MAGNACHIP SEMICONDUCTOR Corp - Quarter Report: 2021 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

001-34791

Magnachip Semiconductor Corporation

(Exact name of registrant as specified in its charter)


Delaware		83-0406195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o MagnaChip Semiconductor S.A.

1, Allée Scheffer,

L-2520

Luxembourg, Grand Duchy of Luxembourg

(352)

45-62-62

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒

Yes

☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or 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.

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 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). ☐ Yes ☒ No

As of July 31, 2021, the registrant had 46,451,323 shares of common stock outstanding.

Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS


		Page No.
PART I FINANCIAL INFORMATION			3
Item 1.	Interim Consolidated Financial Statements (Unaudited)		3
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020		3
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020		4
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020		5
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020		6
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020		7
	Magnachip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		52
Item 4.	Controls and Procedures		53
PART II OTHER INFORMATION			54
Item 1.	Legal Proceedings		54
Item 1A.	Risk Factors		54
Item 6.	Exhibits		56
SIGNATURES			57

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


	June 30, 2021			December 31, 2020
	(In thousands of U.S. dollars, except share data)
Assets
Current assets
Cash and cash equivalents	$	271,880		$	279,940
Accounts receivable, net		56,730			64,390
Inventories, net		41,369			39,039
Other receivables		9,173			4,338
Prepaid expenses		6,836			7,332
Hedge collateral (Note 9)		4,830			5,250
Other current assets (Notes 10 and 19)		5,117			9,321

Total current assets		395,935			409,610
Property, plant and equipment, net		94,721			96,383
Operating lease right-of-use assets		4,520			4,632
Intangible assets, net		2,541			2,727
Long-term prepaid expenses		5,626			4,058
Deferred income taxes		43,069			44,541
Other non-current assets		11,141			9,739

Total assets	$	557,553		$	571,690

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	52,040		$	52,164
Other accounts payable		9,119			2,531
Accrued expenses (Note 8)		13,020			16,241
Accrued income taxes		1,679			12,398
Operating lease liabilities		2,181			2,210
Current portion of long-term borrowings, net		—			83,479
Other current liabilities (Note 10)		5,001			4,595

Total current liabilities		83,040			173,618
Accrued severance benefits, net		39,520			40,462
Non-current operating lease liabilities		2,338			2,422
Other non-current liabilities		10,024			9,588

Total liabilities		134,922			226,090

Commitments and contingencies (Note 19)
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 55,562,907 shares issued and 46,350,945 outstanding at June 30, 2021 and 44,943,854 shares issued and 35,783,347 outstanding at December 31, 2020		556			450
Additional paid-in capital		253,244			163,010
Retained earnings		279,163			286,834
Treasury stock, 9,211,962 shares at June 30, 2021 and 9,160,507 shares at December 31, 2020, respectively		(109,407	)		(108,397	)
Accumulated other comprehensive income (loss)		(925	)		3,703

Total stockholders’ equity		422,631			345,600

Total liabilities and stockholders’ equity	$	557,553		$	571,690

The accompanying notes are an integral part of these consolidated financial statements.

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	(In thousands of U.S. dollars, except share data)
Revenues:
Net sales – standard products business	$	103,268		$	108,955		$	216,174		$	219,691
Net sales – transitional Fab 3 foundry services		10,608			9,873			20,721			19,610

Total revenues		113,876			118,828			236,895			239,301
Cost of sales:
Cost of sales – standard products business		70,409			76,817			149,656			158,423
Cost of sales – transitional Fab 3 foundry services		9,497			9,873			18,887			19,610

Total cost of sales		79,906			86,690			168,543			178,033

Gross profit		33,970			32,138			68,352			61,268
Operating expenses:
Selling, general and administrative expenses		14,001			12,408			26,635			24,510
Research and development expenses		13,322			11,108			26,745			21,617
Other charges		5,020			—			15,436			554

Total operating expenses		32,343			23,516			68,816			46,681

Operating income ( loss)		1,627			8,622			(464	)		14,587
Interest expense		(85	)		(5,430	)		(1,126	)		(11,037	)
Foreign currency gain (loss), net		250			8,469			(4,421	)		(22,502	)
Other income, net		611			791			1,231			1,629

Income (loss) from continuing operations before income tax expense		2,403			12,452			(4,780	)		(17,323	)
Income tax expense		2,601			678			2,891			1,981

Income (loss) from continuing operations		(198	)		11,774			(7,671	)		(19,304	)
Income from discontinued operations, net of tax		—			17,397			—			24,726

Net income (loss)	$	(198	)	$	29,171		$	(7,671	)	$	5,422

Basic earnings (loss) per common share—
Continuing operations	$	(0.00	)	$	0.34		$	(0.18	)	$	(0.55	)
Discontinued operations		—			0.50			—			0.71

Total	$	(0.00	)	$	0.84		$	(0.18	)	$	0.16

Diluted earnings (loss) per common share—
Continuing operations	$	(0.00	)	$	0.28		$	(0.18	)	$	(0.55	)
Discontinued operations		—			0.37			—			0.71

Total	$	(0.00	)	$	0.65		$	(0.18	)	$	0.16

Weighted average number of shares—
Basic		46,322,027			35,092,312			43,324,088			34,992,734
Diluted		46,322,027			46,474,237			43,324,088			34,992,734

The accompanying notes are an integral part of these consolidated financial statements.

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


	Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	(In thousands of U.S. dollars)
Net income (loss)	$	(198	)	$	29,171		$	(7,671	)	$	5,422

Other comprehensive income (loss)
Foreign currency translation adjustments		109			(6,543	)		(1,949	)		15,708
Derivative adjustments
Fair valuation of derivatives		432			2,204			(1,693	)		(2,800	)
Reclassification adjustment for loss (gain) on derivatives included in net income (loss)		(475	)		193			(986	)		251

Total other comprehensive income (loss)		66			(4,146	)		(4,628	)		13,159

Total comprehensive income (loss)	$	(132	)	$	25,025		$	(12,299	)	$	18,581

The accompanying notes are an integral part of these consolidated financial statements.

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)


	Common Stock				Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
(In thousands of U.S. dollars, except share data)	Shares		Amount		Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Three Months Ended June 30, 2021:
Balance at March 31, 2021		46,257,413	$	555	$	250,829		$	279,361		$	(109,407	)	$	(991	)	$	420,347
Stock-based compensation		—		—		2,405			—			—			—			2,405
Exercise of stock options		1,000		0		11			—			—			—			11
Settlement of restricted stock units		92,532		1		(1	)		—			—			—			—
Other comprehensive income, net		—		—		—			—			—			66			66
Net loss		—		—		—			(198	)		—			—			(198	)

Balance at June 30, 2021		46,350,945	$	556	$	253,244		$	279,163		$	(109,407	)	$	(925	)	$	422,631

Three Months Ended June 30, 2020:
Balance at March 31, 2020		35,054,682	$	442	$	153,286		$	(81,880	)	$	(107,649	)	$	14,645		$	(21,156	)
Stock-based compensation		—		—		1,643			—			—			—			1,643
Exercise of stock options		88,351		1		662			—			—			—			663
Other comprehensive loss, net		—		—		—			—			—			(4,146	)		(4,146	)
Net income		—		—		—			29,171			—			—			29,171

Balance at June 30, 2020		35,143,033	$	443	$	155,591		$	(52,709	)	$	(107,649	)	$	10,499		$	6,175


	Common Stock					Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
(In thousands of U.S. dollars, except share data)	Shares			Amount		Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Six Months Ended June 30, 2021:
Balance at December 31, 2020		35,783,347		$	450	$	163,010		$	286,834		$	(108,397	)	$	3,703		$	345,600
Stock-based compensation		—			—		4,051			—			—			—			4,051
Exchange of exchangeable senior notes		10,144,131			101		83,639												83,740
Exercise of stock options		176,760			2		2,547			—			—			—			2,549
Settlement of restricted stock units		298,162			3		(3	)		—			—			—			—
Acquisition of treasury stock		(51,455	)		—		—			—			(1,010	)		—			(1,010	)
Other comprehensive loss, net		—			—		—			—			—			(4,628	)		(4,628	)
Net loss		—			—		—			(7,671	)		—			—			(7,671	)

Balance at June 30, 2021		46,350,945		$	556	$	253,244		$	279,163		$	(109,407	)	$	(925	)	$	422,631

Six Months Ended June 30, 2020:
Balance at December 31, 2019		34,800,312		$	439	$	152,404		$	(58,131	)	$	(107,033	)	$	(2,660	)	$	(14,981	)
Stock-based compensation		—			—		2,528			—			—			—			2,528
Exercise of stock options		88,351			1		662			—			—			—			663
Settlement of restricted stock units		308,364			3		(3	)		—			—			—			—
Acquisition of treasury stock		(53,994	)		—		—			—			(616	)		—			(616	)
Other comprehensive income, net		—			—		—			—			—			13,159			13,159
Net income		—			—		—			5,422			—			—			5,422

Balance at June 30, 2020		35,143,033		$	443	$	155,591		$	(52,709	)	$	(107,649	)	$	10,499		$	6,175

The accompanying notes are an integral part of these consolidated financial statements.

