section 3(b), as applicable; (iii) in the case of a Demand Registration that contemplates an Underwritten Offering, if (A) the Registration Statement therefor does not remain effective for such period as, in the opinion of counsel for the managing underwriters thereof, is required by law for the delivery of a Prospectus in connection with the sale of Registrable Securities by an underwriter or dealer, or (B) the conditions to closing specified in the applicable underwriting agreement are not satisfied by reason of a violation or breach of such underwriting agreement or this Agreement by the Company; or (iv) if, as a result of a determination made by the managing underwriters of an Underwritten Offering pursuant to Section 6(a), the Initiating Demand Holders shall not be entitled to include in such Demand Registration at least 75% of the Registrable Securities that such Initiating Demand Holders requested pursuant to Section 3(a) or Section 3(b), as applicable, to be so included in such Demand Registration.

(f) Initiating Demand Holders may, at any time prior to the effective date of the Registration Statement relating to such Demand Registration, or in the case of a Registration Statement that has already become effective, before the pricing of the applicable offering, revoke the Demand Notice delivered pursuant to Section 3(a) or Section 3(b), as applicable, by providing a written notice to the Company revoking such Demand Notice. The Initiating Demand Holders shall be deemed to have effected a Demand Registration for purposes of Section 3(e) and Section 8 in the case of any withdrawal of a Demand Registration in accordance with this Section 3(f), unless: (i) such withdrawal is based on a reasonable determination, made by the Initiating Demand Holders holding a majority of the Registrable Securities to be included in the Registration Statement therefor, that there has been, since the date of the applicable Demand Notice pursuant to Section 3(a) or Section 3(b), as applicable, a material adverse change in business, financial condition, results of operations or prospects of the Company; or (ii) the Initiating Demand Holders reimburse the Company for all Registration Expenses incurred by the Company with respect to such withdrawn Demand Registration. Unless such Initiating Demand Holders otherwise agree, such Initiating Demand Holders shall provide the reimbursement contemplated by clause (ii) of the immediately preceding sentence pro rata based on the relative number of Registrable Securities requested to be included in such withdrawn Demand Registration by each such Initiating

 

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Demand Holder. Except as otherwise contemplated by such clause (ii), no revocation pursuant to this Section 3(f) shall relieve the Company of its obligation hereunder to pay the Registration Expenses in connection with any such request.

(g) Subject to the limitations set forth in Section 6(a), the Company shall have the right to register pursuant to a Demand Registration, and the Company and Third-Party Security Holders shall have the right to include in such Demand Registration, such number of shares of Common Stock or other equity securities of the Company as the Company and such Third-Party Security Holders may specify.

(h) The Initiating Demand Holders delivering a Demand Notice pursuant to Section 3(a) or Section 3(b), as applicable, may distribute the Registrable Securities covered by such demand by means of an Underwritten Offering or any other method of distribution permitted in accordance with the Registration Statement, with such method to be determined by the Initiating Demand Holders holding a majority of the Registrable Securities so requested to be registered by the Initiating Demand Holders.

4. Piggyback Registration Rights.

(a) If at any time after the Closing Date the Company shall propose to file a Registration Statement under the Securities Act relating to a public offering of the Common Stock or other equity securities of the Company (other than in connection with an Excluded Registration) for the Company’s own account or for the account of any holder of the Company’s equity securities, in each case, on a registration form and in a manner that would permit the registration of Registrable Securities for sale to the public under the Securities Act, the Company shall (i) give written notice at least 20 days before the anticipated filing date to each Holder (other than any Holder that has provided written notice to the Company that such Holder elects not to receive notices from the Company pursuant to this Section 4(a)), specifying the approximate date on which the Company proposes to file such Registration Statement and advising such Holder of its right to have any and all of the Registrable Securities of such Holder included among the securities to be covered thereby, subject to reduction in accordance with Section 6, and (ii) at the written request of any such Holder given to the Company within ten days after written notice from the Company has been given to such Holder, include among the securities covered by such Registration Statement the number of Registrable Securities which such Holder shall have requested to be so included, subject to reduction in accordance with Section 6.

(b) Nothing in this Section 4 shall create any liability on the part of the Company to any Holder if for any reason the Company shall decide not to file, or to delay the filing of, a Registration Statement proposed to be filed pursuant to Section 4(a) or to withdraw such Registration Statement subsequent to the filing thereof, regardless of any action whatsoever that a Holder may have taken, whether as a result of the issuance by the Company of any notice hereunder or otherwise; provided, however, that the Company shall not be relieved of its obligation hereunder to pay the Registration Expenses in connection with any such filing or proposed filing.

5. Holdback. In the case of an Underwritten Offering of securities of the Company, each Holder agrees, if requested by the managing underwriter or underwriters of such Underwritten Offering, to enter into a lock-up agreement with the Company and the underwriters of such Underwritten Offering, as of any date requested by such underwriters, in which such Holder shall agree that it shall not effect any Lock-up Letter Transactions during the period beginning seven days before, and ending 90 days (or such shorter period as may be permitted by such lead managing underwriters) after, the date of the Prospectus

 

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used in connection with such Underwritten Offering, except for the offering and sale of Registrable Securities included in such registration and except for such other transactions as are customarily excepted from such a lock-up agreement.

6. Cutbacks.

(a) In connection with any Demand Registration contemplating an Underwritten Offering, if the managing underwriters of such offering shall give notice to the Company (it being understood that the Company shall as soon as reasonably practicable provide any such notice to all Holders who have requested to include Registrable Securities in such offering) that, in their opinion, the number of Registrable Securities requested to be included in such offering and the number of any equity securities which the Company and any Third-Party Security Holders propose to include in such offering for sale for their respective accounts exceed the number of Registrable Securities and such other equity securities which can be offered or sold in such offering without being reasonably likely to have a material adverse effect on the offering price, timing or distribution of the Registrable Securities or the market for the Common Stock (an “Adverse Offering Effect”), there shall be included in such offering only the number of Registrable Securities and any such other equity securities that, in the opinion of such managing underwriters, can be included without being reasonably likely to have an Adverse Offering Effect. In such event, the Registrable Securities and any such other equity securities shall be included in the offering pursuant to such Demand Registration in the following priority:

(i) first, all of the Demand Registrable Securities which can be so included without being reasonably likely to have an Adverse Offering Effect; and

(ii) second, if all of the Demand Registrable Securities may be so included in such offering, such number of equity securities proposed to be sold by the Company and Third-Party Security Holders in such offering which can be included therein without being reasonably likely to have an Adverse Offering Effect (with any reduction in such number being allocated among the Company and such Third-Party Security Holders in accordance with their separate agreements).

(b) If not all of the Demand Registrable Securities may be included in such offering without being reasonably likely to have an Adverse Offering Effect, any reduction in such number shall be allocated among the Initiating Demand Holders and all other Holders electing to participate in such offering pursuant to Section 3(a) or Section 3(b) pro rata based on the relative number of Demand Registrable Securities beneficially owned by each such Holder as of the date on which the Demand Notice related thereto was received by the Company.

(c) Each Holder wishing to include Registrable Securities pursuant to Section 4(a) in any offering covered by a Registration Statement filed by the Company relating to a public offering of Common Stock or other equity securities for its own account or for the account of any security holder (other than any Holder) shall have the right to include such Registrable Securities in any such offering only to the extent that the inclusion of such Registrable Securities shall not reduce the number of shares of Common Stock or other equity securities to be offered and sold therein for the account of the Company or any such other security holder. In connection with the inclusion of Registrable Securities pursuant to Section 4(a) in any such offering, if the managing underwriters of an Underwritten Offering deliver a notice to the Company (it being understood that the Company shall as soon as reasonably practicable provide any such notice to all Holders who have requested to include Registrable Securities in such offering), that, in their opinion, the number of securities the Company proposes to sell for its own account

 

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or for the account of any such other security holder and the number of such Registrable Securities exceeds the number of securities which can be offered or sold in such offering without being reasonably likely to have an Adverse Offering Effect with respect to the securities to be offered for the account of the Company or such other security holder, there shall be included in such offering only the number of Registrable Securities that, in the opinion of such managing underwriters, can be included without being reasonably likely to have an Adverse Offering Effect. If not all of the Registrable Securities requested to be included in such offering may be so included without being reasonably likely to have an Adverse Offering Effect, the reduction in the aggregate number of Registrable Securities that shall be included in such offering shall be allocated among the Holders who have requested Registrable Securities to be so included pro rata based on the relative number of Registrable Securities beneficially owned by each such Holder as of the date on which the Company provides notice of its proposed filing of a Registration Statement pursuant to Section 4(a).

7. Selection of Underwriters. The Initiating Demand Holders shall have the right to select the underwriter or underwriters to administer any Underwritten Offering in connection with a Demand Registration; provided, that the underwriter or underwriters shall be reasonably acceptable to the Company.

8. Limitations of Registration Rights.

Notwithstanding the provisions of Section 3 and this Section 8, at such time or times as the Company is not Form S-3 Eligible, the Initiating Demand Holders shall have the right hereunder to effect a maximum of three Demand Registrations in the aggregate, and the Company shall in no event be obligated to take any action to effect more than three such Demand Registrations. From and after such time as the Company has become Form S-3 Eligible, and for so long as the Company remains Form S-3 Eligible, the Initiating Demand Holders shall have the right hereunder, subject to Section 3 and this Section 8, to effect an unlimited number of Demand Registrations.

9. Blackout Restrictions. If the Company determines in good faith that the registration and distribution of Registrable Securities (a) would materially impede, delay, interfere with or otherwise materially adversely affect any pending financing, registration of securities by the Company in a primary offering for its own account, acquisition, corporate reorganization, debt restructuring or other material transaction involving the Company or (b) would require disclosure of material non-public information that the Company has a bona fide business purpose for preserving as confidential, the Company shall be entitled to defer the filing or effectiveness of a Registration Statement, or to suspend the use of an effective Registration Statement, for the shortest period of time reasonably required (each such period, a “Blackout Period”); provided, however, that the Company shall not be entitled to obtain deferrals or suspensions under (i) clause (a) of this Section 9 for more than an aggregate of 90 days in any 12-month period, or (ii) clause (b) of this Section 9 on more than two occasions or for more than an aggregate of 60 days in any 12-month period; provided, further, that the Company shall not under any circumstances be entitled to obtain deferrals or suspensions for more than an aggregate of 120 days in any 12-month period. The Company shall notify each Holder of the initiation and expiration or earlier termination of a Blackout Period and, as soon as reasonably practicable after such expiration or termination, shall amend or supplement any effective Registration Statement and the related Prospectus to the extent necessary to permit the Holders to resume use of such Prospectus in connection with the offer and sale of the Registrable Securities in accordance with applicable law. Each Holder agrees to treat as confidential the delivery of any notice by the Company to such Holder pursuant to this Section 9 and the information set forth in any such notice. For the avoidance of doubt, except as would otherwise constitute a Blackout Period in accordance with the first sentence of this Section 9, any period during which the directors and

 

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officers of the Company are prohibited from purchasing, selling or otherwise engaging in transactions in securities of the Company pursuant to any internal Company policy restricting trading during specified periods of the Company’s fiscal year or otherwise shall not be deemed a Blackout Period for purposes of this Agreement.

10. Registration Procedures. In connection with the registration obligations of the Company under Section 3, the Company shall:

(a) prior to filing a Registration Statement or related Prospectus or any amendment or supplement thereto, furnish to a single counsel selected by the Holders holding a majority of the Registrable Securities included or to be included in such Registration Statement (and, if requested in writing by a Holder, to such Holder) copies of such Registration Statement or Prospectus (or amendment or supplement) as proposed to be filed (including, upon the request of the Holders or counsel, documents to be incorporated by reference therein), which documents shall be subject to the reasonable review and comments of the Holders holding the Registrable Securities included or to be included in such Registration Statement and their counsel;

(b) prepare and file with the SEC amendments and post-effective amendments to each Registration Statement and such amendments and supplements to the related Prospectus as may be required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder necessary to keep such Registration Statement effective until the Holders of the Registrable Securities covered by such Registration Statement have completed the distribution related thereto or for such shorter period permitted under this Agreement;

(c) promptly notify each Holder holding Registrable Securities covered by a Registration Statement, through its counsel, when such Registration Statement and any amendment or post-effective amendment thereto and the related Prospectus and any amendment or supplement to such Prospectus have been filed and, with respect to such Registration Statement or any amendment and post-effective amendment thereto, when such Registration Statement or such post-effective amendment has become effective;

(d) furnish to each Holder such number of copies of the applicable Registration Statement and of each amendment and post-effective amendment thereto and the related Prospectus or Prospectus supplement as such Holder may reasonably request in order to facilitate such Holder’s disposition of Registrable Securities (the Company hereby consenting to the use (subject to the limitations set forth in Section 11(b)) of the Prospectus or any amendment or supplement thereto in connection with such disposition);

(e) promptly notify each Holder holding Registrable Securities covered by a Registration Statement, through its counsel, at any time when the related Prospectus is required to be delivered under the Securities Act, that the Company has become aware that such Prospectus, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and prepare and furnish to such Holder, as soon as reasonably practicable, without charge to such Holder, a reasonable number of copies of an amendment to such Registration Statement or supplement to such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;

 

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(f) use reasonable efforts to register or qualify Registrable Securities covered by a Registration Statement under such securities or blue sky laws of such jurisdictions as each Holder holding such Registrable Securities shall reasonably request, and to do any and all other acts and things which may be reasonably necessary to enable such Holder to consummate the disposition in such jurisdictions of such Registrable Securities, except that the Company shall not be required for any such purpose to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this Section 10(f), it would not be obligated to be so qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction;

(g) make available to its stockholders, as soon as reasonably practicable, an earnings statement that shall satisfy the provisions of Section 11(a) of the Securities Act, provided that the Company shall be deemed to have complied with this Section 10(g) if it has complied with Rule 158 under the Securities Act;

(h) if the registration involves an Underwritten Offering, enter into a customary underwriting agreement and in connection therewith:

(i) to the extent reasonably practicable, make such representations and warranties to the underwriters in such form and with such substance and scope as are customarily made by issuers to underwriters in comparable Underwritten Offerings;

(ii) use reasonable efforts to obtain opinions of counsel to the Company (in form, scope and substance reasonably satisfactory to the managing underwriters), addressed to the underwriters, and covering the matters customarily covered in opinions requested in comparable Underwritten Offerings;

(iii) use reasonable efforts to obtain “comfort” letters and bring-downs thereof from the Company’s independent registered public accounting firm addressed to the underwriters, such letters to be in customary form and covering matters of the type customarily covered in “comfort” letters by independent registered public accounting firms in connection with Underwritten Offerings; and

(iv) deliver such documents and certificates as may be reasonably requested by the managing underwriters to evidence compliance with any customary conditions contained in the underwriting agreement;

(i) cooperate with the Holders holding Registrable Securities covered by a Registration Statement and the managing underwriter or underwriters or agents, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing the securities to be sold under such Registration Statement, or the transfer of such securities into book-entry form (not subject to any stop transfer instruction), and enable such securities to be in such denominations and registered in such names as the managing underwriter or underwriters or agents, if any, or such Holders, may request;

(j) if reasonably requested by the managing underwriter or underwriters or a Holder holding Registrable Securities being sold in a Demand Registration or in connection with another registration involving an Underwritten Offering, incorporate in a Prospectus supplement or post-effective amendment to the applicable Registration Statement such information as the managing underwriters and the Holders holding a majority of the Registrable Securities being sold by all Holders agree should be

 

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included therein relating to the plan of distribution with respect to such Registrable Securities, including information with respect to the amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and any other terms of the Underwritten Offering of the Registrable Securities to be sold in such offering and make all required filings of such Prospectus supplement or post-effective amendment upon being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment;

(k) in the event of the issuance of any stop order by the SEC of which the Company is aware suspending the effectiveness of a Registration Statement, or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any Registrable Securities included in such Registration Statement for sale in any jurisdiction, promptly notify each Holder holding any Registrable Securities included in such Registration Statement of the issuance thereof, use its reasonable efforts to obtain the withdrawal of such stop order or other order at the earliest practicable time, and promptly notify each such Holder of the withdrawal thereof;

(l) use its reasonable efforts to cause all Common Stock covered by such Registration Statement to be listed on any securities exchange on which the Common Stock covered by such Registration Statement is not already so listed and if such listing is then permitted under the rules of such securities exchange;

(m) provide a CUSIP number for all Registrable Securities and, unless such Registrable Securities shall be registered in book-entry form, provide the applicable transfer agent and registrar for such Registrable Securities with printed certificates for the Registrable Securities, which certificates shall be in a form eligible for deposit with The Depository Trust Company;

(n) cooperate with each Holder of Registrable Securities covered by a Registration Statement and each underwriter or agent participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with FINRA;

(o) use its reasonable efforts to comply with all applicable rules and regulations of the SEC;

(p) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by the applicable Registration Statement;

(q) make available upon reasonable notice at reasonable times during normal business hours and for reasonable periods for inspection by one representative appointed by the Holders of a majority of the Registrable Securities covered by the applicable Registration Statement, by any managing underwriter or underwriters participating in any Underwritten Offering to be effected pursuant to a Registration Statement, and by any attorney, accountant or other agent retained by such Holders or any such managing underwriter or underwriters, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause the proper officers and other employees of the Company and representatives of the independent registered public accounting firm that has certified the Company’s financial statements to make themselves available during normal business hours to discuss the business of the Company and to supply all information reasonably requested by any such managing underwriter or underwriters or agents thereof in connection with such Registration Statement as shall be necessary to enable such Persons to exercise their due diligence responsibility (subject to the entry by each Person referred to in this Section 10(q) into customary confidentiality agreements in a form reasonably acceptable to the Company); and

 

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(r) in the case of an Underwritten Offering, cause the senior executive officers of the Company to participate in such customary “road show” presentations as may be reasonably requested by the lead managing underwriter of any such Underwritten Offering and otherwise to cooperate with and participate in customary selling efforts related thereto.

11. Agreements of Holders.

(a) As a condition to the Company’s obligation under this Agreement to cause Registrable Securities of any Holder to be included in a Registration Statement, such Holder shall timely provide the Company with all of the information required to be provided in such Registration Statement with respect to such Holder pursuant to Items 507 and 508 (or any successor Items) of Regulation S-K under the Securities Act and such other information as otherwise may reasonably be requested by the Company to comply with applicable law in connection with such Registration Statement.

(b) Each Holder shall comply with the prospectus delivery requirements of the Securities Act in connection with the offer and sale of Registrable Securities made by such Holder pursuant to any Registration Statement. Upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 10(e) or Section 10(k) or of the imposition of any Blackout Period, each Holder holding Registrable Securities shall forthwith discontinue the disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities and the related Prospectus until such Holder’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 10(e) or the withdrawal of any stop order or other order referred to in Section 10(k), and, if so directed by the Company, shall deliver to the Company all copies, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Registrable Securities at the time of receipt of such notice.

(c) Each Holder shall comply with Regulation M under the Exchange Act in connection with the offer and sale of Registrable Securities made by such Holder pursuant to any Registration Statement.

12. Registration Expenses. The Company shall pay all Registration Expenses in connection with all registrations pursuant to this Agreement to the extent provided herein. In connection with all such registrations, each Holder shall pay all underwriting discounts, commissions and fees, brokerage and sales commissions, and transfer and documentary stamp taxes, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Registration Statement, and, except as provided for in clause (g) of the definition of “Registration Expenses,” all fees and expenses of counsel to such Holder.

13. Indemnification; Contribution.

(a) The Company agrees to indemnify and hold harmless each Holder in any offering or sale of Registrable Securities pursuant to this Agreement, each Person, if any, who participates as an underwriter in any such offering and sale of Registrable Securities, and each Person, if any, who controls such Holder or such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and their respective directors, trustees, officers, partners, agents, employees and Affiliates against all losses, claims, damages, liabilities and expenses (including reasonable attorneys’ fees and expenses, as incurred, and any amounts paid in any settlement effected with the Company’s consent, which consent shall not be unreasonably withheld or delayed) (collectively, “Losses”) incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation arising out of or based upon any untrue or alleged untrue statement of a material fact contained in, or any omission or

 

15

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alleged omission of a material fact required to be stated in, any Registration Statement, Prospectus, Free Writing Prospectus or “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or necessary to make the statements therein (in the case of a Prospectus, a Free Writing Prospectus or “issuer information,” in the light of the circumstances then existing) not misleading, except in each case insofar as such statements or omissions arise out of or are based upon (i) any such untrue statement or alleged untrue statement or omission or alleged omission made in reliance on and in conformity with information with respect to such Holder furnished in writing to the Company by such Holder or its counsel expressly for use therein, (ii) the use of any Prospectus, Free Writing Prospectus or “issuer information” after such time as the obligation of the Company to keep effective the Registration Statement of which such Prospectus forms a part has expired or (iii) the use of any Prospectus, Free Writing Prospectus or “issuer information” after such time as the Company has advised the Holders that the filing of an amendment or supplement thereto is required, except such Prospectus, Free Writing Prospectus or “issuer information” as so amended or supplemented.