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended
	June 30, 2021			June 30, 2020
	(In thousands of U.S. dollars)
Cash flows from operating activities
Net income (loss)	$	(7,671	)	$	5,422
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		6,998			10,479
Provision for severance benefits		3,507			10,179
Amortization of debt issuance costs and original issue discount		261			1,205
Loss on foreign currency, net		13,353			26,397
Restructuring and other charges		3,295			141
Provision for inventory reserves		3,346			2,033
Stock-based compensation		4,051			2,528
Other, net		266			(111	)
Changes in operating assets and liabilities
Accounts receivable, net		5,098			(438	)
Unbilled accounts receivable, net		—			10,933
Inventories		(7,170	)		(14,060	)
Other receivables		(4,841	)		67
Other current assets		8,623			4,747
Accounts payable		1,040			4,947
Other accounts payable		(2,287	)		(5,898	)
Accrued expenses		(3,980	)		161
Accrued income taxes		(10,249	)		349
Other current liabilities		(102	)		871
Other non-current liabilities		(274	)		1,238
Payment of severance benefits		(2,836	)		(4,272	)
Other, net		(62	)		147

Net cash provided by operating activities		10,366			57,065
Cash flows from investing activities
Proceeds from settlement of hedge collateral		972			5,855
Payment of hedge collateral		(585	)		(7,841	)
Purchase of property, plant and equipment		(4,866	)		(8,842	)
Payment for intellectual property registration		(288	)		(473	)
Collection of guarantee deposits		307			47
Payment of guarantee deposits		(4,960	)		(571	)
Other, net		(130	)		21

Net cash used in investing activities		(9,550	)		(11,804	)
Cash flows from financing activities
Proceeds from exercise of stock options		2,549			663
Acquisition of treasury stock		(1,653	)		(1,021	)
Repayment of financing related to water treatment facility arrangement		(288	)		(267	)
Repayment of principal portion of finance lease liabilities		(33	)		(119	)

Net cash provided by (used in) financing activities		575			(744	)
Effect of exchange rates on cash and cash equivalents		(9,451	)		(3,350	)

Net increase (decrease) in cash and cash equivalents		(8,060	)		41,167
Cash and cash equivalents
Beginning of the period		279,940			151,657

End of the period	$	271,880		$	192,824

Supplemental cash flow information
Cash paid for interest	$	2,094		$	9,522
Cash paid for income taxes	$	11,227		$	1,889
Non-cash investing activities
Property, plant and equipment additions in other accounts payable	$	3,632		$	602
Non-cash financing activities
Exchange of exchangeable senior notes into common stock	$	83,740		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. Business, Basis of Presentation and Significant Accounting Policies

Business

Magnachip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, industrial and automotive applications. The Company provides technology platforms for analog, mixed signal, power, high voltage,

non-volatile

memory and Radio Frequency (“RF”) applications.

On September 1, 2020 (the “Closing Date”), the Company completed the sale of the Company’s Foundry Services Group business and its fabrication facility located in Cheongju, Korea, known as “Fab 4” to Key Foundry Co., Ltd. (the “Buyer”), a Korean corporation, in exchange for a purchase price equal to approximately $350.6 million in cash, pursuant to the terms of a business transfer agreement (the “Business Transfer Agreement”) dated March 31, 2020 by and among the Company and Magnus Semiconductor, LLC, a Korean limited liability company (“Magnus”). The purchase price was paid in a combination of U.S. Dollars in the amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer assumed all severance liabilities relating to the transferred employees, which had a value of approximately $100 million. The Buyer is a wholly owned subsidiary of Magnus, which was established by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. On April 20, 2020, Magnus assigned, and the Buyer assumed, all rights and obligations of Magnus under the Business Transfer Agreement. This divestiture of the Foundry Services Group business and Fab 4 was made in connection with the Company’s strategic shift of its operational focus to its standard products business. The Foundry Services Group was historically a reportable segment. The Foundry Services Group business was classified as discontinued operations in the Company’s consolidated statements of operations and excluded from both continuing operations and segment results for the three months ended March 31, 2020. Accordingly, the Company has one reportable segment, its standard products business, together with transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3,” that it expects to perform for the Buyer for a period of up to three years from the Closing Date (the “Transitional Fab 3 Foundry Services”).

The Company’s standard products business includes its Display Solutions and Power Solutions business lines. The Company’s Display Solutions products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and mobile, automotive applications and home appliances. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer and industrial applications.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification (“ASC”) 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements, except for the changes below. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for a full year or for any other periods. The consolidated statement of cash flow for the six months ended June 30, 2020 has not been adjusted to separately disclose the cash flow related to discontinued operations, but the material items in the operating and investing activities of the cash flow relating to discontinued operations for the same period is disclosed in Note 3. Unless otherwise stated, information in these notes to consolidated financial statements relates to the Company’s continuing operations and excludes the discontinued operations.

The December 31, 2020 balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form

10-K

for the fiscal year ended December 31, 2020.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No. 2019-12,

“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU

2019-12”).

ASU

2019-12

removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU

2019-12

as of January 1, 2021, and the adoption of ASU

2019-12

did not have a material impact on the Company’s consolidated financial statements.

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2. Merger Agreement

On March 25, 2021, the Company, South Dearborn Limited, an exempted company incorporated in the Cayman Islands with limited liability (“Parent”), formed by an affiliate of Wise Road Capital LTD, and Michigan Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, among other things, and subject to the terms and conditions thereof, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing its corporate existence under the General Corporation Law of the State of Delaware (the “DGCL”) as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent.

Pursuant to the Merger Agreement, each share of the Company’s common stock, par value $0.01 per share (the “Common Stock”), issued and outstanding immediately before the effective time of the Merger (the “Effective Time”) (other than (a) shares of Common Stock owned by the Company or any of its wholly owned subsidiaries or by Parent or any of its subsidiaries immediately before the Effective Time (collectively,

the

“Excluded Shares”) and (b) any shares of Common Stock for which the holder thereof (i) has not voted in favor of the Merger or consented to it in writing and (ii) has properly and validly exercised their statutory rights of appraisal in respect of such shares of Common Stock in accordance with Section 262 of the DGCL (collectively, “Dissenting Shares”)) will be cancelled and will cease to exist and will be automatically converted into the right to receive $29.00 in cash, without interest (the “Merger Consideration”), subject to applicable withholding taxes.

Consummation of the Merger is subject to certain customary closing conditions, including (i) approval of the Merger Agreement by our stockholders, (ii) the receipt of certain required or requested governmental approvals or authorizations (including from the Committee on Foreign Investment in the United States (“CFIUS”) and the Korean Ministry of Trade, Industry and Energy (“MOTIE”)), (iii) the absence of any order or law issued, enacted or deemed applicable by certain governmental authorities specified in the Merger Agreement that makes consummation of the Merger illegal and that remains in effect (a “Prohibitive Order”), (iv) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties, and each party’s compliance with its obligations under the Merger Agreement (subject in the case of this clause (v) to certain materiality qualifiers).

The Merger Agreement contains termination rights for each of the Company and Parent, including if (i) the consummation of the Merger does not occur by 11:59 p.m. (New York time) on September 25, 2021 (subject to extension to December 25, 2021 and again to March 25, 2022 at the option of either party if certain regulatory approvals or authorizations have not been obtained by such date or certain governmental authorities specified in the Merger Agreement have issued, enacted or deemed applicable a Prohibitive Order), (ii) the Requisite Company Vote is not obtained, (iii) any of certain governmental authorities specified in the Merger Agreement issues, enacts or deems applicable after the date of the Merger Agreement a Prohibitive Order that has become final and

non-appealable,

or (iv) the other party has breached the Merger Agreement, which breach would give rise to a failure, or has materially contributed to the failure, of certain conditions to the

non-breaching

party’s obligations to close (subject to a cure period). Additionally, each of the Company and Parent may terminate the Merger Agreement in certain other circumstances.

For the three and six months ended June 30, 2021, the Company incurred $2,459 thousand and $12,290 thousand, respectively, of professional fees and certain transaction

related-expenses

incurred in connection with the Merger, which were recognized in other charges in the consolidated statements of operations.

The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to the Company’s Current Report on Form

8-K

filed on March 29, 2021.

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3. Discontinued Operations

On September 1, 2020, the Company completed the sale of the Company’s Foundry Services Group business and Fab 4. As a result of the sale of the Foundry Services Group business and Fab 4, the Company recorded a gain of $287,117

thousand and all operations from the Foundry Services Group business and Fab 4 were classified as discontinued operations for the three and six months ended June 30, 2020. Following the consummation of the sale, and for up to three years, the Company is expected to provide the Transitional Fab 3 Foundry Services at an agreed upon cost plus

mark-up.

For the periods prior to the Closing Date, revenue from providing the Transitional Fab 3 Foundry Services to the Foundry Services Group is recorded at cost on both of the continuing and discontinued businesses for comparative purposes. Cash inflows to the Company from the Buyer related to providing the Transitional Fab 3 Foundry Services were

$11,166 thousand and $24,790 thousand for the three and six months ended June 30, 2021, respectively.

The following table summarizes the results from discontinued operations, net of tax, for the three and six months ended June 30, 2020.


	Three Months Ended			Six Months Ended
	June 30, 2020			June 30, 2020
	(In thousands of U.S. dollars)
Revenues:
Net sales – Foundry Services Group	$	95,779		$	182,058
Net sales – transitional Fab 3 foundry services		(9,873	)		(19,610	)

Total revenues		85,906			162,448
Cost of sales:
Cost of sales – Foundry Services Group		64,869			130,452
Cost of sales – transitional Fab 3 foundry services		(9,873	)		(19,610	)

Total cost of sales		54,996			110,842

Gross profit		30,910			51,606
Operating expenses:
Selling, general and administrative expenses		4,992			10,636
Research and development expenses		6,915			14,318
Restructuring and other charges		589			2,704

Total operating expenses		12,496			27,658

Operating income from discontinued operations		18,414			23,948
Foreign currency gain (loss), net		(23	)		2,074
Others, net		(59	)		48

Income from discontinued operations before income tax expense		18,332			26,070
Income tax expense		935			1,344

Income from discontinued operations, net of tax	$	17,397		$	24,726

For the three and six months ended June 30, 2020, the Company recorded $589 thousand and $2,704

thousand, respectively, in professional fees incurred in connection with the sale of the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the abov

The following table provides supplemental cash flows information related to discontinued operations:


	Six Months Ended
	June 30, 2020
	(In thousands of U.S. dollars)
Significant non-cash operating activities:
Depreciation and amortization	$	5,365
Provision for severance benefits		6,405
Stock-based compensation		263
Investing activities:
Capital expenditures	$	(4,415	)

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4. Inventories

Inventories as of June 30, 2021 and December 31, 2020 consist of the following (in thousands):


	June 30, 2021			December 31, 2020
Finished goods	$	7,829		$	6,425
Semi-finished goods and work-in-process		32,524			30,968
Raw materials		8,524			6,526
Materials in-transit		593			1,021
Less: inventory reserve		(8,101	)		(5,901	)

Inventories, net	$	41,369		$	39,039

Changes in inventory reserve for the three and six months ended June 30, 2021 and 2020 are as follows (in thousands):


	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
	June 30, 2021						June 30, 2020
Beginning balance	$	(6,281	)	$	(5,901	)	$	(4,807	)	$	(5,947	)
Change in reserve
Inventory reserve charged to costs of sales		(3,186	)		(5,350	)		(1,794	)		(3,069	)
Sale of previously reserved inventory		1,343			1,977			747			1,653

		(1,843	)		(3,373	)		(1,047	)		(1,416	)
Write off		28			930			642			1,141
Translation adjustments		(5	)		243			(95	)		221
Reclassified to assets held for sale		—			—			—			694

Ending balance	$	(8,101	)	$	(8,101	)	$	(5,307	)	$	(5,307	)

Inventory reserve represents the Company’s best estimate in value lost due to excessive inventory level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods,

work-in-process

and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or

scrapped.

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5. Property, Plant and Equipment

Property, plant and equipment as of June 30, 2021 and December 31, 2020 are comprised of the following (in thousands):


	June 30, 2021			December 31, 2020
Buildings and related structures	$	24,184		$	24,882
Machinery and equipment		104,875			106,244
Finance lease right-of-use assets		331			344
Others		44,277			40,116

		173,667			171,586
Less: accumulated depreciation		(93,549	)		(90,370	)
Land		14,603			15,167

Property, plant and equipment, net	$	94,721		$	96,383

Aggregate depreciation expenses totaled $6,626 thousand and $4,794 thousand for the six months ended June 30, 2021 and 2020, respectively.

6. Intangible Assets

Intangible assets as of June 30, 2021 and December 31, 2020 are comprised of the following (in thousands):


	June 30, 2021
	Gross amount		Accumulated amortization			Net amount
Intellectual property assets	$	9,425	$	(6,884	)	$	2,541

Intangible assets	$	9,425	$	(6,884	)	$	2,541


	December 31, 2020
	Gross amount		Accumulated amortization			Net amount
Intellectual property assets	$	9,486	$	(6,759	)	$	2,727

Intangible assets	$	9,486	$	(6,759	)	$	2,727

Aggregate amortization expenses for intangible assets totaled $372 thousand and $320

thousand for the six months ended June 30, 2021 and 2020,

respectively.

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7. Leases

The Company has operating and finance leases for buildings and other assets such as vehicles and office equipment. The Company’s leases have remaining lease terms ranging from 1 year to 5 years.

The tables below present financial information related to the Company’s leases.

Supplemental balance sheets information related to leases as of June 30, 2021 and December 31, 2020 are as follows (in thousands):


Leases	Classification	June 30, 2021		December 31, 2020
Assets
Operating lease	Operating lease right-of-use assets	$	4,520	$	4,632
Finance lease	Property, plant and equipment, net		165		206

Total lease assets		$	4,685	$	4,838

Liabilities
Current
Operating	Operating lease liabilities	$	2,181	$	2,210
Finance	Other current liabilities		69		68
Non-current
Operating	Non-current operating lease liabilities		2,338		2,422
Finance	Other non-current liabilities		112		153

Total lease liabilities		$	4,700	$	4,853

The following table presents the weighted average remaining lease term and discount rate:


	June 30, 2021			December 31, 2020
Weighted average remaining lease term
Operating leases		2.9 years			3.0 years
Finance leases		2.5 years			3.0 years
Weighted average discount rate
Operating leases		4.71	%		5.55	%
Finance leases		7.75	%		7.75	%

The components of lease cost included in the Company’s consolidated statements of operations, are as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Operating lease cost	$	727	$	461	$	1,407	$	929
Finance lease cost
Amortization of right-of-use assets		16		15		33		31
Interest on lease liabilities		3		4		7		9

Total lease cost	$	746	$	480	$	1,447	$	969

The above table does not include an immaterial cost of short-term leases for the three and six months ended June 30, 2021 and 2020.

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Other lease information is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	727	$	461	$	1,407	$	929
Operating cash flows from finance leases		3		4		7		9
Financing cash flows from finance leases		17		14		33		28

The aggregate future lease payments for operating and finance leases as of June 30, 2021 are as follows (in thousands):


	Operating Leases			Finance Leases
Remainder of 2021	$	1,409		$	40
2022		1,574			79
2023		837			80
2024		601			—
2025		414			—

Total future lease payments		4,835			199
Less: Imputed interest		(316	)		(18	)

Present value of future payments	$	4,519		$	181

8. Accrued Expenses

Accrued expenses as of June 30, 2021 and December 31, 2020 are comprised of the following (in thousands):


	June 30, 2021		December 31, 2020
Payroll, benefits and related taxes, excluding severance benefits	$	8,259	$	10,296
Withholding tax attributable to intercompany interest income		1,144		28
Interest on senior notes		—		1,396
Outside service fees		1,179		755
Restructuring and others		1,611		2,658
Others		827		1,108

Accrued expenses	$	13,020	$	16,241

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9. Derivative Financial Instruments

The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of the zero cost collar contracts as of June 30, 2021 are as follows (in thousands):


Date of transaction	Total notional amount		Month of settlement
December 15, 2020	$	30,000	July 2021 to December 2021
February 26, 2021	$	18,000	July 2021 to December 2021
May 13, 2021	$	39,000	January 2022 to September 2022

Details of the zero cost collar contracts as of December 31, 2020 are as follows (in thousands):


Date of transaction	Total notional amount		Month of settlement
July 13, 2020	$	30,000	January 2021 to June 2021
December 15, 2020	$	30,000	July 2021 to December 2021
December 18, 2020	$	18,000	March 2021 to June 2021

The zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contract

The fair values of the Company’s outstanding zero cost collar contracts recorded as assets and liabilities as of June 30, 2021 and December 31, 2020 are as follows (in thousands):


Derivatives designated as hedging instruments:		June 30, 2021		December 31, 2020
Asset Derivatives:
Zero cost collars	Other current assets	$	—	$	2,036
Liability Derivatives:
Zero cost collars	Other current liabilities	$	846	$	195
Zero cost collars	Other non-current liabilities	$	66	$	—

Offsetting of derivative liabilities as of June 30, 2021 is as follows (in thousands):


As of June 30, 2021	Gross amounts of recognized liabilities		Gross amounts offset in the balance sheets		Net amounts of liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets				Net amount
As of June 30, 2021	Gross amounts of recognized liabilities		Gross amounts offset in the balance sheets		Net amounts of liabilities presented in the balance sheets		Financial instruments		Cash collateral pledged		Net amount
Liability Derivatives:
Zero cost collars	$	912	$	—	$	912	$	—	$	(580)	$	332

Offsetting of derivative assets and liabilities as of December 31, 2020 is as follows (in thousands):


As of December 31, 2020	Gross amounts of recognized assets/liabilities		Gross amounts offset in the balance sheets		Net amounts of assets/liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets				Net amount
As of December 31, 2020	Gross amounts of recognized assets/liabilities		Gross amounts offset in the balance sheets				Financial instruments		Cash collateral pledged		Net amount
Asset Derivatives:
Zero cost collars	$	2,036	$	—	$	2,036	$	—	$	—	$	2,036
Liability Derivatives:
Zero cost collars	$	195	$	—	$	195	$	—	$	—	$	195

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For derivative instruments that are designated and qualify as cash flow hedges, gains or losses on the derivative aside from components excluded from the assessment of effectiveness are reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended June 30, 2021 and 2020. Net sales of discontinued operations for the three months ended June 30, 2020 are included in the below table (in thousands):


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Income Recognized in AOCI on Derivatives				Location/Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations							Location/Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives
	Three Months Ended June 30,						Three Months Ended June 30,							Three Months Ended June 30,
	2021		2020				2021		2020					2021			2020
Zero cost collars	$	432	$	2,204		Net sales	$	475	$	(193	)		Other income, net	$	(58	)	$	55

	$	432	$	2,204			$	475	$	(193	)			$	(58	)	$	55

The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the six months ended June 30, 2021 and 2020. Net sales of discontinued operations for the six months ended June 30, 2020 are included in the below table (in thousands):


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives						Location/Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations							Location/Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives
	Six Months Ended June 30,								Six Months Ended June 30,							Six Months Ended June 30,
	2021			2020					2021		2020					2021			2020
Zero cost collars	$	(1,693	)	$	(2,800	)		Net sales	$	986	$	(251	)		Other income, net	$	(144	)	$	172

	$	(1,693	)	$	(2,800	)			$	986	$	(251	)			$	(144	)	$	172

As of June 30, 2021, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $1,045 thousand.

The Company set aside cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”), Deutsche Bank AG, Seoul Branch (“DB”) and Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar contracts. These cash deposits are recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of June 30, 2021 and December 31, 2020 are as follows (in thousands):


Counterparties	June 30, 2021		December 31, 2020
NFIK	$	3,250	$	3,250
DB		—		1,000
SC		1,000		1,000

Total	$	4,250	$	5,250

The Company is required to deposit additional cash collateral with NFIK and DB for any exposure in excess of $500

thousand, and $

580 thousand of additional cash collateral was required and recorded as hedge collateral on the consolidated balance sheets as of June 30, 2021. There was no such cash collateral required as of December 31, 2020.

These zero cost collar contracts may be terminated by the counterparties in a number of circumstances, including if the Company’s credit rating falls below

B-/B3

or if the Company’s total cash and cash equivalents is less than $30,000 thousand at the end of a fiscal quarter, unless a waiver is obtained.

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10. Fair Value Measurements

Fair Value of Financial Instruments

As of June 30, 2021, the following table represents the Company’s liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):


	Carrying Value June 30, 2021		Fair Value Measurement June 30, 2021		Quoted Prices in Active Markets for Identical Liability (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Derivative liabilities (other current liabilities)	$	846	$	846		—	$	846		—
Derivative liabilities (other non-current liabilities)	$	66	$	66		—	$	66		—

As of December 31, 2020, the following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):


	Carrying Value December 31, 2020		Fair Value Measurement December 31, 2020		Quoted Prices in Active Markets for Identical Asset / Liability (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivative assets (other current assets)	$	2,036	$	2,036		—	$	2,036		—
Liabilities:
Derivative liabilities (other current liabilities)	$	195	$	195		—	$	195		—

Items not reflected in the table above include cash equivalents, accounts receivable, other receivables, accounts payable, and other accounts payable, fair value of which approximate carrying values due to the short-term nature of these instruments. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs.