(b) In connection with any Registration Statement filed pursuant to this Agreement, each Holder holding Registrable Securities to be covered thereby agrees, severally and not jointly with any other Holders, to indemnify and hold harmless the Company, each Person, if any, who participates as an underwriter in any such offering and sale of Registrable Securities and each Person, if any, who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and their respective directors, trustees, officers, partners, agents, employees and Affiliates, against all Losses incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation arising out of or based upon any untrue or alleged untrue statement of a material fact contained in, or any omission or alleged omission of a material fact required to be stated in, any Registration Statement, Prospectus, Free Writing Prospectus or “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or necessary to make the statements therein (in case of a Prospectus, a Free Writing Prospectus or “issuer information,” in the light of the circumstances then existing) not misleading, but only to the extent that any such untrue statement or omission is made in reliance on and in conformity with information with respect to such Holder furnished in writing to the Company by such Holder or its counsel specifically for use therein; provided, however, that no Holder shall be required to indemnify the Company or any other indemnified party under this Section 13(b) with respect to any amount in excess of the amount of the gross proceeds, after deducting any underwriting discounts and commissions, received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c) Any Person entitled to indemnification hereunder agrees to give prompt written notice to the indemnifying party after the receipt by such indemnified party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such indemnified party may claim indemnification or contribution pursuant to this Agreement, provided that failure to give such notification shall not affect the obligations of the indemnifying party pursuant to this Section 13 except to the extent the indemnifying party shall have been actually and materially prejudiced as a result of such failure. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall so elect, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation, unless in the reasonable judgment of any indemnified party, based on

 

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the opinion of counsel, a conflict of interest is likely to exist between the indemnifying party and such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall not be liable for the fees and expenses of (i) more than one counsel for all Holders holding Registrable Securities who are indemnified parties, selected by the Holders holding a majority of the Registrable Securities held by all Holders who are indemnified parties (which selection shall be reasonably satisfactory to the Company), (ii) more than one counsel for the underwriters in an Underwritten Offering or (iii) more than one counsel for the Company, in each case in connection with any one action or separate but similar or related actions. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party, based on the opinion of counsel, a conflict of interest is likely to exist between an indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel, provided that the indemnifying party shall not be liable for the fees and expenses of (A) more than one counsel for all Holders holding Registrable Securities who are indemnified parties, selected by the Holders holding a majority of the Registrable Securities who are indemnified parties (which selection shall be reasonably satisfactory to the Company), (B) more than one counsel for the underwriters in an Underwritten Offering or (C) more than one counsel for the Company, in each case in connection with any one action or separate but similar or related actions. No indemnifying party, in defense of any such action, suit, proceeding or investigation, shall, except with the consent of each indemnified party, consent to the entry of any judgment or entry into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such action, suit, proceeding or investigation to the extent such liability is covered by the indemnity obligations set forth in this Section 13. No indemnified party shall consent to entry of any judgment or entry into any settlement without the consent of each indemnifying party.

(d) If the indemnification from the indemnifying party provided for in this Section 13 is unavailable to an indemnified party hereunder in respect of any Losses, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such Losses, as well as any other relevant equitable considerations; provided, however, that no Holder shall be required to contribute any amount in excess of the amount of the gross proceeds, after deducting any underwriting discounts and commissions, received by such Holder upon the sale of the Registrable Securities giving rise to such contribution obligation. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other matters, whether any action in question, including any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the Losses referred to above shall be deemed to include, subject to the limitations set forth in Section 13(c), any legal or other fees and expenses reasonably incurred by such indemnified party in connection with any investigation or proceeding. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The parties agree that it would not be just and equitable if contribution pursuant to this Section 13(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the consideration referred to in this Section 13(d). If indemnification is available under this Section 13, the indemnifying parties shall indemnify each

 

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indemnified party to the full extent provided in Section 13(a) or Section 13(b), as the case may be, without regard to the relative fault of such indemnifying parties or indemnified party or any other equitable consideration provided for in this Section 13(d).

(e) The provisions of this Section 13 shall be in addition to any liability which any indemnifying party may have to any indemnified party and shall survive the termination of this Agreement.

(f) The indemnification and contribution required by this Section 13 shall be made by periodic payments of the amount thereof during the course of any action, suit, proceeding or investigation, as and when invoices are received or Losses are incurred.

14. Confidentiality. To the extent that the information and other material in connection with the registration rights contemplated in this Agreement (in any case, whether furnished before, on or after the date hereof) constitutes or contains confidential business, financial or other information of the Company, the Holders or their respective Affiliates, each party to this Agreement covenants for itself and its directors, officers, employees and stockholders that it shall use due care to prevent its directors, officers, partners, members, managers, employees, counsel, accountants and other representatives from disclosing such information to persons other than to their respective authorized employees, counsel, accountants, advisers, stockholders, partners, limited partners, managers or members (or proposed stockholders, partners, limited partners, managers, members or advisers of such persons), and other authorized representatives, in each case, for so long as such person agrees to keep such information confidential in accordance with the terms hereof; provided, however, that each Holder or the Company may disclose or deliver any information or other material disclosed to or received by it if the Holder or the Company is advised by its counsel that disclosure or delivery is required by law, regulation or judicial or administrative order or process and, in any such instance, the Holder or the Company, as the case may be, making the disclosure uses reasonable efforts to consult with the Company or Holder, as applicable, prior to making any such disclosure. Notwithstanding the foregoing, a Holder will be permitted to disclose any information or other material disclosed to or received by it hereunder and shall not be required to provide the aforementioned notice to the Company, if the disclosure is in connection with a routine audit by a regulatory or self-regulatory authority that maintains jurisdiction over the Holder; provided, however, that the Holder must file an appropriate request seeking to have any information disclosed in connection with the routine audit treated confidentially. For purposes of this Section 14, “due care” means at least the same level of care that such Holder or the Company would use to protect the confidentiality of its own sensitive or proprietary information. This Section 14 shall not apply to information that is or becomes publicly available (other than to a person who has caused such information to become publicly available through a breach of this Agreement).

15. Participation in Underwritten Offerings. No Holder may include Registrable Securities in any Demand Registration or other Underwritten Offering pursuant to this Agreement unless such Holder (a) agrees to sell such Holder’s Registrable Securities on the basis provided in any underwriting arrangements approved by the Company (subject to the rights of the Holders provided for herein), which approval shall not be unreasonably withheld, conditioned or delayed, and (b) completes and executes all questionnaires, powers of attorney, custody agreements, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements.

16. Reports Under the Exchange Act. For so long as any Registrable Securities remain outstanding and the Company is required under the Exchange Act and rules and regulations thereunder to file with the SEC reports pursuant to Section 13 or 15(a) of the Exchange Act, the Company shall (a) use

 

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reasonable efforts to satisfy the conditions of Rule 144 required thereunder to make Rule 144 available to the holders for the sale of Registrable Securities, including filing with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act, and (b) reasonably promptly upon written request therefor by any Holder, furnish to such Holder a written statement by the Company as to its compliance with its reporting obligations under the Exchange Act.

17. Assignment of Registration Rights. The right to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned (but only with all related obligations hereunder) solely by an Holder in connection with a transfer of such Registrable Securities in accordance with the Company’s Certificate of Incorporation (including, without limitation, by a distribution (tax-free or otherwise) of such Registrable Securities) to a Person that is either (a) an Oxbow Affiliated Fund or (b) a Person receiving Registrable Securities in connection with an in-kind distribution by any Holder to its stockholders, partners, members or other equity holders; provided that, in each case, as a condition to the effectiveness of any such assignment, such Person shall be required to execute a counterpart of this Agreement. Upon such Person’s execution of such counterpart, such Person shall be a Holder under this Agreement and shall be entitled to the benefits of, and shall be subject to the restrictions contained in, this Agreement, as amended from time to time, that are applicable hereunder to the Holder from whom such rights hereunder were assigned. From and after the date of any such effective assignment, the term “Holders” as used herein shall also refer to such Person.

18. Binding Effect; Benefit. This Agreement shall inure to the benefit of and be binding upon the parties hereto, any Holder and any successor and permitted assignee thereof; provided, however, that, except as provided for in Section 17, this Agreement and the provisions of this Agreement that are for the benefit of the Holders shall not be assignable by any Holder, and any such purported assignment shall be null and void. Except to the extent provided for in Section 13, nothing in this Agreement, expressed or implied, is intended to confer upon any Person other than the Company, the Holders and their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement. No purchaser of Registrable Securities from a Holder shall be deemed to be a successor or assignee of such Holder merely by reason of such purchase.

19. Amendments and Waivers.

(a) The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions of this Agreement, including the provisions of this sentence (each such amendment, modification, supplement, waiver or consent, an “Amendment”), may not be given, unless the Company consents thereto and has obtained the written consent thereto of Holders holding a majority of the Registrable Securities; provided, however, that if any Amendment would materially and adversely affect any Holder disproportionately relative to any other Holder or Holders, such Amendment shall also require the written consent of Holders holding a majority of the Registrable Securities held by all Holders so disproportionately affected.

(b) Notwithstanding Section 19(a), an Amendment with respect to a matter that relates exclusively to the rights of (i) Holders holding Registrable Securities whose securities are being included in a Registration Statement shall be effective only if consented to by Holders holding a majority of the Registrable Securities being included in such Registration Statement and (ii) the Initiating Demand Holder or Initiating Demand Holders with respect to a particular Demand Registration or Underwritten Offering shall be effective only if consented to by such Initiating Demand Holder or Initiating Demand Holders.

 

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(c) Each Holder from time to time shall be bound by any Amendment effected pursuant to this Section 19, whether or not any notice, writing or marking indicating such Amendment appears on the Registrable Securities or is delivered to such Holder.

20. Notices; Designated Company Representative. All notices, demands, requests, consents or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when (a) delivered personally to the recipient, (b) sent by confirmed facsimile or confirmed e-mail transmission before 5:00 p.m. New York City time on a Business Day, and otherwise on the next Business Day, or (c) one Business Day after being sent to the recipient by reputable overnight courier service (charges prepaid). Such notices, demands, requests, consents and other communications shall be sent (i) if to the Company, to: SkyWater Technology, Inc., 2401 E. 86^th St., Bloomington, Minnesota 55425, Attn: Jason Stokes, Chief Legal Officer and General Counsel, [email protected], or to such other address, facsimile number or e-mail address as the Company shall designate in writing to the Holders from time to time, and (ii) if to any Holder, to such Holder at the address of such Holder set forth on the signature pages hereto, or to such other address of any Holder as such Holder shall designate in writing to the Company upon becoming a Holder hereunder and from time to time thereafter. The designated representative of the Company shall be its Chief Executive Officer or such other officer as the Company shall designate in writing to the Holders from time to time.

21. Interpretation. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. Subject to Section 25, this Agreement shall become effective as between the Company and any Holder when the Company and such Holder shall have received a copy of counterparts hereof signed by the other party hereto.

23. Governing Law. This Agreement and all claims or causes of action (whether in tort, contract or otherwise) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts laws.

24. Submission to Jurisdiction; WAIVER OF JURY TRIALS.

(a) Each of the parties hereto herby irrevocably acknowledges and consents that any legal action or proceeding brought with respect to this Agreement or any of the obligations arising under or relating to this Agreement shall be brought and determined exclusively in the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware), and each of the parties hereto hereby irrevocably submits to and accepts with regard to any such action or proceeding, for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware). Each party hereby further irrevocably waives

 

20

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any claim that the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware) lacks jurisdiction over such party, and agrees not to plead or claim, in any legal action or proceeding with respect to this Agreement or the transactions contemplated hereby brought in the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware) that any such court lacks jurisdiction over such party.

(b) Each party irrevocably consents to the service of process in any legal action or proceeding brought with respect to this Agreement or any of the obligations arising under or relating to this Agreement by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party, at its address for notices as provided for in Section 20, such service to become effective ten days after such mailing. Each party hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other documents contemplated hereby, that service of process was in any way invalid or ineffective. Subject to Section 24(c), the foregoing shall not limit the rights of any party to serve process in any other manner permitted by applicable law. The foregoing consents to jurisdiction shall not constitute general consents to service of process in the State of Delaware for any purpose except as provided above and shall not be deemed to confer rights on any Person other than the respective parties to this Agreement.

(c) Each of the parties hereto hereby waives any right it may have under the laws of any jurisdiction to commence by publication any legal action or proceeding with respect to this Agreement or any of the obligations under or relating to this Agreement. To the fullest extent permitted by applicable law, each of the parties hereto hereby irrevocably waives any objection which it may now or hereafter have to the laying of the venue of any suit, action or proceeding with respect to this Agreement or any of the obligations arising under or relating to this Agreement in the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware), and hereby further irrevocably waives and agrees not to plead or claim that the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any federal court of the United States of America sitting in the State of Delaware) is not a convenient forum for any such suit, action or proceeding.

(d) The parties hereto agree that any judgment obtained by any party hereto or its successors or permitted assignees in any action, suit or proceeding referred to above may, in the discretion of such party (or its successors or permitted assignees), be enforced in any jurisdiction, to the extent permitted by applicable law.

(e) EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES (I) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY SUIT, ACTION OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER AND (II) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HAVE BEEN INDUCED TO ENTER

 

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INTO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY BY, AMONG OTHER MATTERS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 24(e).

25. Effectiveness; Termination.

(a) Notwithstanding any other provision of this Agreement, this Agreement shall become effective on the Closing Date.

(b) This Agreement shall terminate with respect to any Holder on the earliest to occur of (i) the date on which such Holder first ceases to hold any Registrable Securities or (ii) the date on which such Holder notifies the Company in writing that such Holder irrevocably withdraws as a Holder under this Agreement. Notwithstanding any such termination of this Agreement by any Holder, all rights, liabilities and obligations of such Holder and the Company under Sections 12, 13, 19, 23, 24, 25 and 27 shall remain in effect in accordance with their terms. No termination of any provision of this Agreement shall relieve any party of any liability for any breach of such provision occurring prior to such termination.

26. Entire Agreement. This Agreement is intended by the parties to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and the registration rights granted by the Company with respect to the Registrable Securities. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to the registration rights granted by the Company with respect to the Registrable Securities. No party hereto shall have any rights, duties or obligations other than those specifically set forth in this Agreement. This Agreement supersedes all prior agreements and undertakings among the parties with respect to such registration rights.

27. Specific Performance. Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for any other parties’ failure to perform their obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, to the extent permitted by applicable law, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure, without bond or other security being required.

28. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the parties shall negotiate in good faith with a view to the substitution therefor of a suitable and equitable solution in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid provision, provided, however, that the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law.

[Signature pages follow]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph hereof.

 

COMPANY:
SKYWATER TECHNOLOGY, INC.
By:
		Name:
		Title:
OXBOW:
CMI OXBOW PARTNERS, LLC
By:
		Name:
		Title:
[Signature blocks for Common Unit Holders to be added]

[***] CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL.

Exhibit 10.6

PROCESS TECHNOLOGY LICENSE AGREEMENT

BETWEEN

CYPRESS SEMICONDUCTOR CORPORATION

AND

CYPRESS SEMICONDUCTOR (MINNESOTA) INC.

DATED AS OF MARCH 1, 2017

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TABLE OF CONTENTS

 

						Page
1.		Definitions					1
		1.1		Definitions			1
2.		Rights and Licenses					5
		2.1		Licensor License Grant			5
		2.2		New PDK and Miscellaneous Technology License Grant			6
		2.3		Royalty Bearing Products			7
		2.4		Limitations and Scope			7
		2.5		Covenant Not to Exceed License			8
		2.6		Ownership			8
		2.7		Delivery; Additional Technology			9
3.		Implementation of Licensed Process Technology					9
		3.1		Responsibility for Implementation			9
		3.2		Copies			9
		3.3		New PDK Development			10
4.		Compensation					10
		4.1		Royalty Rate			10
		4.2		Year			10
		4.3		Royalty Payments			10
		4.4		Form of Payment			11
		4.5		Taxes			11
		4.6		Interest			11
		4.7		Books and Records; Audit			11
5.		Disclaimer					11
		5.1		No Warranties			11
		5.2		Exclusion of Damages			12
6.		Protection of Licensed Technology					12
7.		Confidential Information					13
		7.1		Definition			13
		7.2		Restriction			13
		7.3		Additional Obligations			14
		7.4		Exceptions			14
		7.5		Compelled Disclosure			14
		7.6		Irreparable Harm			14
		7.7		Return			14

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8.		Term and Termination					15
		8.1		Term			15
		8.2		Termination			15
		8.3		Change of Control			16
		8.4		Effect of Termination			16
9.		General Terms					16
		9.1		Notices			16
		9.2		Severability			17
		9.3		Entire Agreement			17
		9.4		Assignment			18
		9.5		No Third Party Beneficiaries			18
		9.6		Amendment			18
		9.7		Governing Law; Jurisdiction			18
		9.8		Counterparts and Facsimile Signature			19
		9.9		Construction			19

Exhibits

Exhibit A-1 – Licensed Process Technology – Royalty Bearing

Exhibit A-2 – Licensed Process Technology – Non-Royalty Bearing

Exhibit B-1 – Licensed PDKs

Exhibit B-2 – Legacy PDK Technology

Exhibit C – Licensed Semiconductor Technology

Exhibit D – Licensed Backend Technology

Exhibit E – Excluded Technology

Exhibit F – Royalty Bearing Licensed Process Technology

 

-ii-

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PROCESS TECHNOLOGY LICENSE AGREEMENT

This Process Technology License Agreement, including the Exhibits hereto (this “Agreement”), is made by and between Cypress Semiconductor Corporation, a Delaware corporation with its principal place of business at 198 Champion Court, San Jose, CA 95134 (“Licensor”) and Cypress Semiconductor (Minnesota) Inc., a Delaware corporation with its principal place of business at 2401 East 86th St., Bloomington, MN 55425 (“Licensee”, together with Licensor, referred to individually as a “Party” and collectively as the “Parties”).

RECITALS

WHEREAS, Licensor has entered into a Stock Purchase Agreement dated November 27, 2016 (“SPA”) with CMI Acquisition, LLC (“Acquirer”) whereby Acquirer shall acquire 100% of the ownership interest in and to Licensee from Licensor;

WHEREAS, prior to the transaction contemplated by the SPA, Licensee has been a wholly-owned subsidiary of Licensor;

WHEREAS, Licensee has used a certain semiconductor manufacturing process (the “Licensed Process Technology”, “Licensed Backend Technology”, “Licensed Semiconductor Technology” and “Licensed PDKs” as defined below) in the Facility (as defined below);

WHEREAS, Acquirer wishes for Licensee to be able to continue use of the Licensed Process Technology, Licensed Backend Technology, Licensed Semiconductor Technology and Licensed PDKs after the Closing Date (as defined in the SPA); and

WHEREAS, Licensor is willing to provide Licensee a limited license to the Licensed Process Technology, Licensed Backend Technology, Licensed Semiconductor Technology and Licensed PDKs under the terms and conditions set forth herein;

NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, the Parties, intending to be legally bound, hereby agree as follows:

1. Definitions

1.1 Definitions.

All capitalized terms used but not defined herein are as defined in the SPA. As used herein:

(a) “Affiliate” of any Person means any Person that controls, is controlled by, or is under common control with such Person. As used herein, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract or otherwise.

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(b) “Closing Date” has the meaning set forth in the SPA.