Fair Value of Borrowings


	December 31, 2020
	Carrying Value		Fair Value
		(In thousands of U.S. dollars )
Borrowings:
5.0% Exchangeable Senior Notes due March 2021 (Level 2)	$	83,479	$	145,466

On January 17, 2017, the Company’s wholly owned subsidiary, MagnaChip Semiconductor S.A., closed an offering (the “Exchangeable Notes Offering”) of 5.0% Exchangeable Senior Notes due March 1, 2021 (the “Exchangeable Notes”), of $86,250 thousand, which represents the principal amount, excluding $5,902 thousand of debt issuance costs. In December 2018 and February 2019, MagnaChip Semiconductor S.A. repurchased a principal amount equal to $1,590 thousand and $920 thousand, respectively, of the Exchangeable Notes in the open market. The Exchangeable Notes matured on March 1, 2021, unless they were earlier repurchased or converted. The Company estimated the fair value of the Exchangeable Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the Exchangeable Notes, see Note 11, “Borrowings.”

Fair Values Measured on a

Non-recurring

Basis

The Company’s

non-financial

assets, such as property, plant 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. As of June 30, 2021 and 2020 the Company did not have any assets or liabilities

measured at fair value on a

non-recurring

basis.

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11. Borrowings

There were no borrowings outstanding as of June 30, 2021. As of December 31, 2020, the following table represents the Company’s borrowings (in thousands):


	December 31,
	2020
5.0% Exchangeable Senior Notes due March 2021	$	83,740
Less: unamortized discount and debt issuance costs		(261	)

Total borrowings, net		83,479
Less: current portion of long-term borrowings, net		83,479

Long-term borrowings, net	$	—

5.0% Exchangeable Senior Notes

On January 17, 2017, MagnaChip Semiconductor S.A. closed the Exchangeable Notes Offering of $86,250 thousand aggregate principal amount of 5.0% Exchangeable Notes. Interest on the Exchangeable Notes accrue

at a rate of 5.0% per annum, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2017. The Exchangeable Notes matured on March 1, 2021, unless they were earlier repurchased or converted. Holders had the right to convert their notes at their option at any time prior to the close of business on the business day immediately preceding the stated maturity date.

The Company incurred debt issuance costs of $5,902 thousand related to the issuance of the Exchangeable Notes. The debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Interest expense related to the Exchangeable Notes for the six months ended June 30, 2021 was $958 thousand. Interest expense related to the Exchangeable Notes for the three and six months ended June 30, 2020 were $1,425 thousand and $2,841 thousand, respectively.

In February 2019, the Company repurchased a principal amount equal to $920 thousand of the Exchangeable Notes in the open market, resulting in a loss of $63 thousand, which was recorded as loss on early extinguishment of borrowings, net in the consolidated statements of operations for the year ended December 31, 2019. In December 2018, the Company repurchased a principal amount equal to $1,590 thousand of the Exchangeable Notes in the open market, resulting in a loss of $234 thousand, which was recorded as loss on early extinguishment of borrowings, net in the consolidated statements of operations for the year ended December 31, 2018.

Prior to the March 1, 2021 maturity of the Exchangeable Notes, holders elected to exchange all outstanding Exchangeable Notes for an aggregate of 10,144,131

shares of the Company’s common stock in satisfaction in full of the outstanding obligations under the Exchangeable Notes. Upon exchange, the Company delivered for each $1,000 principal amount of

exchanged

Exchangeable Notes a number of shares equal to the exchange rate of 121.1387 shares of common stock per $1,000 principal amount of Exchangeable Notes, which was equivalent to an exchange price of approximately $8.26 per share of common stock. In connection with the exchanges, the fractional shares were paid in cash. Following March 1, 2021, the Company does not have any Exchangeable Notes outstanding.

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12. Accrued Severance Benefits

The majority of accrued severance benefits are for employees in the Company’s Korean subsidiary. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of June 30, 2021, 98% of all employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits are as follows (in thousands):


	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
	June 30, 2021						June 30, 2020
Beginning balance	$	52,553		$	54,452		$	50,610		$	53,344
Provisions		1,736			3,507			1,755			3,774
Severance payments		(1,343	)		(2,836	)		(1,502	)		(3,454	)
Translation adjustments		159			(2,018	)		922			(1,879	)

		53,105			53,105			51,785			51,785
Less: Cumulative contributions to severance insurance deposit accounts		(13,316	)		(13,316	)		(1,570	)		(1,570	)
The National Pension Fund		(59	)		(59	)		(73	)		(73	)
Group severance insurance plan		(210	)		(210	)		(215	)		(215	)

Accrued severance benefits, net	$	39,520		$	39,520		$	49,927		$	49,927

The severance benefits funded through the Company’s National Pension Fund and group severance insurance plan will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

Beginning in July 2018, the Company contributes to certain severance insurance deposit accounts a certain percentage of severance benefits that are accrued for eligible employees for their services from January 1, 2018. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. The Company deducts the contributions made to these severance insurance deposit accounts from its accrued severance benefits.

The Company is liable to pay the following future benefits to its

non-executive

employees upon their normal retirement age (in thousands):


	Severance benefit
Remainder of 2021	$	78
2022		258
2023		651
2024		932
2025		2,051
2026		2,356
2027 – 2031		19,643

The above amounts were determined based on the

non-executive

employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to

non-executive

employees that will cease working with the Company before their normal retirement ages.

Korea’s mandatory retirement age is 60 under the Employment Promotion for the Aged Act.

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13. Foreign Currency Gain (Loss), Net

Net foreign currency gain or loss includes

non-cash

translation gain or loss associated with intercompany balances. A substantial portion of the Company’s net foreign currency gain or loss is

non-cash

translation gain or loss associated with intercompany long-term loans to the Company’s Korean subsidiary. The loans are denominated in U.S. dollars and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of June 30, 2021 and December 31, 2020, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $387,486 thousand and $378,852 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,130.0:1 and 1,088.0:1 using the first base rate as of June 30, 2021 and December 31, 2020, respectively, as quoted by the KEB Hana Bank.

Income Taxes

The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income

or non-income tax

examinations by tax authorities of these jurisdictions for all open tax years.

For the three and six months ended June 30, 2021, the Company recorded an income tax expense from continuing operations of $

2,601

thousand and $

2,891

thousand, respectively, primarily attributable to interest on intercompany loan balances. During the second quarter of 2021, income tax expense of $

624

thousand was also recorded for certain income-based tax assessments as a result of a regular tax examination completed for the Company’s Korean subsidiary for multiple tax year

For the three and six months ended June 30, 2020, the Company recorded an income tax expense from

continuing operations of $

678

thousand and $

1,981

thousand, respectively, primarily attributable to interest on intercompany loan balances. The income tax expense was recorded for the Company’s Korean subsidiary based on the estimated taxable income for the respective period, combined with its ability to utilize net operating loss carryforwards up to

60%

in 2020.

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15. Geographic and Other Information

The following sets forth information relating to the single continuing operating segment (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Revenues
Standard products business
Display Solutions	$	46,601	$	69,176	$	105,496	$	146,769
Power Solutions		56,667		39,779		110,678		72,922

Total standard products business		103,268		108,955		216,174		219,691
Transitional Fab 3 foundry services		10,608		9,873		20,721		19,610

Total revenues	$	113,876	$	118,828	$	236,895	$	239,301


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Gross Profit
Standard products business	$	32,859	$	32,138	$	66,518	$	61,268
Transitional Fab 3 foundry services		1,111		—		1,834		—

Total gross profit	$	33,970	$	32,138	$	68,352	$	61,268

The following is a summary of net sales—standard products business (which does not include the Transitional Fab 3 Foundry Services) by geographic region, based on the location to which the products are billed (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Korea	$	30,868	$	21,957	$	57,302	$	52,774
Asia Pacific (other than Korea)		69,352		84,210		153,092		161,752
United States		1,363		1,461		2,637		2,170
Europe		1,206		856		2,449		1,827
Others		479		471		694		1,168

Total	$	103,268	$	108,955	$	216,174	$	219,691

For the three months ended June 30, 2021 and 2020, of the Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in China and Hong Kong represented 60.6% and 82.8%, respectively, and net sales—standard products business in Vietnam represented 32.0% and 13.8%, respectively. For the six months ended June 30, 2021 and 2020, of the Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in China and Hong Kong represented 58.6% and 88.8%, respectively, and net sales—standard products business in Vietnam represented 35.0% and 7.7%, respectively.

Net sales from the Company’s top ten largest customers in the standard products business (which does not include the Transitional Fab 3 Foundry Services) accounted for 80% and 88% for the three months ended June 30, 2021 and 2020, respectively, and 81% and 89%

for the six months ended June 30, 2021 and 2020, respectively.

For the three months ended June 30, 2021, the Company had two customers that represented 40.0% and 11.7% of its net sales – standard products business. For the six months ended June 30, 2021, the Company had two customers that represented 44.6% and 10.8% of its net sales – standard products business. For the three months ended June 30, 2020, the Company had one customer that represented 56.5% of its net sales – standard products business, and for the six months ended June 30, 2020, the Company had two customers that represented 54.7% and 10.7% of its net sales – standard products business.

As of June 30, 2021 and December 31, 2020, one customer accounted for 26.9% and 45.1% of accounts receivable, respectively.

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16. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the following as of June 30, 2021 and December 31, 2020, respectively (in thousands):


	June 30, 2021			December 31, 2020
Foreign currency translation adjustments	$	120		$	2,069
Derivative adjustments		(1,045	)		1,634

Total	$	(925	)	$	3,703

Changes in accumulated other comprehensive income (loss) for the three months ended June 30, 2021 and 2020 are as follows (in thousands):


Three Months Ended June 30, 2021	Foreign currency translation adjustments		Derivative adjustments			Total
Beginning balance	$	11	$	(1,002	)	$	(991	)

Other comprehensive income before reclassifications		109		432			541
Amounts reclassified from accumulated other comprehensive income		—		(475	)		(475	)

Net current-period other comprehensive income (loss)		109		(43	)		66

Ending balance	$	120	$	(1,045	)	$	(925	)


Three Months Ended June 30, 2020	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	18,046		$	(3,401	)	$	14,645

Other comprehensive income (loss) before reclassifications		(6,543	)		2,204			(4,339	)
Amounts reclassified from accumulated other comprehensive loss		—			193			193

Net current-period other comprehensive income (loss)		(6,543	)		2,397			(4,146	)

Ending balance	$	11,503		$	(1,004	)	$	10,499

Changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2021 and 2020 are as follows (in thousands):


Six Months Ended June 30, 2021	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	2,069		$	1,634		$	3,703

Other comprehensive loss before reclassifications		(1,949	)		(1,693	)		(3,642	)
Amounts reclassified from accumulated other comprehensive income		—			(986	)		(986	)

Net current-period other comprehensive loss		(1,949	)		(2,679	)		(4,628	)

Ending balance	$	120		$	(1,045	)	$	(925	)


Six Months Ended June 30, 2020	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	(4,205	)	$	1,545		$	(2,660	)

Other comprehensive income (loss) before reclassifications		15,708			(2,800	)		12,908
Amounts reclassified from accumulated other comprehensive loss		—			251			251

Net current-period other comprehensive income (loss)		15,708			(2,549	)		13,159

Ending balance	$	11,503		$	(1,004	)	$	10,499

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17. Earnings (Loss) Per Share

The following table illustrates the computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended					Six Months Ended
	June 30, 2021			June 30, 2020		June 30, 2021			June 30, 2020
	(In thousands of U.S. dollars, except share data)
Basic earnings (loss) per share
Income (loss) from continuing operations	$	(198	)	$	11,774	$	(7,671	)	$	(19,304	)
Income from discontinued operations, net of tax		—			17,397		—			24,726

Net income (loss)	$	(198	)	$	29,171	$	(7,671	)	$	5,422

Basic weighted average common stock outstanding		46,322,027			35,092,312		43,324,088			34,992,734
Basic earnings (loss) per common share
Continuing operations	$	(0.00	)	$	0.34	$	(0.18	)	$	(0.55	)
Discontinued operations		—			0.50		—			0.71

Total	$	(0.00	)	$	0.84	$	(0.18	)	$	0.16

Diluted earnings (loss) per share
Income (loss) from continuing operations	$	(198	)	$	11,774	$	(7,671	)	$	(19,304	)
Add back: Interest expense on Exchangeable Notes		—			1,425		—			—

Income (loss) from continuing operations allocated to common stockholders	$	(198	)	$	13,199	$	(7,671	)	$	(19,304	)
Income from discontinued operations, net of tax		—			17,397		—			24,726

Net income (loss) allocated to common stockholders	$	(198	)	$	30,596	$	(7,671	)	$	5,422

Basic weighted average common stock outstanding		46,322,027			35,092,312		43,324,088			34,992,734
Net effect of dilutive equity awards		—			1,237,770		—			—
Net effect of assumed conversion of 5.0% Exchangeable Notes to common stock		—			10,144,155		—			—

Diluted weighted average common stock outstanding		46,322,027			46,474,237		43,324,088			34,992,734
Continuing operations	$	(0.00	)	$	0.28	$	(0.18	)	$	(0.55	)
Discontinued operations		—			0.37		—			0.71

Total	$	(0.00	)	$	0.65	$	(0.18	)	$	0.16

The following outstanding instruments were excluded from the computation of diluted earnings (loss) per share, as they have an anti-dilutive effect on the calculation:

	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Options		1,470,421		699,167		1,470,421		2,075,494
Restricted Stock Units		1,012,197		—		1,012,197		1,238,639

For the six months ended June 30, 2021 and 2020, 2,875,982 shares and 10,144,155 shares, respectively, of potential common stock from the assumed conversion of Exchangeable Notes were also excluded from the computation of diluted loss per share as the effect were anti-dilutive for the period.

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18. Other Charges

For the three months ended June 30, 2021, other charges

totaled $

5,020

thousand, of

which $

2,459

thousand related to professional fees and certain transaction related expenses incurred in connection with the Merger and $2,561 thousand related to certain

non-recurring

professional fees and expenses in connection with regulatory requests.

For the six months ended June 30, 2021, other charges totaled

$15,436

thousand, of which

$12,290

thousand related to professional fees and certain transaction related expenses incurred in connection with the Merger and

$3,146

thousand related to certain

non-recurring

professional fees and expenses in connection with regulatory requests. For the six months ended June 30, 2020, other charges were

$554

thousand, which pertained to

non-recurring

professional service fees and expenses incurred in connection with certain treasury and finance initiatives.

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19. Commitments and Contingencies

Advances to Suppliers

The Company, from time to time, may make advances in form of prepayments or deposits to suppliers to procure materials to meet its planned production. The Company recorded advances of $1,150 thousand and $5,500 thousand as other current assets as of June 30, 2021 and December 31, 2020, respectively.

COVID-19

Pandemic

In December 2019, a strain of coronavirus causing a disease known as

COVID-19

surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the

COVID-19

outbreak a pandemic. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines,

shelter-in-place

orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of

COVID-19

have in some cases resulted in the

re-imposition

of certain restrictions and containment measures, and may continue to lead to other restrictions being

re-implemented

in the foreseeable future in response to efforts to reduce the rapid spread of

COVID-19.

The Company experienced some minor disruption in its Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of the

COVID-19

pandemic. To date, its external Display Solutions business contractors and

sub-contractors

have not been materially impacted by the

COVID-19

pandemic. The Company is, however, unable to accurately predict the full impact that the

COVID-19

pandemic will have on its future results of operations due to numerous uncertainties, including the severity and duration of the outbreak, the efficacy of ongoing global vaccination efforts, potential future recurrences of the outbreak, the spread of disease variants that may be resistant to the existing vaccines, further containment actions that may be taken by governmental authorities, the impact to the businesses of its customers and suppliers, and other factors.

The Company continues to closely monitor and evaluate the nature and scope of the impact of the

COVID-19

pandemic to its business, consolidated results of operations, and financial condition, and may take further actions altering its business operations and managing its costs and liquidity that the Company deems necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

Merger-related Complaints

Since April 22, 2021, eleven complaints (each, a “Shareholder Complaint,” and together, the “Shareholder Complaints”) have been filed seeking to enjoin the Merger, or, if the Merger is consummated, rescind the Merger or recover damages, as well as an award of each plaintiff’s fees and litigation expenses. The Shareholder Complaints, each filed as an individual action by a purported stockholder of the Company, are captioned as

Schulthess v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03587

(S.D.N.Y.) (the “Schulthess Complaint”),

Pittman v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-02306

(E.D.N.Y.),

Flanagan v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03743

(S.D.N.Y.),

Castelli v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03769

(S.D.N.Y.) (the “Castelli Complaint”),

Doolittle v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03801

(S.D.N.Y.),

Thomas v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03860

(S.D.N.Y.),

Finger v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-03927

(S.D.N.Y.),

Kent v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-00657

(D. Del.),

Kennedy v. Magnachip Semiconductor Corporation, et al.

, Case No.

2:21-cv-02110

(E.D. Pa.),

Monroy v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-04921

(S.D.N.Y.) (the “Monroy Complaint”), and

Jones v. Magnachip Semiconductor Corporation, et al.

, Case No.

1:21-cv-04966

(S.D.N.Y.). Each Shareholder Complaint alleges either that the preliminary proxy statement filed by the Company with the Securities and Exchange Commission (“SEC”) on April 19, 2021 or the definitive proxy statement filed by the Company with the SEC on May 7, 2021, is false and/or misleading and asserts claims for violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and SEC Rule

14a-9

against the Company and certain current or former members of the Company’s board of directors (the “Board”). The Schulthess Complaint, Castelli Complaint and Monroy Complaint also allege breaches of fiduciary duties by certain current or former members of the Board. The Schulthess Complaint further alleges that the Company aided and abetted purported breaches of fiduciary duties by certain current or former members of the Board.

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Merger-related Events

CFIUS

On May 26, 2021, outside legal counsel of each of the Company and Parent received an

e-mail

from the U.S. Department of Treasury on behalf of the Staff Chairperson of the CFIUS. In the

e-mail,

the CFIUS Staff Chairperson, acting on the recommendation of CFIUS, requested that the parties file a notice concerning the Merger and thereby undergo formal CFIUS review of the Merger. Under the terms of the Merger Agreement, the parties’ receipt of the request from CFIUS to file a notice concerning the Merger results in the closing of the Merger now being conditioned on the receipt of CFIUS approval without the imposition of a “Burdensome Condition” (as defined in the Merger Agreement), other than a Burdensome Condition to which Parent had previously agreed. The Company and Parent filed such notice with CFIUS on June 11, 2021.

On June 15, 2021, outside legal counsel of each of the Company and Parent received a letter attaching an “Order Establishing Interim Mitigation Measures” (the “Interim Order”) from the U.S. Department of Treasury on behalf of CFIUS. The Interim Order imposes the following interim measures, effective as of June 15, 2021, on the Company and Parent: (i) neither of the Company or Parent shall take any action, directly or indirectly, to close, consummate, complete, or effectuate the purpose of the Merger, including: (a) the transfer, lease, license, or sale of any asset or subsidiary of the Company to Parent or any affiliate thereof, (b) the merger of Parent or any affiliate thereof with or into the Company or any affiliate thereof, or (c) the acquisition of any equity or other ownership interest in the Company or any affiliate thereof by Parent or any subsidiary thereof; (ii) Parent shall not take, and shall ensure that none of its subsidiaries take, any security interest in the Company or any affiliate thereof; and (iii) the Company shall not take any action to: (a) change its state of incorporation from Delaware to any other jurisdiction or (b) delist from, or modify the existing listing of the Company on, the New York Stock Exchange. The Interim Order is to remain in effect until (1) CFIUS concludes action under Section 721 of the Defense Production Act of 1950, as amended (the “DPA”) with respect to the Merger, (2) the President takes action or declines to take action under Section 721 of the DPA with respect to the Merger or (3) CFIUS or the President revokes or terminates the Interim Order.

On June 17, 2021, in light of the Interim Order, the Company announced the postponement of its special meeting of stockholders, which was scheduled to be held at 8:00 p.m. Eastern time on June 17, 2021, pending further developments with respect to the Interim Order.