(c) “Change of Control” as to a Party shall mean the occurrence of one or more of the following with respect to that Party: (i) the acquisition by any person (or related group of persons), whether by tender or exchange offer made directly to that Party’s stockholders, open market purchases or any other transaction or series of transactions, of common stock possessing sufficient voting power in the aggregate to elect an absolute majority of the members of that Party’s Board of Directors; (ii) a merger or consolidation in which that Party is not the surviving entity, except for a transaction in which securities representing more than fifty percent (50%) of the total combined voting power of the surviving entity are held by persons who held common stock immediately prior to such merger or consolidation; (iii) any reverse merger in which that Party is the surviving entity but in which securities representing more than fifty percent (50%) of the total combined voting power of that Party’s outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger; or (iv) the sale, transfer or other disposition of all or substantially all of the assets of that Party.

(d) “Effective Date” means the Closing Date as defined by the SPA.

(e) “Excluded Technology” means (i) the semiconductor manufacturing process Technology of Licensor that is used in the Facility as of the Closing Date that is described in Exhibit E; (ii) sort program Technology and packaging, dicing, and other assembly Technology; and (iii) any Technology other than the Licensed PDKs, Licensed Semiconductor Technology, Licensed Backend Technology, or Licensed Process Technology.

(f) “Facility” means the semiconductor fabrication facility located at 2401 East 86th St., Bloomington, MN 55425 in use by Licensee as of the Closing Date.

(g) “Foundry Services Agreement” means that certain Foundry Services Agreement, dated as of the same date hereof, by and between Licensor and Licensee.

(h) “Improvement” means any improvement, modification, derivative, enhancement to, of, and refinement of, in whole or in part, the Licensed Process Technology, Licensed PDKs, Licensed Semiconductor Technology, Licensed Backend Technology, Licensed Background Technology, or Licensed Technical Information.

(i) “Intellectual Property Rights” means any and all rights of the following types, which may exist or be created under the laws of any jurisdiction in the world, whether registered or unregistered: (i) patents, industrial property and applications for patents and industrial property (collectively, “Patents”), (ii) trademarks, service marks, trade dress, rights of publicity, rights in trade names, corporate names, and similar rights, including all registrations and applications for registration of the foregoing and all goodwill associated therewith (collectively, “Trademarks”), (iii) rights associated with works of authorship or mask works, including and copyrights mask work rights and registrations and applications for registration thereof, regardless of the medium of fixation or means of expression (collectively, “Copyrights”), (iv) all rights in know- how, confidential technical or business information and trade secrets (collectively, “Trade Secrets”), (v) any other proprietary rights in or to Technology anywhere in the world.

 

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(j) “Licensed Backend Technology” means the eTest and sort backend wafer processing Technology used in the Facility as of the Closing Date, as described in Exhibit D, and any Licensed Improvements thereto made by Licensee as permitted by Section 2.1(d).

(k) “Licensed Background Technology” means the Technology for which the Intellectual Property Rights are owned and freely licensable by Licensor and which (i) is documented (in the form of written records or electronic data) in the books and records of the Facility as of the Closing Date, (ii) has been used in the manufacture of Licensed Products or the operation of the Facility prior to, but which is not in use at the Facility as of, the Closing Date, and (iii) is not Excluded Technology or Licensed Technology.

(l) “Licensed Improvement” means any Licensor Improvement to the Licensed Process Technology or the Licensed Backend Technology which does not change the scope of the application of the Licensed Process Technology or the Licensed Backend Technology (as applicable) and would not generally be considered in the industry as a new process, excluding any Improvements to the ONO Stack Process.

(m) “Licensed Intellectual Property” means (i) the Intellectual Property Rights (excluding Patents) owned by Licensor (or which Licensor has the right to license consistent with the terms hereof with no cost to Licensor) which are embodied in the Licensed Process Technology, Licensed PDKs, Licensed Semiconductor Technology, Licensed Backend Technology, Licensed Background Technology, or Licensed Technical Information and (ii) the Licensed Patents. Notwithstanding anything to the contrary, the “Licensed Intellectual Property” does not include any (A) Intellectual Property Rights covering Excluded Technology; or (B) any rights in any rights in trade names, trade dress, logos, packaging design, slogans, Internet domain names, registered or unregistered trademarks or services marks or registrations.

(n) “Licensed Patent” means any Patent owned by Licensor (or which Licensor has the right to license consistent with the terms hereof with no cost to Licensor) as of the Effective Date that, absent a license, is infringed by the use of the Licensed Process Technology, Licensed PDKs, Licensed Semiconductor Technology, Licensed Background Technology, or Licensed Backend Technology by Licensee in the Facility as of the Effective Date.

(o) “Licensed PDK(s)” means the process design kits (PDKs) for the Licensed Process Technology, as described in Exhibit B-1.

(p) “Licensed Product” means (i) a semiconductor device, at whatever stage of completion in the manufacturing process, in die, wafer or chip form, or any other device or item of value, in each case for which the design is owned by Licensee or a third-party customer of Licensee or (ii) a Licensor Product.

 

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(q) “Licensed Process Technology” means only that Licensor semiconductor manufacturing process Technology used in the Facility as of the Closing Date as described in Exhibits A-1 and A-2, and any Licensed Improvements thereto made by Licensee as permitted by Section 2.1(d) and the associated Licensed PDKs. Notwithstanding anything to the contrary, Licensed Process Technology expressly excludes the Excluded Technology described in Exhibit E.

(r) “Licensed Semiconductor Technology” means (i) IP blocks, (ii) standards cells, and (iii) other semiconductor design technology, in each case for which the Intellectual Property Rights are owned by Licensor (or which Licensor has the right to license consistent with the terms hereof with no cost to Licensor) and in each case as described in Exhibit C, and in each case that are used to design integrated circuits for manufacture in the Facility as of the Closing Date.

(s) “Licensed Technical Information” means the existing documentation (in tangible or electronic form), information, data and materials used in the Facility, or otherwise in Licensor’s possession, as of the Closing Date relating to or necessary for describing the Licensed Process Technology.

(t) “Licensed Technology” means, collectively, the Licensed Process Technology, Licensed Backend Technology, Licensed PDKs, Legacy PDK Technology, Licensed Semiconductor Technology, Licensed Background Technology, Miscellaneous Technology, and Licensed Technical Information.

(u) “Licensee Improvement” means any Improvement to the Licensed Technology made solely by Licensee, other than any Improvement with respect to any of the Royalty Bearing Licensed Process Technologies or the ONO Stack Process.

(v) “Licensor Improvement” means any Improvement other than a Licensee Improvement, regardless of which Party makes the Improvement.

(w) “Licensor Product” means a semiconductor device, at whatever stage of completion in the manufacturing process, in die, wafer or chip form, manufactured by Licensee for or on behalf of Licensor, including for Licensor’s customers and supplied to Licensor or to a third party on behalf of Licensor pursuant to the Foundry Services Agreement.

(x) “Miscellaneous Technology” means the following Licensor proprietary software programs to the extent, and in the form, used in the Facility as of the Closing Date: (i) “Tool Automation” and (ii) “Test Program Management System” (TPMS).

(y) “ONO Stack Process” means the Licensed Process Technology that is the flow portion starting from the oxide-nitride-oxide (ONO) bottom oxide pre-clean and ending at the top oxide deposition, including the ONO Process Recipe (as defined below).

 

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(z) “Royalty Bearing Licensed Process Technology” means the Licensed Process Technology specified in Exhibit F hereto or any derivative process, including any Licensed Improvements thereto.

(aa) “Royalty Bearing Product” means any semiconductor product, including any Licensed Product, made using the Royalty Bearing Licensed Process Technology, provided that Licensor Products shall not be Royalty Bearing Products.

(bb) “Royalty Rate” is defined in Section 4.1 (Royalty Rate).

(cc) “Sales Revenue” means: (i) the total amount received by Licensee for the sale or other disposal of all Royalty Bearing Products to third party customers in arm’s length transactions, after deduction of taxes, duties or other governmental charges imposed on the sale of such products; refunds for returned product; trade, quantity, promotional and other customary discounts actually allowed; and freight and packing actually charged on such sales and separately itemized; or if the respective Royalty Bearing Product is sold or otherwise disposed of in a non-arm’s length transaction or in combination with other products where the price attributed to the Royalty Bearing Product is less than the average price for sales during the previous three month period as determined in accordance with “(i)” above, then the Sales Revenue means (ii) such average arms-length sales price determined in accordance with “(i)” above.

(dd) “Technology” means embodiments of Intellectual Property Rights, including databases, data collections, diagrams, formulae, process technology, recipes, test suites, mask works, reticles, documentation, know-how, proprietary information, software, works of authorship, and other forms of technology (whether or not embodied in any tangible form and including all tangible and electronic embodiments of the foregoing).

2. Rights and Licenses

2.1 Licensor License Grant. Licensor hereby grants to Licensee a worldwide, non-exclusive, non-sublicensable license:

(a) under the Licensed Intellectual Property in the Licensed Process Technology and Licensed Backend Technology, to practice any methods disclosed thereby and use any equipment at the Facility for the manufacture, sale, offer for sale, or disposal by Licensee of Licensed Products;

(b) under the Licensed Intellectual Property in the Licensed PDKs, to copy, create derivative works of, distribute, and disclose (under a non-disclosure agreement at least as protective as the non-disclosure and security requirements of this Agreement) the Licensed PDKs to Licensee’s third-party customers, to the minimum extent required, for the sole purpose of permitting such customers to design, or have designed, integrated circuits for use, sale and manufacture by Licensee at the Facility using the Licensed Process Technology as permitted in Section 2.1(a);

 

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(c) under the Licensed Intellectual Property in the Licensed Semiconductor Technology, to disclose (under a non-disclosure agreement at least as protective as the non-disclosure and security requirements of this Agreement) the Licensed Semiconductor Technology with the Licensed PDKs to Licensee’s third-party customers, to the minimum extent required, for the sole purpose of permitting such customers to design, or have designed, integrated circuits for use, sale and manufacture by Licensee at the Facility using the Licensed Process Technology as permitted in Section 2.1(a);

(d) under the Intellectual Property Rights of Licensor in the Licensed Improvements made by Licensee, to make such Licensed Improvements, and practice any methods disclosed thereby, for use as permitted in Section 2.1(a);

(e) under the Licensed Intellectual Property in the Licensed Technical Information, to use, copy, and prepare derivative works based on the Licensed Technical Information for use solely to exercise Licensee’s license rights set forth in Section 2.1(a); and

(f) under the Licensed Intellectual Property Rights in the Licensed Background Technology, to use the Licensed Background Technology at the Facility for the manufacture, sale, offer for sale, or disposal by Licensee of Licensed Products using the Licensed Process Technology as permitted in Section 2.1(a) or otherwise as necessary to exercise the other rights expressly granted to Licensee under this Agreement.

2.2 New PDK and Miscellaneous Technology License Grants.    

(a) Licensor shall include with the Licensed Technology certain legacy PDKs and certain process specifications as described on Exhibit B-2 (together, the “Legacy PDK Technology”) to enable the Licensee to undertake to develop, or have developed (subject to Section 3.3 below), certain new PDKs (the “New PDKs”) for use by Licensee in providing foundry services to third parties. Accordingly, Licensor hereby grants to Licensee, under Licensor’s Intellectual Property Rights in such Legacy PDK Technology, a perpetual, non-exclusive, non-transferable (except as permitted under Section 9.4), royalty-free, non-sublicensable license to, copy, create derivative works of, and disclose (under a non-disclosure agreement at least as protective as the non-disclosure and security requirements of this Agreement) the Legacy PDK Technology for the purpose of developing or having developed the New PDK and to distribute and disclose (under a non-disclosure agreement at least as protective as the non-disclosure and security requirements of this Agreement) the New PDKs to Licensee’s third-party customers, to the minimum extent required, for the sole purpose of permitting such customers to design, or have designed, integrated circuits for manufacture by Licensee at the Facility using the Licensed Process Technology as permitted in Section 2.1(a).

(b) Licensor hereby grants to Licensee, under Licensor’s Intellectual Property Rights in the Miscellaneous Technology and on an as-is basis without any warranty of any kind, a perpetual, non-exclusive, non-transferable (except as permitted under Section 9.4), royalty-free, non-sublicensable license to use the Miscellaneous Technology at the Facility in accordance with any applicable documentation made available by Licensor for the manufacture, sale, offer for sale, or disposal by Licensee of Licensed Products using the Licensed Process Technology as permitted in Section 2.1(a).

 

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2.3 Royalty Bearing Products. Licensee’s license to the Royalty Bearing Licensed Process Technology (the “Royalty Bearing License”) shall be royalty bearing and Licensee shall pay the Royalties specified in Section 4 on all Royalty Bearing Products manufactured or sold by it. No other Licensed Products shall be Royalty Bearing Products hereunder. Licensee’s license to the Licensed Technology other than the Royalty Bearing Licensed Process Technology (the “Royalty Free License”) shall be royalty free.

2.4 Limitations and Scope.

(a) For one (1) year following the Effective Date (the “Terminable Period”), the Royalty Free License shall be terminable (as set forth Section 8), non-transferable (except as permitted under Section 9.4) and non-sublicensable. Following the end of the Terminable Period, Licensee’s Royalty Free License shall become perpetual, irrevocable and non-terminable.

(b) Licensee’s Royalty Bearing License shall be non-sublicensable and non-transferable (except as permitted under Section 9.4).

(c) The Licensed Process Technology and the Licensed Backend Technology may be used by Licensee only at the Facility and may not be transferred to, or used in, any other facility.

(d) The Parties acknowledge and agree that nothing contained in this Agreement shall be construed as:

(i) an agreement by Licensor to bring or prosecute actions or suits against third parties for infringement of Intellectual Property Rights or any other right, or conferring any right upon Licensee to bring or prosecute actions or suits against third parties for infringement of Intellectual Property Rights or any other right;

(ii) conferring on Licensee any right to use in advertising, publicity or otherwise any Licensor trademark, trade name or names, or any contraction or abbreviation thereof; or

(iii) an obligation upon Licensor to furnish any technical information or know-how except as otherwise specifically provided herein.

(e) Notwithstanding the provisions of Section 2.1 (Licensor License Grant), no license to any Excluded Technology is granted or implied hereunder, and Licensor shall retain the right to assert its rights under any Licensor Intellectual Property Rights against any Licensee or any third party with respect to infringement of Licensor’s Intellectual Property Rights by any Excluded Technology.

 

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(f) Licensor does not confer on Licensee or any third party, by implication, estoppel or otherwise, any license or other right, except for the licenses and rights expressly granted hereunder to Licensee.

2.5 Covenant Not to Exceed License. Licensee covenants that Licensee shall not exceed the scope of the foregoing licenses. For the avoidance of doubt and notwithstanding anything to the contrary, (i) the Parties acknowledge and agree that no license is granted (expressly, by implication, by estoppel, or otherwise) under this Agreement with respect to the Licensed Products or other products or devices of the Licensee’s customers or any designs or circuitry thereof (including those designed using the Licensed PDKs or Licensed Semiconductor Technology), (ii) Licensee agrees and acknowledges that the Licensor Products may be manufactured for, or supplied, offered for sale, or sold to, Licensor only and no other Person and Licensee shall not, and shall not permit any third Person to, otherwise use or exploit any Licensor Products, and (iii) Licensee may not make any Improvements to the ONO Stack Process.

2.6 Ownership.

(a) As between Licensor and Licensee, (i) Licensor retains and shall own all right, title and interest (including Intellectual Property Rights) in and to the Licensed Technology and the Licensor Improvements and (ii) Licensee shall own all right, title, and interest (including Intellectual Property Rights) in and to the Licensee Improvements and the New PDK (subject to Licensor’s retained rights in the Legacy PDK Technology). Without any further consideration, Licensee hereby irrevocably transfers, conveys, and assigns to Licensor in perpetuity (and shall continue to irrevocably transfer, convey, and assign to Licensor in perpetuity) all of its right, title, and interest in and to all Licensor Improvements (existing now or during the Term of this Agreement). Licensor shall have the exclusive right to apply for Intellectual Property Rights for the Licensor Improvements as it wishes and the exclusive right to enforce such Intellectual Property Rights. Licensee agrees to execute such documents, render such assistance, and take such other action as Licensor may reasonably request, at Licensor’s expense, to apply for, register, perfect, confirm, and protect Licensor’s rights in the Licensor Improvements. Licensor reserves all rights not explicitly granted in this Agreement.

(b) Licensee hereby grants to Licensor to a perpetual, irrevocable, non-exclusive, transferable, royalty-free, fully paid-up, worldwide, sublicensable license to use, modify, or reproduce, in whole or in part, the Licensee Improvements to make, have made, use, sell, offer for sale, import, and distribute semiconductor devices.

(c) During the Term, Licensee shall deliver to Licensor, without additional compensation, information, data and materials relating to, necessary for, describing and/or relating to Improvements made by Licensee in the form in which such information, data and materials then exist, at meetings scheduled by Licensor and Licensee at a mutually agreed time at the Facility no more frequently than once each calendar quarter, it being agreed and acknowledged that Licensee shall have no obligation to specially prepare additional materials describing such Improvements that are not in Licensee’s possession. All such information, data and materials relating to Licensee Improvements shall be considered to be Licensee’s confidential information and shall be treated in the same manner by Licensor as Licensee is required to treat Licensor’s Confidential Information under Section 7 of this Agreement.

 

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2.7 Delivery; Additional Technology. The Parties expect all material embodiments of the Licensed Technology to be at the Facility as of the Closing Date. To the extent that any such material embodiments of the Licensed Technology other than Licensed Background Technology are not at the Facility as of the Closing Date, upon written notice from Licensee, Licensor will deliver them to Licensee in accordance with Section 5.2(f) of the SPA. Notwithstanding anything to the contrary, Licensor has no obligation to deliver or make available any Licensed Background Technology to Licensee under the terms of this Agreement; provided, however, that, upon Licensee’s request, Licensor shall use reasonable efforts to provide to Licensee the technical information with respect to such Licensed Background Technology that exists, and is in Licensor’s possession, as of the Closing Date. To the extent that Licensee wishes to license from Licensor any Technology for which the Intellectual Property Rights are owned by Licensor (other than the Licensed Technology), then upon written notice from Licensee, the Parties will negotiate in good faith a separate license agreement therefor.

3. Implementation of Licensed Process Technology

3.1 Responsibility for Implementation. Licensee shall be solely responsible for the implementation of the Licensed Process Technology and Licensed Backend Technology in the Facility; provided, however, that the Parties may agree for Licensor to provide services to Licensee such as transition services, and Licensor’s obligation to provide any such services shall then be limited to those expressly required in a signed, written agreement for such services (including the Transition Services Agreement (as defined in the SPA)). Upon Licensee’s written request, Licensor will provide reasonable assistance to Licensee in its efforts to (i) transfer the Licensed PDK packages from Licensor’s interlocked CAD tools to stand alone kits for use by Licensee’s third-party customers as permitted in Section 2.1(b) and (ii) convert the Licensed Semiconductor Technology to standalone documents without links to Licensor’s memos or databases for use by Licensee as permitted in Section 2.1(c). Other than as set forth in Section 2.7, Licensor has no obligation to deliver any technical information under this Agreement that is not already being used in the Facility at the Closing. In the event that Licensor does deliver any technical information, Licensee shall bear its own costs, including reproduction, shipping and handling, and telecommunications costs associated with or incurred in the delivery or receipt of any technical information hereunder. For clarity, Licensor shall deliver the specifications identified in the Exhibits to Licensee in electronic form.

3.2 Copies. Licensee may copy, modify and otherwise use the Licensed Technical Information in accordance with and subject to the restrictions and licenses set forth herein (including the obligations under Sections 6 and 7) solely as necessary to exercise the rights granted hereunder. Licensee agrees to maintain a document control system after the time frame covered by corresponding services therefor, if any, under the Transition Services Agreement to control copies of such Licensed Technical Information and to otherwise treat such information as Licensor’s Confidential Information.

 

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3.3 New PDK Development. Licensee shall be solely responsible for the development of the New PDK. Notwithstanding the foregoing, if Licensee engages a third party developer to develop the New PDK, Licensor will reimburse Licensee for up to $150,000.00 of reasonable and customary out-of-pocket development costs incurred by Licensee and paid within 12-months from the date of this Agreement. Licensor will reimburse Licensee for such costs within forty-five (45) days of receiving an invoice detailing such costs and evidence that they have been paid by Licensee.

4. Compensation

4.1 Royalty Rate. The “Royalty Rate” is payable as a percentage of Sales Revenue and shall be as set forth in the following table:

 

Year 1

Year 2

Year 3 and beyond

Royalty Rate

[***]

[***]

[***]

4.2 Year. The Royalty Rate is applicable to sales made in each consecutive 52-week period during the Term, with Year 1 for each Royalty Bearing Licensed Process Technology commencing on the date a corresponding Royalty Bearing Product is first sold (each, a “Year”).