On July 26, 2021, outside legal counsel of each of the Company and Parent received a letter from the Acting CFIUS Staff Chairperson notifying the parties that CFIUS will undertake an investigation of the Merger pursuant to Section 721(b)(2) of the DPA, which will be completed no later than September 13, 2021.

MOTIE

On June 16, 2021, the Company’s Korean subsidiary received a letter from the MOTIE requesting it to either apply for an approval or file a report, as may be applicable,

under Article 11-2 of

the Act on Prevention of Divulgence and Protection of Industrial Technology (the “ITA”) concerning the Merger.

Under the terms of the Merger Agreement, the Company’s Korean subsidiary’s receipt of the request from MOTIE to apply for approval or file a report pursuant to the ITA concerning the Merger may be deemed to have resulted in the closing of the Merger now being conditioned on the receipt of MOTIE’s authorization without the imposition of a “Burdensome Condition” (as defined in the Merger Agreement), other than a Burdensome Condition to which Parent had previously agreed. The Company’s Korean subsidiary filed such report with MOTIE on July 20, 2021.

SAMR

On June 30, 2021, based on an application filed by the Company and Parent on May 7, 2021, the State Administration for Market Regulation (“SAMR”) announced that the Merger was cleared pursuant to the Anti-monopoly Law (China) on June 21, 2021. Under the terms of the Merger Agreement, the parties’ receipt of the clearance from SAMR satisfies one of the conditions to the closing of the Merger.

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FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form

10-K

filed on March 9, 2021 (“2020 Form

10-K”)

(including that the impact of the

COVID-19

pandemic may also exacerbate the risks discussed therein).

All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Statements made in this Quarterly Report on Form

10-Q

(this “Report”), unless the context otherwise requires, that include the use of the terms “we,” “us,” “our” and “Magnachip” refer to Magnachip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this Report.

Overview

We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, computing, industrial and automotive applications. We provide technology platforms for analog, mixed-signal, power, high voltage,

non-volatile

memory, and radio frequency applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,200 registered patents and pending applications and extensive engineering and manufacturing process expertise.

Our standard products business includes our Display Solutions and Power Solutions business lines.

Our Display Solutions products provides flat panel display solutions to major suppliers of large and small flat panel displays. These products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in mobile communications, automobiles, entertainment devices, notebook PCs, monitors and liquid crystal display (LCD) and organic light emitting diodes (OLED). Our Display Solutions products support some of the industry’s most advanced display technologies, such as OLEDs, low temperature polysilicons thin film transistors (LTPS TFTs) and amorphous silicon thin film transistors

(a-Si

TFTs). Since 2007, we have designed and manufactured OLED display driver integrated circuit (IC) products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD to Wide Quad High Definition (WQHD) for applications including smartphones, TVs, and other mobile devices.

Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in consumer, communications, computing, industrial and automotive applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs),

AC-DC

converters,

DC-DC

converters, LED drivers, switching regulators, linear regulators, interface ICs and power management ICs (PMICs) for a range of devices, including televisions, smartphones, desktop PCs, notebooks, tablets, servers, telecommunication power, home appliances, industrial applications such as uninterruptible power supplies (UPSs), LED lighting, personal mobility, motor drives and battery management systems (BMS).

Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and rapidly develop and introduce new products and services in response to market demands. Our design center and substantial manufacturing operations in Korea place us at the core of the global electronics device supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs, and allows us to better serve and capture additional demand from existing and new customers.

To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must also invest in relevant research and development activities and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.

The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.

Demand for our products and services is driven by overall demand for communications, IoT, consumer and industrial products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we are diversifying our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.

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Net sales for our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (OEM) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed into multi-source components for a particular product line. Once we have design wins and the products enter into mass production, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the

end-market

demand for the goods in which our products are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for components for a particular product among selected qualified suppliers.

In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation on these products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.

Our standard products business requires investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. Many of these processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and

12-inch

wafer capacity, such as organic light emitting diodes (OLED). We believe this balanced capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings.

Since 2007, we had designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to an external

12-inch

foundry starting in the second half of 2015. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED products to external

12-inch

foundries, we are able to adapt dynamically to changing customer requirements and address growing markets without substantial capital investments by us. However, relying on external foundries exposes us to the risk of being unable to secure manufacturing capacity, particularly under the current global shortage of foundry services. Although we are working strategically with external foundries to secure long-term wafer capacity, if we are unsuccessful, our ability to deliver products to our customers may be negatively impacted, which would adversely affect our relationship with customers and opportunities to secure new design-wins.

Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully.

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Recent Developments

The Merger

Under the terms of the Merger Agreement, each share of our common stock issued and outstanding immediately before the Effective Time (other than Excluded Shares and Dissenting Shares) will be cancelled and will cease to exist and will be automatically converted into the right to receive $29.00 in cash, without interest, and subject to applicable withholding taxes. The

all-cash

transaction has an equity value of approximately $1.4 billion. The Merger is fully backed by equity commitments and not contingent on any financing conditions.

We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger.

For more information on the Merger Agreement and the Merger, see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 2. Merger Agreement” in this Report.

Conversion of 5.0% Exchangeable Senior Notes due 2021 (the “Exchangeable Notes”)

Prior to the March 1, 2021 maturity of our Exchangeable Notes, holders thereof elected to exchange the Exchangeable Notes for an aggregate of 10,144,131 shares of our common stock in satisfaction in full of the outstanding obligations under the Exchangeable Notes. On March 1, 2021, we paid the final interest payment on the Exchangeable Notes of $2.1 million and no longer have any Exchangeable Notes obligations outstanding as of such date.

COVID-19

Pandemic

In December 2019, a strain of coronavirus causing a disease known as

COVID-19

surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the

COVID-19

outbreak a pandemic. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines,

shelter-in-place

COVID-19

have, in some cases, resulted in the

re-imposition

of certain restrictions and containment measures, and may continue to lead to other restrictions being

re-implemented

in the foreseeable future in response to efforts to reduce the rapid spread of

COVID-19.

We experienced some minor disruption in our Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of the

COVID-19

pandemic. To date, our external Display Solutions business contractors and

sub-contractors

have not been materially impacted by the

COVID-19

pandemic. We are, however, unable to accurately predict the full impact that the

COVID-19

pandemic will have on future results of operations due to numerous uncertainties, including the severity and the duration of the outbreak, the efficacy of ongoing global vaccination efforts, potential future recurrences of the outbreak, the spread of disease variants that may be resistant to the existing vaccines, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers, and other factors.

We continue to closely monitor and evaluate the nature and scope of the impact of the

COVID-19

pandemic to our business, consolidated results of operations, and financial condition, and may take further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

Global Semiconductor Chip Shortage

Recent sharp increases in demand for semiconductor products have resulted in a global shortage of manufacturing capacity. As a result, we may experience increased costs to manufacture our products and may not be able to manufacture and deliver all of the orders placed by our customers. Specifically, if we are unable to secure manufacturing capacity from the external foundries we rely on, our ability to deliver products to our customers may be negatively impacted. Also, this shortage of manufacturing capacity may lead to an increase in our manufacturing costs which we may not be fully able to pass on to our customers.

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In an effort to minimize the potential adverse impact of the supply shortage, we are working strategically with external foundries to secure long-term wafer capacity. If we are unsuccessful, however, such shortage could limit our ability to meet demand for our products in the future, which would adversely affect our reputation and competitive position, resulting in a negative impact on results of operations.

We are not able to foresee when the current shortage of manufacturing capacity will subside. A prolonged global supply shortage could negatively impact our financial condition, potentially resulting in a need for additional capital to fund strategic initiatives or operating activities.

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Explanation and Reconciliation of

Non-U.S. GAAP

Measures

Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income

We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (including on a per share basis) in this Report. Adjusted EBITDA, as we define it, is a

non-U.S.

GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net and (iv) other charges. EBITDA for the periods indicated is defined as loss from continuing operations before interest expense (income), net, income tax expense, and depreciation and amortization.

See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:

•

we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from

period-to-period

and may be a better indicator of future performance;

•

we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of the Company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and

•

we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess the Company’s

period-to-period

core operating performance and to understand and assess the manner in which management analyzes operating performance.

We use Adjusted EBITDA in a number of ways, including:

•

for planning purposes, including the preparation of our annual operating budget;

•

to evaluate the effectiveness of our enterprise level business strategies;

•

in communications with our Board of Directors concerning our consolidated financial performance; and

•

in certain of our compensation plans as a performance measure for determining incentive compensation payments.

We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. A reconciliation of loss from continuing operations to Adjusted EBITDA from continuing operations is as follows:


	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021			Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
	(In millions)
Income (loss) from continuing operations	$	(0.2	)	$	(7.7	)	$	11.8		$	(19.3	)
Interest expense (income), net		(0.5	)		(0.1	)		4.7			9.7
Income tax expenses		2.6			2.9			0.7			2.0
Depreciation and amortization		3.5			7.0			2.5			5.1

EBITDA	$	5.5		$	2.1		$	19.7		$	(2.5	)
Adjustments:
Equity-based compensation expense(a)		2.4			4.1			1.5			2.3
Foreign currency loss (gain), net(b)		(0.2	)		4.4			(8.5	)		22.5
Derivative valuation loss (gain), net(c)		0.1			0.1			(0.1	)		(0.2	)
Other charges(d)		5.0			15.4			—			0.6

Adjusted EBITDA	$	12.7		$	26.2		$	12.7		$	22.6

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(a)

This adjustment eliminates the impact of

non-cash

equity-based compensation expenses. Although we expect to incur

non-cash

equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these

non-cash

expenses as supplemental information.

(b)

This adjustment mainly eliminates the impact of

non-cash

foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily

non-cash

gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results.

(c)

This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance.

(d)

For the three and six months ended June 30, 2021, this adjustment eliminates

non-recurring

professional service fees and expenses incurred in connection with the Merger and regulatory requests. For the six months ended June 30, 2020, this adjustment eliminates

non-recurring

professional service fees and expenses incurred in connection with certain treasury and finance initiatives. As these expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

•

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•

although depreciation and amortization are

non-cash

charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

•

Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

•

Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and

•

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.

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We present Adjusted Operating Income as supplemental measures of our performance. We prepare Adjusted Operating Income by adjusting operating income (loss) to eliminate the impact of equity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Operating Income is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations.

Adjusted Operating Income is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income, income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income for the periods indicated as operating income adjusted to exclude (i) equity-based compensation expense and (ii) other charges.

The following table summarizes the adjustments to operating income that we make in order to calculate Adjusted Operating Income from continuing operations for the periods indicated:


	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021			Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
	(In millions)
Operating income (loss)	$	1.6	$	(0.5	)	$	8.6	$	14.6
Adjustments:
Equity-based compensation expense(a)		2.4		4.1			1.5		2.3
Others charges(b)		5.0		15.4			—		0.6

Adjusted Operating Income	$	9.1	$	19.0		$	10.1	$	17.4

(a)

This adjustment eliminates the impact of

non-cash

equity-based compensation expenses. Although we expect to incur

non-cash

expenses as supplemental information.

(b)

For the three and six months ended June 30, 2021, this adjustment eliminates

non-recurring

professional service fees and expenses incurred in connection with the Merger and regulatory requests. For the six months ended June 30, 2020, this adjustment eliminates

non-recurring

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We present Adjusted Net Income (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (including on a per share basis) by adjusting loss from continuing operations to eliminate the impact of a number of

non-cash

expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (including on a per share basis) is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (including on a per share basis) for a number of reasons, including:

•

we use Adjusted Net Income (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact of

non-cash

expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and

•

we believe that reporting Adjusted Net Income (including on a per share basis) is useful to readers in evaluating our core operating results because it eliminates the effects of

non-cash

expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period.

Adjusted Net Income (including on a per share basis) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (including on a per share basis); for the periods indicated as income (loss) from continuing operations, adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net, (iv) other charges and (v) income tax effect on

non-GAAP

adjustments.

The following table summarizes the adjustments to income (loss) from continuing operations that we make in order to calculate Adjusted Net Income (including on a per share basis) from continuing operations for the periods indicated:


	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021			Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
	(In millions)
Income (loss) from continuing operations	$	(0.2	)	$	(7.7	)	$	11.8		$	(19.3	)
Adjustments:
Equity-based compensation expense(a)		2.4			4.1			1.5			2.3
Foreign currency loss (gain), net(b)		(0.2	)		4.4			(8.5	)		22.5
Derivative valuation loss (gain), net(c)		0.1			0.1			(0.1	)		(0.2	)
Other charges(d)		5.0			15.4			—			0.6
Income tax effect on non-GAAP adjustments(e)		—			—			—			—

Adjusted Net Income	$	7.0		$	16.4		$	4.8		$	5.8

Reported earnings (loss) per share – basic	$	(0.00	)	$	(0.18	)	$	0.34		$	(0.55	)
Reported earnings (loss) per share – diluted	$	(0.00	)	$	(0.18	)	$	0.28		$	(0.55	)
Weighted average number of shares – basic		46,322,027			43,324,088			35,092,312			34,992,734
Weighted average number of shares – diluted		46,322,027			43,324,088			46,474,237			34,992,734
Adjusted earnings per share – basic	$	0.15		$	0.38		$	0.14		$	0.17
Adjusted earnings per share – diluted	$	0.15		$	0.36		$	0.13		$	0.16
Weighted average number of shares – basic		46,322,027			43,324,088			35,092,312			34,992,734
Weighted average number of shares – diluted		47,846,217			47,685,875			36,330,083			36,248,039

(a)

This adjustment eliminates the impact of

non-cash

equity-based compensation expenses. Although we expect to incur

non-cash

expenses as supplemental information.

(b)

This adjustment mainly eliminates the impact of

non-cash

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(c)

(d)

For the three and six months ended June 30, 2021, this adjustment eliminates

non-recurring

professional service fees and expenses incurred in connection with the Merger and regulatory requests. For the six months ended June 30, 2020, this adjustment eliminates

non-recurring

(e)

For the three and six months ended June 30, 2021 and 2020, there was no tax impact from the adjustments to net income to calculate our Adjusted Net Income due to net operating loss carry-forwards available at our parent entity in the U.S., based on the nature and origination of the adjustments, to offset related taxable income.

We believe that all adjustments to loss from continuing operations used to calculate Adjusted Net Income was applied consistently to the periods presented.

Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•

Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted Net Income does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

•

Adjusted Net Income does not reflect the costs of holding certain assets and liabilities in foreign currencies; and

•

other companies in our industry may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted Net Income should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted Net Income only as a supplement.

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Factors Affecting Our Results of Operations

Net

Sales.

We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of OLED products to external

12-inch

foundries. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales offices near concentrations of major customers. Our sales offices are located in Korea, Japan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region.

We recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the six months ended June 30, 2021 and 2020, we sold products to 165 and 158 customers, respectively, and our net sales to our ten largest customers represented 81% and 89% of our net sales—standard products business, respectively.

We will provide the Transitional Fab 3 Foundry Services up to September 1, 2023 at an agreed upon cost plus a

mark-up.

For the periods prior to the closing of the sale of the Foundry Services Group business and Fab 4 as of September 1, 2020 (which are accounted for as discontinued operations beginning in the first quarter of 2020), revenue derived from the Transitional Fab 3 Foundry Services is recorded at cost in both our continuing and discontinued operations.

Gross Profit.

Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facility and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs including outsourced manufacturing expenses, and variation in depreciation expense.

Average

Selling

Prices.

Average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence.

Material Costs.

Our material costs consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could increase significantly.

Labor

Costs.

A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of June 30, 2021, approximately 98% of our employees were eligible for severance benefits.

Depreciation Expense.

We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from

30-40

years on buildings to 5 to 12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying values of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.

Selling

Expenses.

We sell our products worldwide through a direct sales force as well as a network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.

General

and

Administrative

Expenses.

General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses.

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Research

and

Development.

The rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other

non-recurring

engineering charges related to product design. Additionally, we develop base line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses of our display business are material and design-related costs for OLED display driver IC product development involving

28-nanometer

or finer processes. The majority of research and development expenses of our power business are certain equipment, material and design-related costs for power discrete products and material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries, including Fab 4.

Interest Expense.

Our interest expense was incurred primarily under our 6.625% Senior Notes due July 15, 2021 (the “2021 Notes”) and the Exchangeable Notes. We redeemed all outstanding 2021 Notes on October 2, 2020. Our Exchangeable Notes were exchanged for common stock prior to their maturity date of March 1, 2021. From and after October 2, 2020 and March 1, 2021, we have not and will not incur interest expense associated with the 2021 Notes and Exchangeable Notes, respectively.

Impact of Foreign Currency Exchange Rates on Reported Results of Operations.

Historically, a portion of our revenues and greater than the majority of our operating expenses and costs of sales have been denominated in

non-U.S.

currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our

non-U.S.

revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in U.S. dollars relative to Korean won, depreciation in the U.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of

non-cash

translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars. As of June 30, 2021, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $387.5 million. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our credit rating falls below

B-/B3

or if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.

Foreign Currency Gain or Loss.

Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in foreign currency gain (loss), net in our statements of operations. A substantial portion of this net foreign currency gain or loss relates to

non-cash

translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar.

Income Taxes.

We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax basis of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the

period-end

will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.

We are subject to income- or

non-income-based

tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or

non-income

based taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

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Discontinued Operations.

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4 to the Buyer. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. On September 1, 2020, we completed the sale for a purchase price of approximately $350.6 million in cash.

Capital

Expenditures.

We primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.

Inventories.

We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.

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Results of Operations – Comparison of Three Months Ended June 30, 2021 and 2020

The following table sets forth consolidated results of operations for the three months ended June 30, 2021 and 2020:


	Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
	Amount			% of Total revenues			Amount			% of Total revenues			Change Amount
	(In millions)
Revenues
Net sales – standard products business	$	103.3			90.7	%	$	109.0			91.7	%	$	(5.7	)
Net sales – transitional Fab 3 foundry services		10.6			9.3			9.9			8.3			0.7

Total revenues		113.9			100.0			118.8			100.0			(5.0	)
Cost of sales
Cost of sales – standard products business		70.4			61.8			76.8			64.6			(6.4	)
Cost of sales – transitional Fab 3 foundry services		9.5			8.3			9.9			8.3			(0.4	)

Total cost of sales		79.9			70.2			86.7			73.0			(6.8	)

Gross profit		34.0			29.8			32.1			27.0			1.8
Selling, general and administrative expenses		14.0			12.3			12.4			10.4			1.6
Research and development expenses		13.3			11.7			11.1			9.3			2.2
Other charges		5.0			4.4			—			—			5.0

Operating income		1.6			1.4			8.6			7.3			(7.0	)
Interest expense		(0.1	)		(0.1	)		(5.4	)		(4.6	)		5.3
Foreign currency gain, net		0.3			0.2			8.5			7.1			(8.2	)
Others, net		0.6			0.5			0.8			0.7			(0.2	)

		0.8			0.7			3.8			3.2			(3.1	)

Income from continuing operations before income tax expense		2.4			2.1			12.5			10.5			(10.0	)
Income tax expense		2.6			2.3			0.7			0.6			1.9

Income (loss) from continuing operations		(0.2	)		(0.2	)		11.8			9.9			(12.0	)
Income from discontinued operations, net of tax		—			—			17.4			14.6			(17.4	)

Net income (loss)	$	(0.2	)		(0.2	)	$	29.2			24.5		$	(29.4	)

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The following sets forth information relating to our continuing operations:


	Three Months Ended June 30, 2021					Three Months Ended June 30, 2020
	Amount		% of Total revenues			Amount		% of Total revenues			Change Amount
	(In millions)
Revenues
Net sales – standard products business
Display Solutions	$	46.6		40.9	%	$	69.2		58.2	%	$	(22.6	)
Power Solutions		56.7		49.8			39.8		33.5			16.9

Total standard products business		103.3		90.7			109.0		91.7			(5.7	)
Net sales – transitional Fab 3 foundry services		10.6		9.3			9.9		8.3			0.7

Total revenues	$	113.9		100.0	%	$	118.8		100.0	%	$	(5.0	)


	Three Months Ended June 30, 2021					Three Months Ended June 30, 2020
	Amount		% of Net sales			Amount		% of Net sales			Change Amount
	(In millions)
Gross Profit
Gross profit – standard products business	$	32.9		31.8	%	$	32.1		29.5	%	$	0.7
Gross profit – transitional Fab 3 foundry services		1.1		10.5			—		—			1.1

Total gross profit	$	34.0		29.8	%	$	32.1		27.0	%	$	1.8

Revenues

Total revenues were $113.9 million for the three months ended June 30, 2021, a $5.0 million, or 4.2%, decrease compared to $118.8 million for the three months ended June 30, 2020. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.