4.3 Royalty Payments.

(a) Within forty-five (45) days after the last day of each quarter of each Year, Licensee shall pay to Licensor a royalty equal to the product of (i) the Royalty Rate and (ii) Sales Revenue (the “Royalty”).

(b) A Royalty Bearing Product shall be considered “sold” on the first to occur of (i) Licensee receiving payment for such Royalty Bearing Product, (ii) a third party being billed or invoiced for such Royalty Bearing Product, or (iii) such Royalty Bearing Product being shipped regardless of actual receipt of payment.

(c) Licensee shall provide Licensor with a written royalty statement in a form reasonably acceptable to Licensor. At a minimum, such royalty statement shall recite per country the Royalty Bearing Products, units sold, description, quantity shipped, gross invoice, total amount billed customers (including taxes, packing, freight and all other charges), and calculated Sales Revenue for each Royalty Bearing Product and Sales Revenue by process technology category. Such statement shall be furnished to Licensor within fifteen (15) days after the last day of each quarter, regardless of whether any Royalty Bearing Products were sold during the quarter or whether any actual Royalty was owed.

 

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4.4 Form of Payment. All payments provided for in this Section 4 (Compensation) shall be made to Licensor in U.S. dollars by electronic transfer to an account designated by Licensor in writing.

4.5 Taxes. All payments provided for in this Section 4 (Compensation) shall be made by Licensee without deduction for value added, sales or other taxes or other withholdings. To the extent that Licensee is required to withhold such payments from such Royalties by law, it shall gross up the amounts paid hereunder to be equal to what they would have been absent such taxes or withholdings. Licensee shall provide to Licensor proof of payment in a form satisfactory to Licensor of the amount of any taxes paid by Licensee in connection with the payments provided for in this Section 4 (Compensation). In the event that withholding taxes apply, Licensor agrees to apply for an exemption certificate from withholding taxes of the applicable jurisdiction and provide the appropriate documentation to Licensee. Further, the Parties shall cooperate, to the extent permitted by law, in recovering any taxes or other withholding paid on payments made by Licensee to Licensor hereunder.

4.6 Interest. In addition to any other remedy available to Licensor for late payment, Licensee shall pay Licensor interest, on any undisputed amount not paid when due, at the rate of [***] per month, or the maximum rate allowed by law, whichever is less, for each month, or part month, calculated from the date which the royalties are otherwise due.

4.7 Books and Records; Audit. For a period of three (3) years after sale of the respective Royalty Bearing Products, Licensee shall keep complete and accurate records appropriate to determine payments due under this Agreement. At the request and expense of Licensor, no more often than once per quarter, an independent certified public accountant designated by Licensor shall have access to such records maintained by Licensee as may be useful to: (i) determine, with respect to any of the three (3) preceding years, the correctness of any report or payment made under this Agreement; or (ii) obtain information as to the royalty payments due in the case of Licensee’s failure to report or pay such royalty pursuant to this Agreement. In the event that the dollar amount of payments reported for any quarter underreports by more than [***] the actual amount due, as determined by said accountant, Licensee shall pay to Licensor the actual payment due, including interest as set forth in Section 4.6 (Interest), and reimburse to Licensor the costs for the audit.

5. Disclaimer

5.1 No Warranties. LICENSOR MAKES NO, AND DISCLAIMS ALL, WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, UNDER THIS AGREEMENT WITH RESPECT TO ANY LICENSED PRODUCT, LICENSED PROCESS TECHNOLOGY, LICENSED PDKS, LEGACY PDK TECHNOLOGY, LICENSED SEMICONDUCTOR TECHNOLOGY, LICENSED BACKEND TECHNOLOGY, LICENSED BACKGROUND TECHNOLOGY, MISCELLANEOUS TECHNOLOGY, AND LICENSED TECHNICAL INFORMATION, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. Without limiting the

 

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foregoing, Licensor does not make any warranty under this Agreement that any Licensed Product or any Improvement or the practice of the Licensed Process Technology, Licensed PDKs, Legacy PDK Technology, Licensed Semiconductor Technology, Licensed Backend Technology, Licensed Background Technology, Miscellaneous Technology, or Licensed Technical Information shall be free from infringement of any Patent. Licensee shall be responsible for obtaining all third-party Patent licenses necessary for Licensee to exercise its rights hereunder. All warranties with respect to any of the foregoing are solely as set forth in the SPA.

5.2 Exclusion of Damages. EXCEPT FOR ANY INFRINGEMENT OR VIOLATION BY A PARTY OF THE OTHER PARTY’S INTELLECTUAL PROPERTY RIGHTS OR BREACH OF SECTIONS 2.4, 2.5, 6, OR 7, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS, OR FOR ANY INDIRECT, SPECIAL, RELIANCE, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

6. Protection of Licensed Technology. Without limiting Licensee’s obligations under Section 7, Licensee shall use its best efforts to prevent any benefit to unauthorized third parties due to Licensee’s access to the ONO Stack Process, including by taking the following steps:

(i) Licensee shall diligently safeguard the Licensed Technology with at least the same degree of care Licensee uses to protect its own confidential information of like importance, but never less than a reasonable standard of care and Licensee shall provide procedures to ensure that the ONO Stack Process is distinguishable from other Technology, information, and materials, including properly marking any and all copies of the ONO Stack Process and informing employees, contractors, and consultants of the confidential and proprietary status of such ONO Stack Process, and to maintain the confidentiality of the ONO Stack Process in the manner as described in this Section 6 and Section 7. Without limiting the foregoing, Licensee shall not remove any “confidential,” “proprietary,” or other similar marking on any of the Licensed Technology and will reproduce all such markings on any copies thereof.

(ii) Licensee shall use its best efforts to prevent the unauthorized distribution or use of, or access to, the ONO Stack Process in Licensee’s control, provided that in no event shall Licensee use less than the same procedures and standards that Licensor uses as of the Closing Date to prevent unauthorized distribution or use of, or access to, the ONO Stack Process;

(iii) Licensee shall ensure that it has in place all necessary contracts with the officers, directors, agents, employees, subcontractors and/or any person who has the opportunity to access the ONO Stack Process to properly effect all the protective measures under this Agreement;

(iv) If a security compromise related to the ONO Stack Process is caused by or results primarily from the acts or omissions of Licensee, Licensee shall be responsible for responding to and containing such security compromise and shall reimburse Licensor for any and all damages and expenses incurred in connection with investigating, mitigating or defending any such security breaches; and

 

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(v) The process and manufacturing protocols and recipes (including the oxide-nitride-oxide (ONO) process recipe) (“Process Recipes”) are considered highly confidential trade secret information, critical to the Licensed Process Technology. Licensee shall keep the Process Recipes in strict confidence. Licensee may disclose Process Recipes (other than the ONO Process Recipe) solely to its employees and its temporary workers (such as those provided by a staffing agency) that are under Licensee’s direct supervision and control, and customers and suppliers solely to the extent necessary for joint technology development that Licensee and such customers engage in with respect to the Licensed Products, in each case having: (a) a need to know such Process Recipe to exercise the rights granted to Licensee under this Agreement solely on behalf of Licensee, and (b) agreed in writing to terms at least as restrictive and protective as those in this Agreement. Notwithstanding the foregoing and anything to the contrary, Licensee will only permit dedicated Licensee employees identified and approved by Licensor in advance to access the ONO Stack Process and Licensee shall ensure that each such Licensee employee with access to the ONO Stack Process executes and delivers to Licensor a Licensor-provided restricted use non-disclosure agreement prior to such access. Licensor shall have the right to review Licensee’s security procedures with respect to the ONO Stack Process and the number of wafers run in the ONO furnace.

7. Confidential Information

7.1 Definition. Licensee acknowledges that “Confidential Information” of Licensor is located at the Facility. “Confidential Information” means the Licensed Technical Information, any information relating to the Licensed Process Technology, Licensed PDKs, Legacy PDK Technology, Licensed Semiconductor Technology, Licensed Backend Technology, Licensed Background Technology, Miscellaneous Technology, or Excluded Technology (regardless of whether it is designated “Confidential”), and other information or materials designated as “Confidential” in writing by Licensor or learned by Licensee under circumstances in which such information would reasonably be understood to be confidential.

7.2 Restriction. Licensee agrees not to use Confidential Information or disclose, distribute or disseminate such Confidential Information except as allowed under this Agreement or as otherwise expressly agreed in writing by Licensor. Licensee agrees to restrict access to such Confidential Information to those employees, contractors or consultants of Licensee who have agreed to be bound by a confidentiality obligation not less protective than that contained in this Agreement. Licensee agrees to establish adequate internal safeguards and otherwise use reasonable care in restricting the use and dissemination of any Confidential Information in order to protect against its unauthorized use or disclosure to any third party. Licensee shall exercise the same degree of care to prevent unauthorized use or disclosure of the Confidential Information to others as it takes to preserve and safeguard its own confidential information, but in any event, no less than a reasonable degree of care. For clarity, nothing in this Section 7 shall limit the obligations in Section 6.

 

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7.3 Additional Obligations. Licensee shall reproduce the Licensor’s proprietary rights notices on any permitted copies of Confidential Information, in the same manner in which such notices were set forth in or on the original. Licensee agrees to maintain a document control system to control copies of any Confidential Information after the time frame covered by corresponding services therefor, if any, under the Transition Services Agreement. Confidential Information or other materials which have been disclosed by Licensor under this Agreement, and all copies thereof which are in the possession of the Licensee, shall be and remain the property of the Licensor.

7.4 Exceptions. Licensee shall be relieved of this obligation of confidentiality to the extent Licensee can demonstrate that Licensor information:

(a) was in the public domain at the time it was disclosed to Licensee or has become in the public domain through no fault of Licensee;

(b) was known to Licensee, without restriction, at the time of disclosure as shown by the files of the Licensee in existence at the time of disclosure;

(c) is disclosed by Licensee with the prior written approval of Licensor;

(d) was independently developed by Licensee without any use of Confidential Information by employees or other agents of (or independent contractors hired by) Licensee who have not had access to any Confidential Information; provided that this exception does not apply to the ONO Process Recipe; or

(e) becomes known to Licensee, without restriction, from a source other than Licensor without breach of this Agreement by Licensor and otherwise not in violation of Licensor’s rights.

7.5 Compelled Disclosure. If Licensee believes that it will be compelled by a court or other authority to disclose Confidential Information of Licensor it shall give Licensor prompt written notice so that Licensor may take steps to oppose such disclosure.

7.6 Irreparable Harm. Licensee acknowledges that breach of the confidentiality obligation would cause irreparable harm to Licensor, the extent of which may be difficult to ascertain. Accordingly, Licensee agrees that Licensor is entitled to immediate injunctive relief in the event of breach of the confidentiality obligation by Licensee, and that Licensor shall not be required to post a bond or show irreparable harm in order to obtain such injunctive relief.

7.7 Return. Within forty-five (45) days after termination of this Agreement, Licensee shall immediately cease using all Confidential Information and promptly return or destroy (at Licensor’s option) all tangible materials containing any such Confidential Information (including all copies thereof) to Licensor. Concurrently with the return or destruction of such materials, Licensee agrees to confirm in writing that all materials containing Confidential Information have been returned to Licensor or destroyed (as applicable) by Licensee.

 

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8. Term and Termination

8.1 Term. The term of this Agreement shall commence on the Effective Date and shall continue until terminated in accordance with this Section 8.2 (the “Term”).

8.2 Termination.

(a) Licensor may terminate this Agreement in the event of a material breach of this Agreement or the SPA by Acquirer or Licensee, such as the breach of the license of Sections 2 (Rights and Licenses), 4 (Compensation) or 7 (Confidential Information), which breach has not been cured within thirty (30) days of written notice thereof from Licensor to Licensee specifying the details of the breach.

(b) The Parties may mutually terminate this Agreement, in which event the future relationship of the Parties shall be determined by the Parties in writing.

(c) This Agreement may be terminated by Licensor if Licensee, (i) ceases conducting its business in the normal course; (ii) is over-indebted, unable to pay its debts when they become due, insolvent or subject to any voluntary insolvency proceedings; (iii) makes a general assignment for the benefit of its creditors; (iv) petitions, applies for, or suffers or permits with or without its consent the appointment of a custodian, receiver, trustee in bankruptcy or similar officer for all or any substantial part of its business or assets; (v) avails itself or becomes subject to any proceeding under the U.S. Bankruptcy Code or any similar state, federal or foreign statute relating to bankruptcy, insolvency, reorganization, receivership, arrangement, adjustment of debts, dissolution or liquidation; (vi) becomes subject to an application for the opening of an insolvency proceeding in relation to Licensee with the insolvency court that is not dismissed within sixty days; or (vii) suffers a material deterioration of its assets, business or financial position that endangers, or is reasonably likely to endanger, the due performance of this Agreement in all material respects by Licensee in the future. Notwithstanding Licensor’s termination rights under this Section 8.2 (Termination), Licensor may agree to continue the Royalty Bearing License granted under this Agreement (and, if during the Terminable Period, the Royalty Free License granted under this Agreement) for the sole purpose of facilitating Licensee’s completion of any work in progress under the Foundry Services Agreement. Licensor shall reasonably agree to such limited continuation of the licenses granted hereunder provided that Licensor is given adequate assurance of Licensee’s continuing compliance with the requirements of this Agreement, including the requirements regarding Confidential Information and the Royalty payments, and the SPA and the other Collateral Agreements.

 

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8.3 Change of Control. In addition to the termination events set forth in Section 8.2 (Termination), Licensor may terminate this Agreement (in its sole discretion) effective upon written notice to Licensee, in the event of a Change of Control of Acquirer or Licensee, provided that such notice is given within thirty (30) days after Licensor receives notice of such Change of Control. Licensee shall provide Licensor written notice of any proposed Change of Control within fifteen (15) days prior to the consummation thereof. Alternatively, Licensor may agree in its sole discretion to continue the Royalty Bearing License granted under this Agreement (and, if during the Terminable Period, the Royalty Free License granted under this Agreement) following a Change of Control for the limited purpose of facilitating Licensee’s completion of any work in progress under the Foundry Services Agreement. Any continuation of the licenses granted hereunder following a Change of Control shall be subject to adequate assurance of Licensee’s continuing its compliance with the requirements of this Agreement, including the requirements regarding Confidential Information and the Royalty payments, and the SPA and the other Collateral Agreements.

8.4 Effect of Termination. Upon termination of this Agreement:

(a) the Royalty Bearing License granted to the Licensee by Licensor hereunder shall terminate immediately;

(b) the Royalty Free License granted to the Licensee by the Licensor hereunder shall not terminate and shall continue, unless the Agreement is terminated during the Terminable Period, in which case the Royalty Free License shall terminate immediately;

(c) Licensee shall return to Licensor any Confidential Information as required under Section 7.7 (Return); and

(d) The following provisions of this Agreement shall survive any termination of this Agreement in accordance with the terms of such provisions: Section 2 (Rights and Licenses), Section 4 (Compensation) (with respect to any Royalty Bearing Products sold or otherwise disposed of prior to or after termination), Section 5 (Disclaimer), Section 6 (Protection of Licensed Technology), Section 7 (Confidential Information), Section 8 (Term and Termination) and Section 9 (General Terms).

9. General Terms.

9.1 Notices. Each Party giving any notice required or permitted under this Agreement will give the notice in writing, and use one of the following methods of delivery to the party to be notified, at the addresses set forth below or other addresses of which the sending party has been notified in accordance with this Section 9.1: (a) personal delivery; (b) commercial overnight courier with a reasonable method of confirming delivery; (c) pre-paid certified or registered mail, return receipt requested, or (d) electronic mail, after confirmation of receipt by return electronic mail. Notice to a Party is effective for purposes of this Agreement only if given as provided in this Section 9.1 or if the intended addressee has actually received the notice.

 

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If to Licensee to:

Cypress Semiconductor (Minnesota) Inc.

2401 East 86th Street

Bloomington, MN 55425

Attention: Bart Zibrowski

E-mail: *****

with a copy (which shall not constitute notice) to:

Fredrikson & Byron, P.A.

200 South Sixth Street, Suite 4000

Minneapolis, Minnesota 55402

Attention: Simon C. Root and Sean P. Kearney

E-mail: [email protected] and [email protected]

If to Licensor to:

Cypress Semiconductor Corporation

198 Champion Court

San Jose, CA 95134

Attention: General Counsel, MS 6.1

E-mail: *****

with a copy to (which shall not constitute notice):

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Attention: Selwyn B. Goldberg, Esq.

Michael Ringler, Esq.

Telecopy: (650) 493-6811

Email: [email protected]

9.2 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

9.3 Entire Agreement. This Agreement constitutes the entire agreement of the Parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements, covenants, representations, warranties, undertakings and understandings, written or oral, among the Parties hereto with respect to the subject matter hereof.

 

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9.4 Assignment. Licensor may assign either this Agreement or any of its rights, interests, or obligations hereunder to any third party or an Affiliate without the prior written approval of Licensee; provided that any such assignment shall not limit the licenses granted hereunder. Licensee shall not assign or purport to assign this Agreement, or any of its rights, interests, or obligations hereunder, by operation of law or otherwise (including through a merger, acquisition, sale of assets or stock, consolidation, or change of control which shall be deemed a purported assignment), without the express written consent of Licensor, provided, however, that in the event of a Change of Control of Licensee after the Terminable Period, the Royalty Free License shall survive any termination of this Agreement pursuant to Section 8.3. Any assignment in breach of the foregoing shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

9.5 No Third Party Beneficiaries. This Agreement is not intended to confer any rights or remedies hereunder to any other Person.

9.6 Amendment. This Agreement may not be amended, restated, supplemented or otherwise modified except by an instrument in writing signed by Licensor and Licensee.

9.7 Governing Law and Jurisdiction.    

(a) Governing Law. This Agreement and any dispute arising out of or in connection with this Agreement (“Dispute”) will be governed as to all matters, including, but not limited to the validity, construction and performance of this Agreement, by and under the laws of the State of Delaware, without giving effect to conflicts of law principles thereof.

(b) Jurisdiction. Each of the Parties irrevocably submits to the jurisdiction of any Delaware state court, or federal court of the United States of America sitting in Delaware, in connection with any Dispute arising out of or relating hereto or the transactions contemplated hereby, and hereby irrevocably agrees that all claims in respect of such Legal Proceeding shall be heard and determined in such state or federal court. Each of the Parties hereby irrevocably waives (and agrees not to plead or claim) any objection to the laying of venue of any Legal Proceeding arising out of or relating hereto or the transactions contemplated thereby in any state or federal court located in the state of Delaware, and the defense of an inconvenient forum to the maintenance of such action or proceeding. The Parties further agree, to the fullest extent permitted by Law, that final and non-appealable judgment against any of them in any Legal Proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified copy of which shall be conclusive evidence of the fact and amount of such judgment. Each of the Parties agrees that service of process, summons, notice or document by U.S. registered mail to such person in accordance with Section 9.1 shall be effective service of process for any Legal Proceeding with respect to any matters to which it has submitted to jurisdiction pursuant to this Section 9.7.

 

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9.8 Counterparts and Facsimile Signature. This Agreement may be executed in one or more counterparts, and by the different Parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. This Agreement may be executed by facsimile signature.

9.9 Construction. All references in this Agreement to “Articles,” “Sections” and “Exhibits” refer to the articles, sections and exhibits of this Agreement. As used in this Agreement, neutral pronouns and any variations thereof shall be deemed to include the feminine and masculine and all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words “hereof,” “herein” and “hereunder” and other words of similar import refer to this Agreement as a whole, as the same may from time to time be amended or supplemented in accordance herewith, and not to any subdivision contained in this Agreement. The word “including” when used herein is not intended to be exclusive and means “including, without limitation.”

[Remainder of page left intentionally blank, signature blocks appear on next page]

 

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IN WITNESS WHEREOF, and intending to be legally bound hereby, Licensor and Licensee have caused their duly authorized representatives to execute this Agreement.

 

CYPRESS SEMICONDUCTOR CORPORATION						CYPRESS SEMICONDUCTOR (MINNESOTA) INC.
By:		/s/ Thad Trent				By:		/s/ Thad Trent
Name:		Thad Trent				Name:		Thad Trent
Title:		EVP, Finance & Administration and Chief Financial Officer				Title:		Vice President and Chief Financial Officer
Date:		March 1, 2017				Date:		March 1, 2017

[Signature Page to Technology License Agreement]

Exhibit 10.7

Amendment No. 1

to the

Process Technology License Agreement

between

Cypress Semiconductor Corporation

and

SkyWater Technology Foundry, Inc. (f/k/a Cypress Semiconductor (Minnesota) Inc.)

This Amendment Number 1 (“Amendment”) to the Process Technology License Agreement by and between Cypress Semiconductor Corporation (“Licensor”) and SkyWater Technology Foundry, Inc. (f/k/a/ Cypress Semiconductor (Minnesota) Inc.) (“Licensee”), dated March 1, 2017 (“Agreement”) will become effective on the Amendment Effective Date, defined below.

Background: The parties wish to make certain modifications to the Agreement to help ensure continuity of supply by Licensee to the United States Government.

The parties agree as follows:

1. Assignment. Notwithstanding the first sentence of Section 9.4 of the Agreement, Licensor agrees that it will not, without Licensee’s prior written consent, assign the Agreement or any of Licensor’s rights, interests, or obligations under the Agreement, to any legal entity not organized under the laws of the United States (or, for clarity, one of its states).

 

a.

Section 9.4 of the Agreement is replaced with the following:

9.4 Assignment. Licensor may assign either this Agreement or any of its rights, interests, or obligations hereunder to any third party or an Affiliate without the prior written approval of Licensee; provided that any such assignment shall not limit the licenses granted hereunder. Licensee shall not assign this Agreement, or any of its rights, interests, or obligations hereunder, without the express written consent of Licensor, provided, however, that in the event of a Change of Control of Licensee after the Terminable Period, the Royalty Free License shall survive any termination of this Agreement pursuant to Section 8.3. Any assignment in breach of the foregoing shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

2. Termination. Notwithstanding any other provision in the Agreement, Licensor agrees that, other than in the event of an uncured failure to pay royalties, (1) Licensor will not terminate the Royalty Bearing License, and (2) if the Agreement is terminated, the Royalty Bearing License shall survive such termination subject to continued payment by Licensee of royalties.

3. New Facility. Should Licensee build or acquire an additional semiconductor fabrication facility (“New Fab”), Licensor will extend the rights and licenses granted in the Agreement to the New Fab subject to mutually agreed terms negotiated in good faith and documented in an amendment to the Agreement signed by authorized representatives of Licensee and Licensor.

4. Improvements. In order to provide Licensee ownership of Improvements made by Licensee to the Licensed Technology, Section 1.1(u) of the Agreement is replaced with the following: “(u) “Licensee Improvement” means any Improvement to the Licensed Technology made solely by Licensee, or made on behalf of Licensee, on or after March 1, 2017.” In addition, notwithstanding any licenses granted to Licensor (and without modifying or limiting such licenses), Licensor waives any right that it may have to request or compel disclosure of Improvements that are made by or on behalf of Licensee which Licensee is prohibited by Law or contract from disclosing to Licensor because they are a) related to performance of a United States Government contract or subcontract, b) export-controlled by the United States Government or related to export-controlled products, c) CUI (Controlled Unclassified Information), CDI (Critical Defense Information), FOUO (For Official Use Only – by the United States Government), or restricted by any other instruction or regulation of the United States Government, d) subject to classification and protection as described in the NISPOM (National Industrial Security Procedures

 

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Operating Manual), or e) related to performance in support of a United States Government contractor or subcontractor. “Law” means any U.S. federal, state, local, municipal, foreign or other law (including common law), statute, constitution, ordinance, code, rule, regulation or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority. “Governmental Authority” means any governmental, quasi-governmental or regulatory authority, agency, court, commission or other governmental or judicial body, in each case, whether foreign or domestic, of any country, nation, republic, federation, union or similar entity or any state, county, parish or municipality, jurisdiction or other political subdivision thereof.

5. PDKs. In order to remove certain restrictions related to PDKs (process design kits):

 

a.

Section 2.1(b) is replaced with the following: “(b) under the Licensed Intellectual Property in the Licensed PDKs, to copy, create derivative works of, distribute, and disclose (under a non-disclosure agreement at least as protective as Licensee’s standard non-disclosure agreement) the Licensed PDKs to Licensee’s third-party customers, for purposes related to Licensee’s business at the Facility or a New Fab”

 

b.

Section 2.2(a) is replaced with the following “(a) Licensor shall include with the Licensed Technology certain legacy PDKs and certain process specifications as described on Exhibit B-2 (together, the “Legacy PDK Technology”) to enable the Licensee to undertake to develop, or have developed (subject to Section 3.3 below), certain new PDKs (the “New PDKs”) for use by Licensee in providing foundry services to third parties. Accordingly, Licensor hereby grants to Licensee, under Licensor’s Intellectual Property Rights in such Legacy PDK Technology, a perpetual, non-exclusive, non-transferable (except as permitted under Section 9.4), royalty-free, non-sublicensable license to, copy, create derivative works of, and disclose (under a non-disclosure agreement at least as protective as the nondisclosure and security requirements of this Agreement) the Legacy PDK Technology for the purpose of developing or having developed the New PDK and to distribute and disclose (under a non-disclosure agreement at least as protective as Licensee’s standard non-disclosure agreement) the New PDKs to Licensee’s third-party customers, for purposes related to Licensee’s business at the Facility or New Fab.”

6. Amendment Effective Date. Cypress entered into an Agreement and Plan of Merger with Infineon Technologies AG (“Infineon”), dated June 3, 2019 (as amended or modified from time to time, the “Merger Agreement”) pursuant to which, among other things, a wholly-owned subsidiary of Infineon will merge with and into Cypress, with Cypress surviving as a wholly-owned subsidiary of Infine on (the “Merger”). This Amendment will become effective upon the completion of the Merger contemplated by the Merger Agreement (the “Amendment Effective Date”). Should the Amendment Effective Date not occur by October 3, 2020, this Amendment shall be null and void.

7. Defined Terms. Capitalized terms not defined in this Amendment shall have the meanings given to them in the Agreement.

8. No Other Changes. Except as specified in this Amendment, the Agreement remains unchanged and in full force and effect.

9. Counterparts. This Amendment may be executed in two or more counterparts, all of which, taken together, shall be regarded as one and the same instrument.

[Remainder of Page Intentionally Blank; Signature Page Follows]

 

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Cypress Semiconductor Corporation				SkyWater Technology Foundry, Inc.
Signature:		/s/ Marc Field		Signature:		/s/ Thomas Sonderman
Name:		Marc Field		Name:		Thomas Sonderman
Title:		Vice President and Deputy General Counsel		Title:		President
Date:		Mar 19, 2020		Date:		Mar 13, 2020

 

		Page 3 of 3

[***] CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL.

Exhibit 10.7.1

Amendment No. 2

to the

Process Technology License Agreement

between

Cypress Semiconductor Corporation

and

SkyWater Technology Foundry, Inc. (f/k/a Cypress Semiconductor (Minnesota) Inc.)

This Amendment Number 2 (“Amendment”) to the Process Technology License Agreement by and between Cypress Semiconductor Corporation (“Licensor”) and SkyWater Technology Foundry, Inc. (f/k/a/ Cypress Semiconductor (Minnesota) Inc.) (“Licensee”), dated March 1, 2017 (“Agreement”) is effective as of April 16, 2020.

WHEREAS the parties wish to expand the license rights previously granted to Licensee in certain technology so that Licensee may create an open source Process Design Kit (“PDK”) that is published on an “open source” basis, i.e., without the requirement that the recipient enter into a non-disclosure agreement, and publishing such a PDK to open source gives the recipient the right to fully utilize the PDK and create derivative works.

Now therefore, the parties agree as follows:

1. Payment. Licensee will remit a payment of $[***] USD to Licensor no later than March 31, 2021, and another identical payment of $[***] USD no later than June 30, 2021.

2. Additional License Grant. Licensor hereby grants Licensee the following additional rights with respect to the Open Source PDK Technology (defined in Attachment A): Licensor grants Licensee a worldwide, non-exclusive, license under the Licensed Intellectual Property in the Open Source PDK Technology, to fully utilize and copy, create derivative works of, distribute, and disclose to third-parties (with or without a non-disclosure agreement) the Open Source PDK Technology as part of one or more Licensee PDKs for such third parties to use the Open Source PDK Technology as incorporated into the Licensee PDKs in their business including to create, use, and publish derivative works.

3. For the sake of clarity, this License does not include the following Cypress-developed IP: a) ONO stack in the SONOS device, b) SONOS flash macro design, or c) any Royalty-Bearing Licensed Process Technology.

4. Defined Terms. Capitalized terms not defined in this Amendment shall have the meanings given to them in the Agreement.

5. No Other Changes. Except as specified in this Amendment, the Agreement remains unchanged and in full force and effect.

6. Counterparts. This Amendment may be executed in two or more counterparts, all of which, taken together, shall be regarded as one and the same instrument.

 

Cypress Semiconductor Corporation						SkyWater Technology Foundry Inc.
Signature:		/s/ Sam Geha				Signature:		/s/ Thomas Sonderman
Name:		Sam Geha				Name:		Thomas Sonderman
Title:		Executive Vice President				Title:		CEO
Date:		Dec 16, 2020				Date:		Dec 16, 2020

Exhibit 10.22

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”) is made as of the                day of                , 2021 by and between SkyWater Technology, Inc., a Delaware corporation, (the “Company”) and                  (the “Indemnitee”). This Agreement supersedes and replaces any and all previous Agreements between the Company and Indemnitee covering the subject matter of this Agreement.

RECITALS

A. The Company’s board of directors (the “Board”) has determined that the increasing difficulty in attracting and retaining qualified persons as directors and officers is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be adequate certainty of protection through insurance and indemnification against risks of claims and actions against them arising out of their service to and activities on behalf of the Company.

B. Section 145 of the General Corporation Law of the State of Delaware (the “DGCL”) empowers the Company by agreement to indemnify and advance expenses to its officers, directors, employees and agents and to indemnify and advance expenses to persons who serve, at the request of the Company, as directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification and advancement of expenses provided by Section 145 is not exclusive.

C. The Company has adopted provisions in its Certificate of Incorporation and Bylaws providing for mandatory indemnification of its officers and directors to the fullest extent permitted by applicable law, subject to certain limitations specified in the Certificate of Incorporation and Bylaws, and the Company wishes to clarify and enhance the rights and obligations of the Company and the Indemnitee with respect to indemnification.

D. To induce and encourage highly experienced and capable persons such as the Indemnitee to serve and continue to serve as directors and officers of the Company and in other capacities with respect to the Company and its affiliates, and to otherwise promote the desirable end that such persons will resist what they consider unjustified lawsuits and claims made against them in connection with the good faith performance of their duties to the Company, with the knowledge that certain costs, judgments, liabilities and expenses incurred by them in their defense of such litigation are to be borne by the Company, the Board has determined that this Agreement is reasonable and prudent to promote and ensure the best interests of the Company and its stockholders.

AGREEMENT

NOW, THEREFORE, in consideration of the Indemnitee’s service as a director or officer of the Company, or service at the Company’s request as a director, officer, employee or agent of other corporations or enterprises, after the date hereof, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties to this Agreement, intending to be legally bound, agree as follows:

1. Service by Indemnitee. The Indemnitee will serve and/or continue to serve as a director or officer of the Company faithfully and to the best of the Indemnitee’s ability so long as the Indemnitee is duly elected or appointed and until such time as the Indemnitee is removed, terminated or resigns.

2. Indemnification.

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(a) General. The Company shall indemnify the Indemnitee (i) as provided in this Agreement and (ii) subject to the provisions of this Agreement, to the fullest extent and in a manner permitted by applicable law, as such may be amended from time to time.

(b) Proceedings Other Than Proceedings by or in the Right of the Company. Except as provided in Section 4, the Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(b) if, by reason of the Indemnitee’s Corporate Status, the Indemnitee is or was, or is or was threatened to be made, a party to, or is or was otherwise involved in, a Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Indemnitee shall be indemnified pursuant to and in accordance with this Section 2(b) against all Losses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with such a Proceeding or any claim, issue or matter therein, but only if the Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful.

(c) Proceedings by or in the Right of the Company. Except as provided in Section 4, the Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(c) if, by reason of the Indemnitee’s Corporate Status, the Indemnitee is or was, or is or was threatened to be made, a party to, or is or was otherwise involved in, a Proceeding brought by or in the right of the Company to procure a judgment in its favor. The Indemnitee shall be indemnified pursuant to and in accordance with this Section 2(c) against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such a Proceeding, but only if the Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that no indemnification for such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which the Indemnitee shall have been adjudged to be liable to the Company, except to the extent (and only to the extent) that the Court of Chancery of the State of Delaware (the “Delaware Chancery Court”) or the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses that the Delaware Chancery Court or such other court shall deem proper.

(d) Indemnification for Expenses if Indemnitee is Wholly or Partly Successful. Notwithstanding anything to the contrary in this Agreement, to the extent that the Indemnitee, by reason of the Indemnitee’s Corporate Status, is or was, or is or was threatened to be made, a party to any Proceeding and is successful, on the merits or otherwise, in defending such Proceeding (including dismissal without prejudice), the Indemnitee shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with the defense of such Proceeding. If the Indemnitee is not wholly successful in defending any such Proceeding but is successful, on the merits or otherwise, in defending one or more but less than all of the claims, issues or matters in such Proceeding (including dismissal without prejudice of certain claims), the Company shall indemnify the Indemnitee against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in defending each such successfully resolved claim, issue or matter. To the extent the Indemnitee has been successful, on the merits or otherwise, in defending any Proceeding, or in defending any claim, issue or matter therein, the Indemnitee shall be entitled to indemnification as provided in this Section 2(d) regardless of whether the Indemnitee met the standards of conduct set forth in Sections 2(b) and 2(c).

 

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(e) Indemnification for Expenses as a Witness. Notwithstanding anything to the contrary in this Agreement, to the fullest extent permitted by applicable law, to the extent that the Indemnitee, by reason of the Indemnitee’s Corporate Status, is or was, or is or was threatened to be made, a witness or otherwise asked to participate in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection therewith. To the extent permitted by applicable law, the Indemnitee shall be entitled to indemnification for Expenses incurred in connection with being, or being threatened to be made, a witness, as provided in this Section 2(e), regardless of whether the Indemnitee met the standards of conduct set forth in Sections 2(b) and 2(c).

(f) Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some portion of the Losses actually and reasonably incurred by the Indemnitee in a Proceeding, but not for the total amount thereof, the Company shall indemnify the Indemnitee for the portion of such Losses to which the Indemnitee is entitled.

3. Advancement of Expenses. Notwithstanding anything to the contrary in this Agreement, but subject to Section 4, if, by reason of the Indemnitee’s Corporate Status, the Indemnitee is or was, or is or was threatened to be made, a party to, is or was otherwise involved in, or is or was, or is or was threatened to be made, a witness in any Proceeding (including a Proceeding brought by or in the right of the Company to procure a judgment in its favor), then the Company shall advance all Expenses actually and reasonably incurred by or on behalf of the Indemnitee in connection with any such Proceeding in advance of the final disposition of such Proceeding within twenty (20) calendar days after the receipt by the Company of a written request for such advance or advances from time to time. Such written request shall include or be accompanied by a statement or statements reasonably evidencing the Expenses incurred by or on behalf of the Indemnitee and for which advancement is requested. The Indemnitee hereby undertakes to repay to the Company any advances of Expenses pursuant to this Section 3 if and to the extent that it shall ultimately be determined by final judicial decision from which there is no further right to appeal that the Indemnitee is not entitled to be indemnified against such Expenses under this Agreement or otherwise. Any advances and undertakings to repay pursuant to this Section 3 shall be unsecured and interest free. The Indemnitee shall be entitled to advancement of Expenses as provided in this Section 3 regardless of any determination by or on behalf of the Company that the Indemnitee has not met the standards of conduct set forth in Sections 2(b) and 2(c).

4. Proceedings Against the Company; Certain Securities Laws Claims.

(a) Notwithstanding anything to the contrary in Section 2 or Section 3, except as provided in Section 7(d), with respect to a Proceeding initiated against the Company by the Indemnitee (whether initiated by the Indemnitee in or by reason of such person’s capacity as an officer or director of the Company or in or by reason of any other capacity, including as an employee or agent of the Company or a director, officer, employee or agent of Another Enterprise), the Company shall not be required to indemnify or advance Expenses to the Indemnitee in connection with prosecuting such Proceeding (or any part thereof) or in defending any counterclaim, cross-claim, affirmative defense or like claim of the Company in such Proceeding (or any part thereof) unless such Proceeding was authorized by the Board. For purposes of this Section 4, a compulsory counterclaim by the Indemnitee against the Company in connection with a Proceeding initiated against the Indemnitee by the Company shall not be considered a Proceeding (or part thereof) initiated against the Company by the Indemnitee, and the Indemnitee shall have all rights of indemnification and advancement with respect to any such compulsory counterclaim in accordance with and subject to the terms of this Agreement.

(b) Notwithstanding anything to the contrary in Section 2 (other than Section 2(d)) or Section 3, except as provided in Section 2(d) with respect to indemnification of Expenses in connection with whole or partial success on the merits or otherwise in defending any Proceeding, the Company shall not be required to indemnify the Indemnitee in connection with any claim made against the Indemnitee for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by the Indemnitee of

 

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securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or similar provisions of state statutory law or common law or, (ii) any reimbursement of the Company by the Indemnitee for any bonus or other incentive-based or equity-based compensation or for any profits realized by the Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by the Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act) or (iii) any reimbursement of the Company by the Indemnitee of any compensation pursuant to any compensation recoupment or clawback policy adopted by the Board or the compensation committee of the Board, including, but not limited to, any such policy adopted to comply with stock exchange listing requirements implementing Section 10D of the Exchange Act.

(c) Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Claim made against the Indemnitee for which payment has actually been made to or on behalf of the Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess Losses beyond the amount paid under any insurance policy or other indemnity provision.

5. Procedure for Determination of Entitlement to Indemnification; Independent Counsel.

(a) To obtain indemnification under this Agreement, the Indemnitee shall submit to the Company (following the final disposition of the applicable Proceeding) a written request for indemnification, including therein or therewith, except to the extent previously provided to the Company in connection with a request or requests for advancement pursuant to Section 3, (i) a statement or statements reasonably evidencing all Losses incurred or paid by or on behalf of the Indemnitee and for which indemnification is requested, and (ii) such documentation and other information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to such indemnification. The written request to the Company shall include a description of the nature of the Proceeding and the facts underlying the Proceeding. The omission by the Indemnitee to notify the Company hereunder will not relieve the Company from any liability which it may have to the Indemnitee hereunder or otherwise, and any delay in so notifying the Company shall not constitute a waiver by the Indemnitee of any rights under this Agreement.. The Secretary of the Company (or other responsible officer) shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification.

(b) Upon written request by the Indemnitee for indemnification pursuant to the first sentence of Section 5(a), if required by applicable law and to the extent not otherwise provided in Section 2(d) of this Agreement, a determination with respect to the Indemnitee’s entitlement to indemnification shall be made in the specific case as follows: (i) if a Change in Control shall have occurred and if so requested in writing by the Indemnitee, by Independent Counsel in a written opinion to the Board; or (ii) if a Change in Control shall not have occurred (or if a Change in Control shall have occurred but the Indemnitee shall not have requested that indemnification be determined by Independent Counsel as provided in clause (i) of this Section 5(b)), (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors, or if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board or (D) by the Company’s stockholders in accordance with applicable law. Notice in writing of any determination as to the Indemnitee’s entitlement to indemnification shall be delivered to the Indemnitee promptly after such determination is made, and if such determination of entitlement to indemnification has been made by Independent Counsel in a written opinion to the Board,

 

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then such notice shall be accompanied by a copy of such written opinion. If it is determined that the Indemnitee is entitled to indemnification, then payment to the Indemnitee of all amounts to which the Indemnitee is determined to be entitled shall be made within twenty (20) calendar days after such determination. If it is determined that the Indemnitee is not entitled to indemnification, then the written notice to the Indemnitee (or, if such determination has been made by Independent Counsel in a written opinion, the copy of such written opinion delivered to the Indemnitee) shall disclose the basis of such determination. The Indemnitee shall cooperate with the person, persons or entity making the determination with respect to the Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within twenty (20) calendar days of such request, accompanied by supporting documentation for specific expenses to be reimbursed or advanced, any and all costs and expenses (including attorneys’ and experts’ fees and expenses) incurred by Indemnitee in so cooperating with the person making such determination.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5(b), the Independent Counsel shall be selected as provided in this Section 5(c). If a Change in Control shall not have occurred (or if a Change in Control shall have occurred but the Indemnitee shall not have requested that indemnification be determined by Independent Counsel as provided in clause (i) of Section 5(b)), then the Independent Counsel shall be selected by the Board, and the Company shall give written notice to the Indemnitee advising the Indemnitee of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred and the Indemnitee shall have requested that indemnification be determined by Independent Counsel, then the Independent Counsel shall be selected by the Indemnitee (unless the Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and the Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, the Indemnitee or the Company, as the case may be, may, within ten (10) calendar days after such written notice of selection has been given, deliver to the Company or to the Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the law firm or person so selected does not meet the requirements of “Independent Counsel” as defined in Section 23, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the law firm or person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, (i) the law firm or person so selected may not serve as Independent Counsel unless and until such objection is withdrawn or the Delaware Chancery Court or another court of competent jurisdiction in the State of Delaware has determined that such objection is without merit. If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5(b) and, following the expiration of twenty (20) calendar days after submission by the Indemnitee of a written request for indemnification pursuant to Section 5(a), Independent Counsel shall not have been selected, or an objection thereto has been made and not withdrawn, then either the Company or the Indemnitee may petition the Delaware Chancery Court or other court of competent jurisdiction in the State of Delaware for resolution of any objection that shall have been made by the Company or the Indemnitee to the other’s selection of Independent Counsel and/or for appointment as Independent Counsel of a law firm or person selected by such court (or selected by such person as the court shall designate), and the law firm or person with respect to whom all objections are so resolved or the law firm or person so appointed shall act as Independent Counsel under Section 5(b). Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 7(a), Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5(b), then the Company agrees to pay the reasonable fees and expenses of such Independent Counsel and to fully indemnify and hold harmless such Independent Counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

 

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6. Burden of Proof, Defenses and Presumptions.

(a) In any judicial proceeding or arbitration pursuant to Section 7 brought by the Indemnitee to enforce rights to indemnification or an advancement of expenses hereunder, or in any action, suit or proceeding brought by the Company to recover an advancement of expenses (whether pursuant to the terms of an undertaking or otherwise), the burden shall be on the Company to prove that the Indemnitee is not entitled to be indemnified, or to such an advancement of expenses, as the case may be.

(b) It shall be a defense in any judicial proceeding or arbitration pursuant to Section 7 to enforce rights to indemnification under Section 2(b) or Section 2(c) (but not in any judicial proceeding or arbitration pursuant to Section 7 to enforce a right to an advancement of expenses under Section 3) that the Indemnitee has not met the standards of conduct set forth in Section 2(b) or Section 2(c), as the case may be, but the burden of proving such defense shall be on the Company. With respect to any judicial proceeding or arbitration pursuant to Section 7 brought by the Indemnitee to enforce a right to indemnification hereunder, or any action, suit or proceeding brought by the Company to recover an advancement of expenses (whether pursuant to the terms of an undertaking or otherwise), neither (i) the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of such action, suit, proceeding or arbitration that indemnification is proper in the circumstances because the Indemnitee has met the applicable standards of conduct, nor (ii) an actual determination by the Company (including by its directors or Independent Counsel) that the Indemnitee has not met such applicable standards of conduct, shall create a presumption that the Indemnitee has not met the applicable standards of conduct or, in the case of a judicial proceeding or arbitration pursuant to Section 7 brought by the Indemnitee seeking to enforce a right to indemnification hereunder, be a defense to such proceeding or arbitration.

(c) The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification hereunder or create a presumption (i) that the Indemnitee did not act in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (ii) with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee’s conduct was unlawful.

(d) For purposes of any determination of good faith, the Indemnitee shall be deemed to have acted in good faith if the Indemnitee’s action is based on (i) the records or books of account of the Company or Another Enterprise (if the Indemnitee is or was serving as a director, officer, employee, agent, or fiduciary of such Other Enterprise at the request of the Company), including financial statements, (ii) information supplied to the Indemnitee by the officers of the Company or Another Enterprise in the course of their duties, (iii) the advice of legal counsel for the Company or Another Enterprise or (iv) information or records given or reports made to the Company or Another Enterprise by an independent certified public accountant, appraiser or other expert selected by the Company or Another Enterprise. The provisions of this Section 6(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed or found to have met the applicable standards of conduct set forth in this Agreement.

(e) The knowledge and/or actions, or failure to act, of any other director, officer, agent or employee of the Company or Another Enterprise shall not be imputed to the Indemnitee for purposes of determining the Indemnitee’s right to indemnification under this Agreement.

 

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7. Remedies of Indemnitee.

(a) In the event that (i) a determination is made pursuant to Section 5 that the Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 3, (iii) except when the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5(b), no determination of entitlement to indemnification shall have been made pursuant to Section 5(b) within seventy-five (75) calendar days after receipt by the Company of the Indemnitee’s written request for indemnification, (iv) under circumstances in which the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5(b), no determination of entitlement to indemnification shall have been made pursuant to Section 5(b) within eighty (80) calendar days after receipt by the Company of the Indemnitee’s written request for indemnification (unless an objection to the selection of such Independent Counsel has been made and substantiated and not withdrawn, in which case the applicable time period shall be seventy (70) calendar days after the Delaware Chancery Court or another court of competent jurisdiction in the State of Delaware (or such person as is appointed by such court to make such determination) has determined or appointed the person to act as Independent Counsel pursuant to Section 5(b)), (v) payment of indemnification is not made pursuant to Section 2(d) or Section 2(e) within twenty (20) calendar days after receipt by the Company of a written request therefor or (vi) payment of indemnification pursuant to Section 2(b) or Section 2(c) is not made within twenty (20) calendar days after a determination has been made pursuant to Section 5(b) that the Indemnitee is entitled to indemnification, then the Indemnitee shall be entitled to seek an adjudication by the Delaware Chancery Court of the Indemnitee’s entitlement to such indemnification or advancement of Expenses. Alternatively, if the foregoing conditions have been satisfied, the Indemnitee, at the Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) calendar days following the date on which the Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by the Indemnitee to enforce the Indemnitee’s rights to indemnification under Section 2(d).

(b) In the event that a determination shall have been made pursuant to Section 5(b) that the Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and the Indemnitee shall not be prejudiced by reason of that adverse determination.

(c) If a determination shall have been made pursuant to Section 5(b) that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 7, absent (i) a misstatement or misrepresentation by the Indemnitee (or anyone acting on the Indemnitee’s behalf) of a material fact, or an omission of a material fact necessary to make the Indemnitee’s statement (or statements of persons acting on behalf of the Indemnitee) not materially misleading, in connection with the request for indemnification or in connection with the provision of information or documentation pursuant to the last sentence of Section 5(b) or (ii) a prohibition of such indemnification under applicable law.

(d) In the event that the Indemnitee, pursuant to this Section 7, seeks a judicial adjudication or an award in arbitration to enforce the Indemnitee’s rights under, or to recover damages for breach of, this Agreement, then the Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all Expenses actually and reasonably incurred by or on behalf of the Indemnitee in such judicial adjudication or arbitration, but only if (and only to the extent) the Indemnitee prevails therein. If it shall be determined in said judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

 

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8. Non-Exclusivity. Except to the extent expressly provided herein, the rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may at any time be entitled under applicable law, the Company’s Certificate of Incorporation, the Company’s Bylaws, any agreement, a vote of stockholders, or a resolution of directors, or otherwise, both as to action in or by reason of the Indemnitee’s Corporate Status and as to action in or by reason of any other capacity of the Indemnitee while serving as a director or officer of the Company. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. In the event of any change after the date of this Agreement in any applicable law, statute or rule that expands the power of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greatest benefits afforded by such change. Notwithstanding anything to the contrary in this Section 8, to the extent the time periods specified in Section 3 and Section 7(a) with respect to the time at which the Indemnitee shall be entitled to seek an adjudication or an award in arbitration as to the Indemnitee’s entitlement to indemnification or advancement differ from similar time periods specified in the Company’s Certificate of Incorporation or Bylaws, the time periods set forth in Section 3 and Section 7(a) shall control and be binding on the Indemnitee and the Company and shall be deemed a waiver of any contrary right specified in the Company’s Certificate of Incorporation or Bylaws. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

9. Insurance, Subrogation and Other Sources of Payment.

(a) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees or agents of the Company or Another Enterprise, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. Without limiting the generality or effect of the immediately preceding sentence, no discontinuation or significant reduction in the scope or amount of coverage from one policy period to the next shall be effective (a) without the prior approval thereof by a majority vote of the individuals who, as of the date of this Agreement, constitute the Board (the “Incumbent Directors”), even if less than a quorum, or (b) if at the time that any such discontinuation or significant reduction in the scope or amount of coverage is proposed there are no Incumbent Directors, without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld or delayed). In all policies of directors’ and officers’ liability insurance obtained by the Company, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company’s directors and officers most favorably insured by such policy. The Company may, but shall not be required to, create a trust fund, grant a security interest or use other means, including a letter of credit, to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnify and advance expenses pursuant to this Agreement. If, at the time of the receipt of a notice of a Proceeding pursuant to Section 15, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers,

 

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employees or agents of the Company or Another Enterprise, the provision of directors’ and officers’ liability insurance as provided in this Section 9. shall be in addition to the Company’s obligations under Section 2 and Section 3 and shall not be deemed to be in satisfaction of those obligations.

(b) In the event of any payment to or on behalf of the Indemnitee under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(c) Except to the extent required by applicable law, the Company shall not be liable under this Agreement to make any payment to the Indemnitee with respect to amounts otherwise indemnifiable (or for which advancement is otherwise required) if and to the extent that the Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. Nothing in this Agreement is intended to affect any right of contribution of or against the Company in the event the Company and any other person or persons have co-equal obligations to indemnify or advance expenses to the Indemnitee.

(d) The Company’s obligation to indemnify or advance Expenses under this Agreement to the Indemnitee, in connection with or by reason of the Indemnitee’s service at the request of the Company as a director, officer, employee, agent or fiduciary of Another Enterprise, shall be reduced by any amount that the Indemnitee has actually received as indemnification or advancement of Expenses from such Other Enterprise with respect to the Proceeding for which indemnification or advancement of Expenses is sought.

10. Contribution. To the fullest extent permitted by applicable law, if, in connection with any Proceeding (or part thereof) in respect of which the Indemnitee would otherwise be entitled to indemnification hereunder, the indemnification provided for in this Agreement is unavailable to the Indemnitee for any reason whatsoever, then the Company, in lieu of indemnifying the Indemnitee, shall contribute to the amount that is incurred by the Indemnitee in connection with such Proceeding (or such part thereof) and that would otherwise have been subject to indemnification hereunder, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding to reflect (a) the relative benefits received by the Company, on the one hand, and the Indemnitee, on the other hand, as a result of the event(s) and/or transaction(s) giving cause to such Proceeding (or such part thereof); and/or (b) the relative fault of the Company (and its directors, officers, employees and agents), on the one hand, and the Indemnitee, on the other hand, in connection with such event(s) and/or transaction(s).

11. Settlements. Notwithstanding anything to the contrary in this Agreement or the Company’s Certificate of Incorporation or Bylaws, the Company shall have no obligation to indemnify the Indemnitee for any amounts paid by or on behalf of the Indemnitee in settlement of any Proceeding, unless the Company has consented in writing to such settlement, which consent shall not be unreasonably withheld. The Company shall not settle any claim in any manner that would impose any fine or obligation on the Indemnitee without the Indemnitee’s prior written consent, which consent shall not be unreasonably withheld.

12. Survival of Rights, Binding Effect and Successors and Assigns.

(a) The indemnification and advancement of Expenses and other rights provided by, or granted pursuant to, this Agreement shall continue during the period that the Indemnitee is a director or officer of the Company and shall continue through and after the Termination Date so long as the Indemnitee

 

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shall, by reason of the Indemnitee’s Corporate Status, be subject to any possible Proceeding (including any appeal thereto) with respect to any action taken or omitted (or that is alleged to have been taken or omitted) by the Indemnitee, or any facts or events that occurred (or that are alleged to have occurred), on or before the Termination Date, and shall further continue for such period of time following the conclusion of any such Proceeding as may be reasonably necessary for the Indemnitee to enforce rights and remedies pursuant to this Agreement as provided in Section 7.

(b) This Agreement shall be binding upon the Indemnitee and upon the Company and its successors and assigns, and shall inure to the benefit of the Indemnitee and the Indemnitee’s heirs, personal representatives, executors, administrators and assigns and to the benefit of the Company and its successors and assigns.

(c) The Company further agrees that in the event the Company or any of its successors or assigns (i) consolidates with or merges into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any corporation or entity, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Company as a result of such transaction assume the obligations of the Company set forth in this Agreement, including any requirements with respect to directors’ and officers’ liability insurance set forth in Section 9.

13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

14. Acknowledgement. The Company expressly acknowledges, confirms and agrees that it has entered into this Agreement and has assumed the obligations imposed on the Company hereby to induce the Indemnitee to serve or continue to serve as a director or officer of the Company, and the Company acknowledges that the Indemnitee is relying upon this Agreement in serving and continuing to serve in such capacity. In addition, both the Company and the Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. The Indemnitee understands and acknowledges that the Company may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s rights under public policy to indemnify the Indemnitee.

15. Notice by Indemnitee. The Indemnitee agrees to notify the Company promptly and in writing upon being served with any summons, citation, subpoena, complaint, petition, indictment, information or other document relating to the actual or threatened commencement of any Proceeding or matter that may be subject to indemnification or advancement of Expenses covered by this Agreement. The failure of the Indemnitee to so notify the Company shall not relieve the Company of any obligation that it may have to the Indemnitee under this Agreement or otherwise, except to the extent the Company is materially prejudiced by such failure.

 

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16. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) if delivered by hand to the party to whom said notice or other communication shall have been directed, on the date so delivered or (b) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed. All such notices, requests, demands and other communications shall be delivered to the Indemnitee or to the Company, as the case may be, at the following addresses:

If to the Indemnitee, to the address set forth on the signature page this Agreement

If to the Company, to:

SkyWater Technology, Inc.

2401 East 86th Street

Bloomington, MN 55245

Attn: General Counsel

or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be, by like notice.

17. Counterparts; Execution and Exchange by Electronic Means. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. The execution and delivery of this Agreement by facsimile, electronic mail (including email, .pdf or other digital copies of signatures) or another form of electronic signature or transmission shall be sufficient to evidence the signatories’ intent to sign this Agreement and sufficient to bind the parties to the terms and provisions of this Agreement.

18. Interpretation.

(a) The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

(b) (i) The terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words refer to this entire Agreement, including Exhibits hereto, (ii) any reference herein to a “Section” is to a Section of this Agreement unless otherwise specified, (iii) the terms “include,” “includes,” “including” and words of similar import when used in this Agreement mean “including, without limitation” unless otherwise specified, (iv) the term “any” means “any and all” and (v) the term “or” shall not be exclusive and shall mean “and/or”.

(c) (i) References to “days” mean calendar days unless Business Days are expressly specified and (ii) references to “written” or “in writing” include in electronic form.

(d) Whenever the context requires, words in the singular shall be held to include the plural and vice versa, and words of one gender shall be held to include the other gender as the context requires.

(e) References herein to “fines” shall include any excise tax assessed with respect to any employee benefit plan.

 

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(f) References herein to a director of Another Enterprise or a director of an Other Enterprise shall include, in the case of any entity that is not managed by a board of directors, such other position, such as manager or trustee or member of the governing body of such entity, that entails responsibility for the management and direction of such entity’s affairs, including the general partner of any partnership (general or limited) and the manager or managing member of any limited liability company.

(g) (i) References herein to serving at the request of the Company as a director, officer, employee, agent or fiduciary of Another Enterprise shall include any service as a director, officer, employee or agent of the Company that imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan of the Company or any of its affiliates, other than solely as a participant or beneficiary of such a plan; and (ii) if the Indemnitee has acted in good faith and in a manner the Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, the Indemnitee shall be deemed to have acted in a manner not opposed to the best interests of the Company for purposes of this Agreement.

19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

20. Modification and Waiver.

(a) No amendment, modification, supplementation or repeal of this Agreement or any provision hereof shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

(b) No amendment, modification, supplementation or repeal of this Agreement or any provision hereof shall limit or restrict any rights of the Indemnitee under this Agreement in respect of any action taken or omitted by the Indemnitee in or by reason of the Indemnitee’s Corporate Status prior to such amendment, modification, supplementation or repeal.

21. Governing Law; Submission to Jurisdiction; Service of Process.

(a) This Agreement and the legal relations among the parties with respect to the matters addressed hereby shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules.

(b) Except with respect to any arbitration commenced by the Indemnitee pursuant to Section 7(a) and except to the extent permitted by Section 2(c) with respect to a determination by a court in which an underlying Proceeding was brought that the Indemnitee is entitled to indemnification of Expenses notwithstanding an adjudication of liability to the Company, each of the Company and the Indemnitee hereby irrevocably and unconditionally (i) agrees and consents to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action, suit or proceeding that arises out of or relates to this Agreement and agrees that any such action instituted under this Agreement shall be brought only in the Delaware Chancery Court (or in any other state court of the State of Delaware if the Delaware Chancery Court does not have subject matter jurisdiction over such action), and not in any other state or federal court in the United States of America or any court or tribunal in any other country; (ii) consents to submit to the exclusive jurisdiction of the courts of the State of Delaware for purposes of any action or proceeding arising out of or in connection with this Agreement; (iii) waives any objection to the laying of venue of any such action or proceeding in the courts of the State of Delaware; and (iv) waives, and agrees not to plead or to make, any claim that any such action or proceeding brought in the courts of the State of Delaware has been brought in an improper or otherwise inconvenient forum.

 

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(c) Each of the Company and the Indemnitee hereby consents to service of any summons and complaint and any other process that may be served in any action, suit or proceeding arising out of or relating to this Agreement in any court of the State of Delaware by mailing by certified or registered mail, with postage prepaid, copies of such process to such party at its address for receiving notice pursuant to Section 16. Nothing in this Agreement shall preclude service of process by any other means permitted by applicable law.

22. Nature of Agreement. This Agreement shall not be deemed an employment contract between the Company and the Indemnitee, and, if the Indemnitee is an officer or employee of the Company, the Indemnitee specifically acknowledges that the Indemnitee may be discharged as an officer or employee of the Company at any time for any reason, with or without cause, and with or without severance compensation, except as may be otherwise provided in a separate written contract between the Company and the Indemnitee.

23. Definitions. For purposes of this Agreement:

(a) “Another Enterprise” and “Other Enterprise” mean a corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or any other form of enterprise, in each case, other than the Company.

(b) “Change in Control” means, and shall be deemed to have occurred if, (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than CMI Oxbow Partners, LLC or their affiliate, a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting stock, (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation that would result in the voting stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting stock of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting stock of the Company or such surviving entity outstanding immediately after such merger or consolidation or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of related transactions) of all or substantially all of the Company’s assets.

(c) “Corporate Status” means (i) the Indemnitee’s status as a present or former director or officer of the Company, (ii) the Indemnitee’s present or former status, at any time while serving as a director or officer of the Company, as a director, officer, employee, agent or fiduciary of Another Enterprise to the extent the Indemnitee is or was serving in such capacity with respect to such Other Enterprise at the request of Company or (iii) the Indemnitee’s present or former status as a director, officer, employee, agent or fiduciary of Another Enterprise to the extent the Indemnitee served in such capacity with respect to such Other Enterprise while serving as a director or officer of the Company, continued serving in such capacity with respect to such Other Enterprise after ceasing to be a director or officer of the Company, and is or was serving in such capacity with respect to such Other Enterprise at the request of Company.

 

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(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

(e) “Expenses” means any of the following: reasonable attorneys’ fees; retainers; disbursements of counsel; court costs; filing fees; transcript costs; fees and expenses of experts; fees and expenses of witnesses; fees and expenses of accountants and other consultants (excluding public relations consultants unless approved in advance by the Company); travel expenses; duplicating and imaging costs; printing and binding costs; telephone charges; facsimile transmission charges; computer legal research costs; postage; delivery service fees; fees and expenses of third-party vendors; and the premium, security for, and other costs associated with any bond (including supersedeas or appeal bonds, injunction bonds, cost bonds, appraisal bonds or their equivalents), in each case incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in a Proceeding (including any judicial or arbitration Proceeding brought to enforce the Indemnitee’s rights under, or to recover damages for breach of, this Agreement), as well as all other “expenses” within the meaning of that term as used in Section 145 of the DGCL and all other disbursements or expenses of types customarily and reasonably incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in or otherwise participating in actions, suits or proceedings similar to or of the same type as the Proceeding with respect to which such disbursements or expenses were incurred; provided, however, that “Expenses” shall not include amounts of judgments, penalties or fines actually levied against, or amounts paid in settlement by, the Indemnitee in connection with any Proceeding.

(f) “Independent Counsel” means a law firm, or a person admitted to practice law in any State of the United States, that is experienced in matters of corporation law and neither presently is, nor in the past three years has been, retained to represent: (i) the Company or the Indemnitee in any matter material to either such party (other than with respect to serving as Independent Counsel (or similar independent legal counsel position) as to matters concerning the rights of the Indemnitee under this Agreement, the rights of other indemnitees under similar indemnification agreements or the rights of the Indemnitee or other indemnitees to indemnification under the Company’s Certificate of Incorporation or Bylaws) or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, “Independent Counsel” shall not include any law firm or person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s rights under this Agreement. For the avoidance of doubt, “Independent Counsel” also shall not include any law firm or person who represented or advised any entity or person in connection with a Change in Control of the Company.

(g) “Losses” means all Expenses, judgments, penalties, fines, liabilities and amounts paid in settlement in connection with a Proceeding.

(h) “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation (including any internal investigation), inquiry, administrative hearing or other proceeding, whether brought by or in the right of the Company or otherwise, and whether civil, criminal, administrative or investigative.

(i) “Termination Date” means the date on which the Indemnitee is no longer a director or officer of the Company; provided, however, that if (i) the Indemnitee continues to serve as a director, officer, employee, agent or fiduciary of Another Enterprise after the date on which the Indemnitee

 

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is no longer a director or officer of the Company, (ii) the Indemnitee is serving in such capacity with respect to such Other Enterprise at the request of the Company and (iii) the Indemnitee served in such capacity with respect to such Other Enterprise while serving as a director or officer of the Company, then “Termination Date” shall mean such later date after the Indemnitee is no longer a director or officer of the Company on which the Indemnitee is no longer serving in such capacity with respect to such Other Enterprise.

[Signature page follows]

 

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IN WITNESS WHEREOF, the Company and the Indemnitee have executed this Agreement on and as of the day and year first above written.

 

SKYWATER TECHNOLOGY, INC.
By:
		Name:
		Title:
INDEMNITEE
By:
		Name:
Address:

[Signature Page to Indemnification Agreement]

Exhibit 10.23

SKYWATER TECHNOLOGY INC.

EXECUTIVE SEVERANCE AND CHANGE OF CONTROL PLAN

1. Purpose. The purpose of the SkyWater Technology Inc. Executive Severance and Change of Control Plan (the “Plan”) is to provide reasonable severance protection to certain executive officers and other key employees of the Company and its Affiliates who are expected to make substantial contributions to the success of the Company and thereby provide for stability and continuity of management.

2. Term. The Plan shall commence upon the Effective Date (as defined below) and shall continue until terminated in accordance with Section 19.

3. Definitions. For purposes of the Plan, the following terms have the meanings set forth below: “Accrued Obligations” has the meaning for that term in Section 5(a).

“Affiliate” means any company or other entity controlled by, controlling or under common control with the Company.

“Base Monthly Salary” means one-twelfth of the Participant’s annual rate of base salary in effect as of the Termination Date, disregarding any reduction that would constitute Good Reason.

“Board” means the Board of Directors of the Company

“Cause” means, with respect to any Participant and as determined by the Committee:

(a) A violation of such Participant’s obligations regarding confidentiality or the protection of sensitive, confidential or proprietary information, or trade secrets;

(b) An act or omission by such Participant resulting in such Participant being charged with a criminal offense which constitutes a felony or involves moral turpitude or dishonesty;

(c) Conduct by such Participant which constitutes poor performance, gross neglect, insubordination, willful misconduct or a breach of the Company’s Code of Conduct or a fiduciary duty to the Company or its stockholders; or

(d) The Company’s determination that such Participant violated state or federal laws relating to the workplace environment, including without limitation, laws relating to sexual harassment or age, sex, race or other prohibited discrimination.

Any determination by the Committee regarding whether an event constituting Cause shall have occurred shall be final, binding and conclusive.

“Change of Control” means the occurrence of any of the following:

(a) A transaction or a series of related transactions occurring after the Effective Date pursuant to which any Person or Group (other than the Company or any Affiliate) becomes the Beneficial Owner of more than fifty percent (50%) of the total voting power of the Voting Stock of the Company, on a Fully Diluted Basis;

 

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(b) Individuals who, as of the day following the IPO closing date for the first sale of Stock listed on a Stock Exchange or designated on a Securities Market, constitute the Board (the “Incumbent Board”) (together with any new directors whose election by such Incumbent Board or whose nomination by such Incumbent Board for election by the stockholders of the Company was approved by a vote of at least a majority of the members of such Incumbent Board then in office who either were members of such Incumbent Board or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of such Board then in office;

(c) The Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company (regardless of whether the Company is the surviving Person), other than any such transaction in which the Prior Stockholders own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation immediately after such transaction; or

(d) The consummation of any direct or indirect sale, lease, transfer, conveyance, or other disposition (other than by way of reorganization, merger, or consolidation), in one transaction or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person or Group (other than the Company or any Affiliate), except any such transaction or series of transactions in which the Prior Stockholders own directly or indirectly at least a majority of the voting power of the Voting Stock of such Person or Group immediately after such transaction or series of transactions.

“Change of Control Severance Multiple” means the applicable number of months for the Participant on Exhibit A.

“Code” means the Internal Revenue Code of 1986, as amended.

“Committee” means the Compensation Committee of the Board.

“Company” means SkyWater Technology Inc. and any successor to its business or assets, by operation of law or otherwise.

“Disability” means the absence of the Participant from the Participant’s duties with the Company on a full-time basis for a period of time which would entitle the Participant to receive benefits under the long-term disability policy in effect at the time of such illness or other physical or mental incapacity.

“Effective Date” means April 5, 2021.

“Employee” means an employee of the Company or an Affiliate.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, as now in effect or as hereafter amended, and any successor thereto.

 

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“Good Reason” means

(a) A material adverse change in the scope of the Participant’s responsibilities or authority, excluding any such change after a Change of Control that is solely as a result of the Company’s common stock no longer being publicly traded on a national securities exchange;

(b) The material reduction in the Participant’s annual base salary or target bonus percentage

(c) The reduction in the aggregate in the Participant’s eligibility for participation in the Company’s benefit plans;

(d) The relocation of the Participant’s principal place of work by more than 50 miles from its then current location; or

(e) The failure of any successor to the Company in a Change of Control to expressly assume the Plan in writing within ten (10) days after the occurrence of a Change of Control.

In order to terminate employment for Good Reason, a Participant must, within 90 days of the initial existence of circumstances constituting Good Reason, notify the Company in writing of the existence of such circumstances, and the Company shall then have 30 days to remedy the circumstances. If the circumstances have not been fully remedied by the Company, the Participant shall have 60 days following the end of such 30-day period to exercise the right to terminate for Good Reason. If the Participant does not timely do so, the right to terminate for Good Reason shall lapse and be deemed waived, and the Participant shall not thereafter have the right to terminate for Good Reason unless further circumstances occur which themselves give rise to a right to terminate for Good Reason.

“Group” has the meaning set forth in Sections 13(d) and 14(d)(2) of the Exchange Act.

“Participant” means an Employee who is designated as a Participant under Section 4(a) hereof, until such time as the Employee’s participation ceases in accordance with Section 4(b) hereof.

“Person” has the meaning set forth in Sections 13(d) and 14(d)(2) of the Exchange Act.

“Prior Stockholders” means the holders of Stock and any other equity securities that represented one hundred percent (100%) of the Voting Stock of the Company immediately prior to a reorganization, merger, or consolidation involving the Company or any sale or other disposition of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole (or other equity securities into which the Stock or such other equity securities are converted as part of such reorganization, merger, or consolidation).

“Protection Period” means the 12-month period beginning on the date of the Change of Control. Notwithstanding anything in the Plan to the contrary, if (i) a Participant’s employment is terminated within three months prior to a Change of Control for reasons that would have constituted a Qualifying Termination if they had occurred following a Change of Control, (ii) the Participant reasonably demonstrates that such termination (or Good Reason event) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change of Control and (iii) a Change of Control involving such third party (or a party competing with such third party to effectuate a Change of Control) does occur, then

 

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for purposes of the Plan the date immediately prior to the date of such termination of employment or event constituting Good Reason shall be treated as a Change of Control. For purposes of determining the timing and amount of payments and benefits to Participant under Section 5(c), the date of the actual Change of Control shall be treated as the Participant’s Termination Date.

“Qualifying Termination” means a termination of the Participant’s employment by the Company without Cause or by the Participant with Good Reason.

“Release” means the waiver and release of claims required of the Participant prior to receipt of certain payments under this Plan as described in Section 7 hereof.

“Securities Market” means an established securities market.

“Separation from Service” means a Participant’s separation from service from the Company and its Affiliates within the meaning of Section 409A of the Code.

“Severance Multiple” means the applicable number of months for the Participant on Exhibit A.

“Stock” means the common stock, par value $0.01 per share, of the Company, or any security into which shares of Stock may be changed or for which shares of Stock may be exchanged.

“Stock Exchange” means the New York Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or another established national or regional stock exchange.

“Subsidiary” means any corporation (other than the Company) or non-corporate entity with respect to which the Company owns, directly or indirectly, fifty percent (50%) or more of the total combined voting power of all classes of Voting Stock.

“Target Bonus” means the amount of cash incentive the participant would receive for performance at “target” for the year in which the Qualifying Termination occurs, disregarding any reduction that would constitute Good Reason.

“Termination Date” means the date on which a Participant has a Separation from Service.

“Tier 1 Participant” means each of the Participants designated as such by the Committee.

“Tier 2 Participant” means each of the Participants designated as such by the Committee.

“Voting Stock” means, with respect to any Person, capital stock of any class or kind ordinarily having the power to vote for the election of directors, managers, or other voting members of the governing body of such Person. Without limiting the generality of the foregoing, the Stock shall be Voting Stock of the Company.

4. Participation.

(a) Designation of Participants. The Participants in the Plan are the executive officers and other key employees of the Company and its Affiliates who are designated as Participants by the Compensation

 

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Committee of the Board (as reflected on Schedule A) and who execute a “Consent to Accept Plan Benefits” in the form attached as Schedule B confirming their status as a Participant, which status is not revoked under Section 19.

(b) Cessation of Participation. A Participant shall cease to be a Participant and shall have no rights hereunder, without further action, when the Participant ceases to be an Employee (unless such Participant is then entitled to severance payments and benefits as provided in Section 5). A Participant entitled to severance payments and benefits under Section 5 shall remain a Participant in this Plan until the full amount of the severance payments and benefits under the Plan have been fully paid and provided to the Participant.

(c) No Employment Rights. Nothing in the Plan will reduce or eliminate the right of the Company and its Affiliates to terminate a Participant’s employment at any time for any reason.

5. Payments and Benefits on Termination of Employment.

(a) For Cause, Death or Disability or Termination without Good Reason. If (x) a Participant terminates employment with the Company and its Affiliates without Good Reason, (y) the Company and its Affiliates terminate a Participant’s employment for Cause or by reason of the Participant’s Disability, or (z) a Participant’s employment is terminated by reason of the Participant’s death, then the Participant will not be entitled to any compensation or benefits under the Plan other than the sum of:

(i) the portion of the Participant’s base salary earned through the Termination Date, to the extent not theretofore paid;

(ii) the amount of any annual incentive compensation under the annual incentive plan applicable to the Participant that has been earned by the Participant for a completed fiscal year preceding the Termination Date, but has not yet been paid to the Participant; and

(iii) any accrued paid vacation, sick leave and other paid time-off to the extent not theretofore paid (the sum of the amounts described in clauses (i), (ii) and (iii) are hereinafter referred to as the “Accrued Obligations”).

The Accrued Obligations will be paid to the Participant in a lump sum within 20 calendar days after the Participant’s Termination Date or at any earlier legally required time.

(b) Qualifying Termination Other Than During Protection Period. In the event of a Participant’s Qualifying Termination other than during the Protection Period, the Participant will be entitled to receive the payments and benefits provided below:

(i) Accrued Obligations. The Accrued Obligations, payable in a lump sum within 20 calendar days after the Participant’s Termination Date or at any earlier legally required time,

(ii) Severance Payments. Subject to Sections 6, 7 and 8, a lump sum severance payment equal to the Participant’s Base Monthly Salary for the number of months equal to the Participant’s Severance Multiple plus the Participant’s Target Bonus times a fraction, the numerator of which is the Participant’s Severance Multiple and the denominator of which is 12, payable within 20 calendar days after the Release described in Section 7 becomes effective and irrevocable in accordance with its terms, but no later than 70 days after the Participant’s Termination Date.

 

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(iii) Health Care Coverage. At the Company’s option, the Participant and the Participant’s eligible dependents shall be entitled either (A) to receive a lump sum amount equal to the current cost of continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) under the Company’s medical and dental plans in which the Participant participated prior to the Participant’s Termination Date for the number of months equal to the Participant’s Severance Multiple, payable within 20 calendar days after the Release described in Section 7 becomes effective and irrevocable in accordance with its terms, but no later than 70 days after the Participant’s Termination Date, or (B) to continue to participate in the Company’s medical and dental plans in which the Participant participated immediately prior to the Participant’s Termination Date, in each case for the number of months equal to the Participant’s Severance Multiple, commencing with the first calendar month following the Termination Date (the “Benefit Continuation Period”); provided, however, that if the Company elects option (B) above, the Benefit Continuation Period shall cease when the Participant becomes eligible for any such coverage under a plan maintained by another employer. The Participant’s continued participation in the Company’s medical and dental plans shall be on terms not less favorable than those in effect for active employees of the Company, subject to the Participant making the monthly premium payment of the amount required for such coverage during the Benefit Continuation Period by active employees of the Company. The Benefit Continuation Period shall run concurrently with (and shall count against) the Company’s obligation to provide continuation coverage pursuant to COBRA.

(c) Qualifying Termination During Protection Period. In the event of a Participant’s Qualifying Termination during the Protection Period, the Participant will be entitled to receive the payments and benefits provided below:

(i) Accrued Obligations. The Accrued Obligations, payable in a lump sum within 20 calendar days after the Participant’s Termination Date or at any earlier legally required time,

(ii) Change of Control Severance Payment. Subject to Sections 6, 7 and 8, a lump sum severance payment in an amount equal to the Participant’s Base Monthly Salary multiplied by the Participant’s Change of Control Severance Multiple plus the Participant’s Target Bonus times a fraction, the numerator which is the Participant’s Change of Control Severance Multiple and the denominator of which is 12, payable within 20 calendar days after the Release described in Section 7 becomes effective and irrevocable in accordance with its terms, but no later than 70 days after the Participant’s Termination Date. Such payment shall be reduced, if applicable, by any severance payments made to the Participant under Section 5(b)(ii) prior to the Change of Control.

(iii) Change of Control Health Care Coverage. At the Company’s option, the Participant and the Participant’s eligible dependents shall be entitled either (A) to receive a lump sum amount equal to the current cost of continuation coverage pursuant to COBRA under the Company’s medical and dental plans in which the Participant participated prior to the Participant’s Termination Date for the number of months equal to the Participant’s Change of Control Severance Multiple, payable within 20 calendar days after the Release described in Section 7 becomes effective and irrevocable in accordance with its terms, but no later than 70 days after the Participant’s Termination Date, or (B) to continue to participate in the Company’s medical and

 

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dental plans in which the Participant participated immediately prior to the Participant’s Termination Date, in each case for the number of months equal to the Participant’s Change of Control Severance Multiple, commencing with the first calendar month following the Termination Date (the “Change of Control Benefit Continuation Period”); provided, however, that if the Company elects option (B) above, the Change of Control Benefit Continuation Period shall cease when the Participant becomes eligible for any such coverage under a plan maintained by another employer. Such continued participation shall be reduced, if applicable, by the number of months of the Participant continued participation in the Company’s medical and dental plans under Section 5(b)(iii) prior to the Change of Control. The Participant’s continued participation in the Company’s medical and dental plans shall be on terms not less favorable than those in effect for active employees of the Company, subject to the Participant making the monthly premium payment of the amount required for such coverage during the Change of Control Benefit Continuation Period by active employees of the Company. The Change of Control Benefit Continuation Period shall run concurrently with (and shall count against) the Company’s obligation to provide COBRA continuation coverage.

6. Impact of Section 4999 Excise Tax. The payments and benefits to Participants under the Plan shall be subject to reduction, if applicable, in accordance with the provisions of Exhibit B.

7. Release. The severance compensation and benefits to be provided under Sections 5(b)(ii), 5(b)(iii), 5(c)(ii), and 5 (c)(iii) shall be provided only if the Participant timely executes and does not timely revoke a Release; provided that the Company has delivered, or has made a good faith effort to deliver, a form of the Release to the Participant no later than the fifth business day after the Participant’s Termination Date. The Release must be signed by the Participant (or his legal representative, if applicable) and become effective and irrevocable in accordance with its terms (taking into account any applicable revocation period set forth therein) by the date specified by the Company, which shall be no later than sixty-five days after the Participant’s Termination Date. If the Participant fails to execute and furnish the Release, or if the Release furnished by the Participant has not become effective and irrevocable in accordance with its terms (taking into account any applicable revocation period set forth therein) by the fiftieth day after the Participant’s Termination Date, the Participant will not be entitled to any payment or benefit under the Plan other than the Accrued Obligations.

8. Covenants. The severance compensation and benefits to be provided under Sections 5(b)(ii), 5(b)(iii), 5(c)(ii), and 5(c)(iii) are subject to the Participant’s continued compliance with the covenants set forth on Exhibit C. The Company’s obligations and the Participant’s right, if any, to severance compensation and benefits under Sections 5(b)(ii), 5(b)(iii), 5 (c)(ii), and 5(c)(iii) shall cease in the event of a material breach by the Participant of any provision of Exhibit C (and, in only those cases where such material breach is curable, the failure to cure such material breach within 10 business days after written notice to the Participant, which notice details, with reasonable specificity, such material breach). Any such cessation of payment shall not reduce any monetary damages that may be available to the Company as a result of such breach.

9. No Mitigation. In no event shall the Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Participant under any of the provisions of this Plan and such amounts shall not be reduced whether or not the Participant obtains other employment.

 

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10. Effect on Other Plans, Agreements and Benefits. It is a condition for eligibility to receive benefits under this Plan that, during the term of the Plan, each Participant waive any and all cash severance and health continuation benefits to which he or she might otherwise have been entitled under any prior agreement or arrangement with the Company or an Affiliate or a policy of the Company or an Affiliate should the Participant experience a termination of employment with the Company and all its Affiliates, and this Plan supersedes and replaces in all respects any rights a Participant had to such benefits from the Company other than as set forth herein. Except to the extent expressly set forth herein, any benefit or compensation to which a Participant is entitled under any agreement between the Participant and the Company or any of its Affiliates or under any plan maintained by the Company or any of its Affiliates in which the Participant participates or participated shall not be modified or lessened in any way as a consequence of the Participant’s participation in this Plan, but shall be payable or provided according to the terms of the applicable plan or agreement.

11. Administration. Except as otherwise specifically provided herein, the Committee shall administer the Plan and shall have full and final authority in its discretion to take all actions determined by the Committee to be necessary in the administration of the Plan. The Committee may delegate, subject to such terms as the Committee shall determine, any of its authority hereunder to such person or persons from time to time as it may designate. In the event of such delegation, all references to the Committee in this Plan shall be deemed references to such delegates as it relates to those aspects of the Plan that have been delegated.

12. Claims for Benefits.

(a) Filing a Claim. Any Participant who wishes to file a claim for benefits under the Plan shall file his or her claim in writing with the Committee.

(b) Review of a Claim. The Committee shall, within 90 days after receipt of such written claim (unless special circumstances require an extension of time, but in no event more than 180 days after such receipt), send a written notification to the Participant as to its disposition. If the claim is wholly or partially denied, such written notification shall (i) state the specific reason or reasons for the denial, (ii) make specific reference to pertinent Plan provisions on which the denial is based, (iii) provide a description of any additional material or information necessary for the Participant to perfect the claim and an explanation of why such material or information is necessary, and (iv) set forth the procedure by which the Participant may appeal the denial of his or her claim, including, without limitation, a statement of the claimant’s right to bring an action under Section 502(a) of ERISA following an adverse determination on appeal.

(c) Appeal of a Denied Claim. If a Participant wishes to appeal the denial of his or her claim, he or she must request a review of such denial by making application in writing to the Committee within 60 days after receipt of such denial. Such Participant (or his or her duly authorized legal representative) may, upon written request to the Committee, review any documents pertinent to his or her claim, and submit in writing, issues and comments in support of his or her position. A Participant who fails to file an appeal within the 60-day period set forth in this Section 9(c) shall be prohibited from doing so at a later date or from bringing an action under ERISA.

(d) Review of a Claim on Appeal. Within 60 days after receipt of a written appeal (unless the Committee determines that special circumstances, such as the need to hold a hearing, require an extension of time, but in no event more than 120 days after such receipt), the Committee shall notify the Participant of the final decision. The final decision shall be in writing and shall include (i) specific reasons for the decision, written in a manner calculated to be understood by the claimant, (ii) specific references to the

 

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pertinent Plan provisions on which the decision is based, (iii) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents relevant to the claim for benefits, and (iv) a statement describing the claimant’s right to bring an action under Section 502 (a) of ERISA.

13. Participants Acceptance of Plan. Each Participant shall indicate his or her acceptance and ratification of, and consent to, all of the terms and conditions of the Plan and any action taken under the Plan by the Committee or the Company or its Affiliates, in any case in accordance with the terms and conditions of the Plan, by executing a “Consent to Accept Plan Benefits” attached as Schedule B.

14. Successors.

(a) Company Successors. This Plan shall bind any successor of the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of a Change of Control or any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term “Company,” as used in this Plan, shall mean the Company as heretofore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan.

(b) Participant Successors. This Plan shall inure to the benefit of and be enforceable by the Participant’s personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. The rights under this Plan are personal in nature and neither the Company nor any Participant shall, without the consent of the other, assign, transfer or delegate any rights or obligations hereunder except as expressly provided in this Section. Without limiting the generality of the foregoing, the Participant’s right to receive any benefits hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his or her will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated.

15. Resolutions of Disputes.

(a) Arbitration. Any and all controversies arising out of or relating to the validity, interpretation, enforceability, or performance of the Plan will be solely and finally settled by means of binding arbitration in Minneapolis, Minnesota. The arbitration shall be conducted in accordance with the applicable employment dispute resolution rules of the American Arbitration Association. The arbitration will be final, conclusive and binding upon the parties. All arbitrator’s fees and related expenses shall be divided equally between the parties.

(b) Legal Fees. The arbitrator shall award the Participant attorneys’ fees and expenses if the Participant prevails on at least one material issue in dispute, including the attorneys’ fees and expenses the Participant incurs in connection with any appeal or the enforcement of any award. Any award of attorneys’ fees and expenses to the Participant shall be paid by the Company within 60 days following the award of such fees and costs by the arbitrator (or, if later, when such fees and expenses are incurred), but in no event

 

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later than December 31 of the calendar year following the year of the conclusion of the arbitration (or, if later, December 31 of the calendar year following the year in which such fees and expenses are incurred).

16. Unfunded Plan Status. All payments pursuant to the Plan shall be made from the general funds of the Company and no special or separate fund shall be established or other segregation of assets made to assure payment. No Participant or other person shall have under any circumstances any interest in any particular property or assets of the Company as a result of participating in the Plan.

17. Withholding. The Company shall have the right to deduct and withhold from any amounts payable under the Plan such federal, state, local or other taxes as are required to be withheld pursuant to any applicable law or regulation.

18. Notice. For the purpose of this Plan, notices and all other communications provided for in this Plan shall be in writing and shall be deemed to have been duly given when actually delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Secretary at the Company’s corporate headquarters address, and to the Participant (at the last address of the Participant on the Company’s books and records).

19. Amendment and Termination. The Company may amend (in whole or in part) or terminate the Plan provided that (i) any amendment or termination that reduces the benefits under Section 5(b) or any notice from the Committee revoking the Participant’s participation in the Plan will not be effective prior to the date that is six months after the date the Company has provided written notice to each affected Participant of such amendment or termination or revocation and (ii) no amendment or termination or revocation will be effective for a period of twelve months after a Change of Control if a Change of Control occurs within six months after the date the Company has provided written notice to each Participant of such amendment or termination or revocation. Notwithstanding the foregoing, no termination shall reduce or terminate any Participant’s right to receive, or continue to receive, any payments and benefits that became payable in respect of a termination of employment that occurred prior to the date of such termination of the Plan.

20. Governing Law. Except to the extent preempted by federal law, the provisions of the Plan shall be governed and construed in accordance with the laws of the State of Minnesota without regard to the conflict of law provisions thereof.

21. Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

22. Headings; Interpretation. Headings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof. Unless the context clearly requires otherwise, the masculine pronoun wherever used herein shall be construed to include the feminine pronoun.

 

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23. Section 409A.

(a) It is intended that the payments and benefits provided under the Plan shall be exempt from the application of the requirements of Section 409A of the Code. This Plan shall be construed, administered and governed in a manner that effects such intent, and the Committee shall not take any action that would be inconsistent with such intent. Specifically, any taxable benefits or payments provided under this Plan are intended to be separate payments that qualify for the “short-term deferral” exception to Section 409A of the Code to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the separation pay exceptions to Section 409A of the Code, to the maximum extent possible. To the extent that none of these exceptions (or any other available exception) applies, then notwithstanding anything contained herein to the contrary, and to the extent required to comply with Section 409A of the Code, if a Participant is a “specified employee,” as determined under the Company’s policy for identifying specified employees on his or her Termination Date, then all amounts due under this Plan that constitute a “nonqualified deferred compensation” within the meaning of Section 409A of the Code, that are provided as a result of a Separation from Service within the meaning of Section 409A of the Code, and that would otherwise be paid or provided during the first six months following the Termination Date, shall be accumulated through and paid or provided on the first business day that is more than six months after the date of the Termination Date (or, if the Participant dies during such six-month period, within 90 days after the Participant’s death). If the payments and benefits provided under the Plan replace payments or benefits under a Participant’s other applicable arrangement that constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code, payments under the Plan shall be made on the schedule specified under the other arrangement to the extent necessary to avoid a violation of Section 409A of the Code.

(b) With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A of the Code: (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit; (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any calendar year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; and (iii) such payments shall be made on or before the last day of the Participant’s calendar year following the calendar year in which the expense occurred, or such earlier date as required hereunder.

(c) The payments and benefits provided under this Plan may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon Participants. The tax treatment of the benefits provided under this Plan is not warranted or guaranteed. Neither the Company, its Affiliates nor their respective directors, officers, employees or advisers shall be held liable for any taxes, interest, penalties or other monetary amounts owed by a Participant (or any other individual claiming a benefit through the Participant) as a result of this Plan.

 

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EXHIBIT A

SEVERANCE MULTIPLE AND CHANGE OF CONTROL SEVERANCE MULTIPLE

 

Severance Multiple
Tier 1 Participants			24
Tier 2 Participants			12
Change of Control Severance Multiple
Tier 1 Participants			24
Tier 2 Participants			18

 

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EXHIBIT B

EFFECT OF SECTION 4999 EXCISE TAX

(a) Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any Payment (as hereinafter defined) would be subject to the Excise Tax (as hereinafter defined), the right to receive any Payment under this Plan shall be reduced if but only if:

(i) such right to such Payment, taking into account all other Payments to or for Participant, would cause any Payment to the Participant under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect; and

(ii) as a result of receiving a parachute payment and paying any applicable tax (including Excise Tax) thereon, the aggregate after-tax amounts received by the Participant under this Plan and all Payments would be less than the maximum after-tax amount that could be received by Participant without causing any such Payment to be considered a parachute payment.

In the event that the receipt of any such right to Payment under this Plan, in conjunction with all other Payments, would cause the Participant to be considered to have received a parachute payment under this Plan that would have the effect of decreasing the after-tax amount received by the Participant as described in clause (ii) of the preceding sentence, then the amounts payable under this Plan shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount.

To the extent that the payment of any compensation or benefits to a Participant is required to be reduced by this Exhibit B, such reduction shall be implemented by determining the “Parachute Payment Ratio” (as hereinafter defined) for each parachute payment and then reducing the parachute payments in order beginning with the parachute payment with the highest Parachute Payment Ratio. For parachute payments with the same Parachute Payment Ration, such parachute payments shall be reduced based on the time of payment of such parachute payments, with amounts having later payment dates being reduced first. For parachute payments with the same Parachute Payment Ratio and the same time of payment, such parachute payments shall be reduced on a pro rata basis (but not below zero) prior to reducing parachute payments with a lower Parachute Payment Ratio.

(b) Definitions. The following terms shall have the following meanings for purposes of this Exhibit B.

(i) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.

(ii) “Parachute Payment Ratio” shall mean a fraction the numerator of which is the value of the applicable parachute payment for purposes of Section 280G of the Code and the denominator of which is the intrinsic value of such parachute payment.

(iii) “Parachute Value” of a Payment shall mean the present value as of the date of the Change of Control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.

 

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(iv) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Participant, whether paid or payable pursuant to this Agreement or otherwise.

(v) The “Safe Harbor Amount” means 2.99 times the Participant’s “base amount,” within the meaning of Section 280(b)(3) of the Code.

 

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EXHIBIT C

COVENANTS

1. Confidential Information

(a) For purposes of this Exhibit C “Confidential Information” means ideas, concepts, information and material that constitute trade secrets and/or proprietary and confidential information of the Company and its Affiliates. Confidential Information includes, but is not limited to, information and knowledge pertaining to products and services offered, ideas, plans, manufacturing, marketing, pricing, distribution and sales methods and systems, sales and profit figures, customer and client lists, and relationships between the Company or its subsidiaries and their respective affiliates, dealers, distributors, wholesalers, customers, clients, suppliers and other who have business dealings with the Company or any of its subsidiaries.

(b) Confidential Information is the sole and exclusive property of the Company. The Participant must not, either during or after the term of this Agreement, directly or indirectly disclose any Confidential Information to any third party without the written permission of the Board, except as required by his employment with the Company, unless such information is in the public domain for reasons other than the Participant’s conduct, or except as may be required by law (provided that the Participant shall give the Company notice of any disclosure required by law so that the Company shall have a reasonable opportunity to attempt to preclude such disclosure). The Participant shall not use Confidential Information to his own advantage or the advantage of parties other than the Company. The Participant shall take all steps necessary to protect the confidentiality of all Confidential Information and to inform the Company immediately of any attempted or actual disclosure of Confidential Information to any third party. The Participant agrees that, upon request of the Company or termination of employment, whichever is first, he shall turn over to the Company all documents, memoranda, notes, plans, records or material in his possession or control that contain or are derived from Confidential Information.

(c) If at any time the Participant has any material information which belongs to any former employer that the Participant is not entitled to have or use for the benefit of the Company and its Affiliates, the Participant shall promptly return any such materials to the Participant’s former employer or obtain any necessary consents. The Participant is not permitted to use or refer to any such materials in the performance of the Participant’s duties.

2. Non-Competition. During the period of the Participant’s employment with the Company and its Affiliates and continuing for the number of months after the Termination Date equal to the applicable of the Participant’s Change of Control Severance Multiple or Severance Multiple (the “Restricted Period”), the Participant shall not directly or indirectly own any interest in, manage, control, participate in, be employed by, consult with, render services for, or in any manner engage in any Competing Business within any geographical area in which the Company or any of its controlled affiliates engage or have active plans at the Termination Date to engage in such businesses. The restriction is without specific geographic limitation inasmuch as the Company and its Affiliates conduct business on a nationwide and international basis, that its sales and marketing prospects are for continued expansion both nationally and internationally, that access to the Company’s Confidential Information would provide any national or international competitor with an unfair competitive advantage, and that, therefore, the restrictions set forth in this Section are reasonable and properly required for the adequate protection of the legitimate interests of the Company. Nothing herein shall prohibit the Participant from owning beneficially not more than 2% of any class of outstanding equity securities or other comparable interests of any issuer that is publicly traded, so long as

 

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the Participant has no active participation in the business of such issuer. For purposes hereof, the term “Competing Business” means any business that is engaged in the production or sale of products that compete with the products produced, distributed or sold by the Company or its controlled affiliates (or are in the process of being actively developed by such entities) as of the Date of Termination. This restriction shall not prevent the Participant from working for a subsidiary, division, venture or other business or functional service unit (collectively a “Unit”) of a Competing Business so long as (i) such Unit is not itself a Competing Business, (ii) the Participant does not manage or participate in business activities or projects of any Unit that is a Competing Business, and (iii) the Participant otherwise strictly complies with the restrictive covenants contained in this Exhibit.

3. Nonsolicitation.

(a) During the Restricted Period the Participant must not, as an individual, employee, consultant, agent, owner, partner, director or stockholder, directly or indirectly solicit, call on or accept any business from any Customer of the Company or its subsidiaries. The term “Customer” means all persons, firms or corporations to whom the Company or its subsidiaries sold products at any time during the one year period immediately preceding when the Participant’s employment with the Company ceased, notwithstanding that some or all of such persons, firms or corporations may have been induced to give business to the Company or its subsidiaries by the Participant.

(b) During the Restricted Period the Participant must not take any action to divert from the Company or its subsidiaries any opportunity in the scope of any present or contemplated future business of the Company or its subsidiaries that arose while he was employed by the Company.

(c) During the Restricted Period the Participant must not directly or indirectly solicit, hire, employ or engage any employee or any former employee of the Company or its Affiliates whose employment with the Company or its Affiliates ceased less than one year before the date of such solicitation, enticement, hiring or engagement.

4. Non-Disparagement. Participant at all times, both during and after Participant’s employment with the Company, shall not make any statement disparaging the Company, any officer, director, employee or other service provider for the Company, or any product or service offered by the Company.

5. Scope of Restrictions. In the event any provision relating to the time period or scope of the restrictions in this Exhibit C shall be declared by a court of competent jurisdiction to exceed the maximum time period or scope such court deems reasonable and enforceable, such time period or scope shall be deemed amended and reformed to the minimum degree necessary to be enforceable.

 

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SCHEDULE B

Consent to Accept Plan Benefits

I agree and consent to the terms of the SkyWater Technology Inc. (“SkyWater”) Executive Severance and Change of Control Plan (the “Plan”). Further, and for the avoidance of doubt, I acknowledge and agree that by signing below, I am waiving any and all existing rights to cash severance or health continuation benefits to be provided to me by SkyWater in connection with a termination of employment from SkyWater, any successor thereto or any Affiliate of either that employs me (collectively, the “Company”), that occurs during the term of the Plan that I may otherwise be entitled to pursuant to any agreement, plan or arrangement (formal or informal, oral or written) with the Company.

 

Signature of [NAME]

By:

Title:
Dated:

 

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Exhibit 10.24

SkyWater Technology, Inc.

Non-Employee Director Compensation Policy

The Board of Directors (“Board”) of SkyWater Technology, Inc. (the “Company”) has adopted this SkyWater Technology, Inc. Non-Employee Director Compensation Policy (the “Policy”) to assist the Compensation Committee of the Board (or its successor, the “Committee”) in establishing retainers, fees, and equity grants (and payment or award thereof, as applicable) associated with director compensation. Any new director compensation policies enacted from time to time are deemed to be incorporated herein upon their effective date. The Committee and/or the Board shall review and reassess this Policy from time to time to determine whether the Policy should be updated.

Capitalized terms used in this Policy but not otherwise defined herein shall have the meaning set forth in the Company’s 2021 Equity Incentive Plan, as it may be amended from time to time, or any successor plan thereto.

Each director who is not an employee of the Company shall be entitled to the payments described below while serving as a director on the Board.

 

Annual Cash Retainer:		An annual retainer fee of USD $75,000 shall be payable in fiscal quarterly installments in advance following the annual meeting of Company’s stockholders at which directors are elected to serve on the Board (the “Annual Meeting”) to each director who becomes or remains a member of the Board following the conclusion of such Annual Meeting. An annual retainer fee of USD $100,000 shall be payable in fiscal quarterly installments in advance following the Annual Meeting to the Chairman of the Board then appointed. A director appointed to the Board other than pursuant to election at the Annual Meeting shall be entitled to pro-rated payment of the annual retainer fee for the partial year of service, payable in fiscal quarterly installments in advance beginning as of his or her commencement of service on the Board. A director must be actively serving as a director on the date of any such payment to receive his or her payment.
Committee Chairmanship Fee:		The corresponding annual chairmanship fee set forth below shall also be payable in fiscal quarterly installments in advance following the Annual Meeting to each director who becomes or remains the chairman of each of the following committees of the Board following the conclusion of such Annual Meeting for his or her chairmanship services. A director appointed to serve as chairman during a year and prior to an Annual Meeting shall be entitled to pro-rated payment of the annual chairmanship fee for the partial year of chairmanship service, payable in fiscal quarterly installments in advance beginning as of his or her commencement of service as chairman. The chairman must be actively serving as the chairman of the applicable committee on the date of any such payment to receive his or her payment.
		Audit Committee:		USD $20,000
		Compensation Committee:		USD $15,000

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		Nominating and Corporate     Governance Committee:		USD $10,000
Committee Membership Fee:		The corresponding annual committee fee set forth below shall also be payable in fiscal quarterly installments in advance following the Annual Meeting to each director who becomes or remains a member of the following committees of the Board (excluding the chairman) for his or her committee member services. A director appointed to serve on a committee during a year and prior to an Annual Meeting shall be entitled to pro-rated payment of the annual committee service fee for the partial year of committee service, payable in fiscal quarterly installments in advance upon his or her commencement of service as a committee member. The member must be actively serving as a member of the applicable committee on the date of any such payment to receive his or her payment.
		Audit Committee:		USD $10,000
		Compensation Committee:		USD $8,000
		Nominating and Corporate     Governance Committee:		USD $5,000
Annual Equity Grant:		As of the date of each Annual Meeting, each director who remains a member of the Board following the conclusion of such Annual Meeting shall be granted restricted stock units relating to that number of shares of Stock having a value equal to $100,000 as of the grant date (but rounded down to the next integer of Stock in the case of a valuation that produces a fractional share), pursuant to the terms of the Company’s standard form of restricted stock unit agreement for directors, which restricted stock units shall vest in full on the date immediately preceding the date of the next occurring Annual Meeting, subject to the director’s continued, active service as a director on such vesting date.   Each director appointed to the Board to constitute the initial Board following the closing of the Company’s initial public offering shall receive a pro-rated annual grant of restricted stock units in connection with the IPO, pursuant to the terms of the Company’s standard form of restricted stock unit agreement for directors, which restricted stock units shall vest in full on the date immediately preceding the date of the next occurring Annual Meeting, subject to the director’s continued, active service as a director on such vesting date.   Each director appointed to the Board other than pursuant to election at the Annual Meeting may, at the discretion of the Board, receive a pro-rated annual grant of restricted stock units, pursuant to the terms of the Company’s standard form of restricted stock unit agreement for directors, which restricted stock units shall vest in full on the date immediately preceding the date of the next occurring Annual Meeting, subject to the director’s continued, active service as a director on such vesting date.

 

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In addition to the foregoing payments, each member of the Board shall be entitled to reimbursement for travel expenses incurred in attending Board meetings and any committee meetings (travel expense reimbursement is subject to the Company’s current expense policy, as amended from time to time).

The Company does not pay any Board retainers or fees or provide any Board equity grants not set forth above. These retainers, fees, or grants may be modified or adjusted from time to time as determined by the Board on recommendation of the Committee.

This Policy supersedes all prior agreements or policies concerning director compensation.

 

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Amendment to Registration Statement on Form S-1 (No. 333-254580) of our report dated March 22, 2021, relating to the consolidated financial statements of CMI Acquisition, LLC and Subsidiaries. We also consent to the reference to us under the heading “Experts” in such Registration Statement.

 

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

April 12, 2021