The standard products business.

Net sales from our standard products business were $103.3 million for the three months ended June 30, 2021, a $5.7 million, or 5.2%, decrease compared to $109.0 million for the three months ended June 30, 2020. This decrease was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a continuing global shortage in manufacturing capacity, as we outsource manufacturing of these products to external

12-inch

foundries. This decrease was offset in part by a higher demand for power products such as MOSFETs, including

high-end

MOSFETs, primarily for TVs and

e-bikes,

whereas the revenue for power products in the second quarter of 2020 was impacted by

COVID-19-related

supply chain issues and market softness in China.

The transitional Fab 3 foundry services.

Net sales from the transitional Fab 3 foundry services were $10.6 million and $9.9 million for the three months ended June 30, 2021 and 2020, respectively.

Gross Profit

Total gross profit was $34.0 million for the three months ended June 30, 2021 compared to $32.1 million for the three months ended June 30, 2020, a $1.8 million, or 5.7%, increase. Gross profit as a percentage of net sales for the three months ended June 30, 2021 increased to 29.8% compared to 27.0% for the three months ended June 30, 2020.

The standard products business.

Gross profit from our standard products business was $32.9 million for the three months ended June 30, 2021, which represented a $0.7 million, or 2.2%, increase from gross profit of $32.1 million for the three months ended June 30, 2020. Gross profit as a percentage of net sales for the three months ended June 30, 2021 increased to 31.8% compared to 29.5% for the three months ended June 30, 2020. The increase in both gross profit and gross profit margin was primarily attributable to an improved product mix and a higher utilization rate of our internal fabrication facility in Gumi.

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Net Sales – Standard Products Business by Geographic Region

We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the three months ended June 30, 2021 and 2020:


	Three Months Ended June 30, 2021					Three Months Ended June 30, 2020
	Amount		% of Net sales – standard products business			Amount		% of Net sales – standard products business			Change Amount
	(In millions)
Korea	$	30.9		29.9	%	$	22.0		20.2	%	$	8.9
Asia Pacific (other than Korea)		69.4		67.2			84.2		77.3			(14.9	)
United States		1.4		1.3			1.5		1.3			(0.1	)
Europe		1.2		1.2			0.9		0.8			0.4
Others		0.5		0.5			0.5		0.4			0.0

	$	103.3		100.0	%	$	109.0		100.0	%	$	(5.7	)

Net sales – standard products business in Korea for the three months ended June 30, 2021 increased from $22.0 million to $30.9 million compared to the three months ended June 30, 2020, or by $8.9 million, or 40.6%, primarily due to a higher demand for power products such as MOSFETs, including

high-end

MOSFETs, primarily for TV and smartphone applications. This increase was offset in part by a decrease in revenue related to our mobile OLED display driver ICs stemming from a continuing global shortage in manufacturing capacity, as we outsource manufacturing of these products to external

12-inch

foundries.

Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended June 30, 2021 decreased to $69.4 million from $84.2 million in the three months ended June 30, 2020, or by $14.9 million, or 17.6%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a continuing global shortage in manufacturing capacity, as we outsource manufacturing of these products to external

12-inch

foundries, which was offset in part by a higher demand for power products such as MOSFETs, including

high-end

MOSFETs, primarily for TVs and

e-bikes.

Operating Expenses

Selling,

General

and

Administrative

Expenses.

Selling, general and administrative expenses were $14.0 million, or 12.3% of total revenues, for the three months ended June 30, 2021, compared to $12.4 million, or 10.4% of total revenues, for the three months ended June 30, 2020. The increase of $1.6 million, or 12.8%, was primarily attributable to certain

non-income-based

tax assessments of $0.6 million as a result of a regular tax examination completed for our primary operating entity in Korea for multiple tax years, and the grant timing of equity-based compensation. This increase was offset in part by a decrease in professional fees mainly comprised of legal and consulting fees.

Research

and

Development

Expenses.

Research and development expenses were $13.3 million, or 11.7% of total revenues, for the three months ended June 30, 2021, compared to $11.1 million, or 9.3% of total revenues, for the three months ended June 30, 2020. The increase of $2.2 million, or 19.9%, was primarily attributable to an increase in outside service fees and various overhead expenses.

Other Charges.

Other charges were $5.0 million for the three months ended June 30, 2021, which consisted of

non-recurring

professional service fees and expenses incurred in connection with the Merger and regulatory requests.

Operating Income

As a result of the foregoing, operating income was $1.6 million for the three months ended June 30, 2021 compared to operating income of $8.6 million the three months ended June 30, 2020. As discussed above, the decrease in operating income of $7.0 million resulted primarily from a $5.0 million increase in other charges, $2.2 million increase in research and development expenses, and a $1.6 million increase in selling, general and administrative expenses. This increase was offset in part by a $1.8 million increase in gross profit.

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Other Income (Expense)

Interest

Expense.

Interest expenses was $0.1 million and $5.4 million for the three months ended June 30, 2021 and June 30, 2020, respectively. Interest expenses was incurred primarily under our 2021 Notes and Exchangeable Notes. We redeemed all outstanding 2021 Notes on October 2, 2020. Our Exchangeable Notes were exchanged for common stock prior to their maturity date of March 1, 2021. From and after October 2, 2020 and March 1, 2021, we have not incurred interest expense associated with the 2021 Notes and Exchangeable Notes, respectively.

Foreign

Currency

Gain,

Net.

Net foreign currency gain for the three months ended June 30, 2021 was $0.3 million compared to net foreign currency gain of $8.5 million for the three months ended June 30, 2020. The net foreign currency gain for the three months ended June 30, 2021 and June 30, 2020 was due to the appreciation in value of the Korean won relative to the U.S. dollar during the period.

A substantial portion of our net foreign currency gain or loss is

non-cash

translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of June 30, 2021 and June 30, 2020, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $387 million and $691 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.

Others,

Net.

Others were comprised of rental income, interest income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the three months ended June 30, 2021 and June 30, 2020 was $0.6 million and $0.8 million, respectively.

Income Tax Expense

Income tax expense was $2.6 million for the three months ended June 30, 2021, which was primarily attributable to interest on intercompany loan balances and certain income-based tax assessments of $0.6 million as a result of a regular tax examination completed for our Korean subsidiary for multiple tax years. Income tax expense was $0.7 million for the three months ended June 30, 2020, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.

Income (Loss) from Continuing Operations

As a result of the foregoing, income from continuing operations decreased by $12.0 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. As discussed above, the decrease in income from continuing operations primarily resulted from an $8.2 million decrease in net foreign currency gain and a $7.0 million decrease in operating income, which were offset in part by a $5.3 million decrease in interest expense.

Income from Discontinued Operations, Net of Tax

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented. Income from discontinued operations, net of tax was $17.4 million for the three months ended June 30, 2020. On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 for a purchase price equal to approximately $350.6 million in cash. We have not incurred a gain or loss from discontinued operations in 2021 as the sale of the Foundry Service Group business and Fab 4 was completed in 2020.

Net Income (Loss)

As a result of the foregoing, a net loss of $0.2 million was recorded for the three months ended June 30, 2021 compared to a net income of $29.2 million for the three months ended June 30, 2020. As discussed above, the decrease in net income of $29.4 million primarily resulted from a $17.4 million decrease in income from discontinued operations, net of tax and a $12.0 million decrease in income from continuing operations.

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Results of Operations – Comparison of Six Months Ended June 30, 2021 and 2020

The following table sets forth consolidated results of operations for the six months ended June 30, 2021 and 2020:


	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
	Amount			% of Total revenues			Amount			% of Total revenues			Change Amount
	(In millions)
Revenues
Net sales – standard products business	$	216.2			91.3	%	$	219.7			91.8	%	$	(3.5	)
Net sales – transitional Fab 3 foundry services		20.7			8.7			19.6			8.2			1.1

Total revenues		236.9			100.0			239.3			100.0			(2.4	)
Cost of sales
Cost of sales – standard products business		149.7			63.2			158.4			66.2			(8.8	)
Cost of sales – transitional Fab 3 foundry services		18.9			8.0			19.6			8.2			(0.7	)

Total cost of sales		168.5			71.1			178.0			74.4			(9.5	)

Gross profit		68.4			28.9			61.3			25.6			7.1
Selling, general and administrative expenses		26.6			11.2			24.5			10.2			2.1
Research and development expenses		26.7			11.3			21.6			9.0			5.1
Other charges		15.4			6.5			0.6			0.2			14.9

Operating income (loss)		(0.5	)		(0.2	)		14.6			6.1			(15.1	)
Interest expense		(1.1	)		(0.5	)		(11.0	)		(4.6	)		9.9
Foreign currency loss, net		(4.4	)		(1.9	)		(22.5	)		(9.4	)		18.1
Others, net		1.2			0.5			1.6			0.7			(0.4	)

		(4.3	)		(1.8	)		(31.9	)		(13.3	)		27.6

Loss from continuing operations before income tax expense		(4.8	)		(2.0	)		(17.3	)		(7.2	)		12.5
Income tax expense		2.9			1.2			2.0			0.8			0.9

Loss from continuing operations		(7.7	)		(3.2	)		(19.3	)		(8.1	)		11.6
Income from discontinued operations, net of tax		—			—			24.7			10.3			(24.7	)

Net income (loss)	$	(7.7	)		(3.2	)	$	5.4			2.3		$	(13.1	)

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The following sets forth information relating to our continuing operations:


	Six Months Ended June 30, 2021					Six Months Ended June 30, 2020
	Amount		% of Total revenues			Amount		% of Total revenues			Change Amount
	(In millions)
Revenues
Net sales – standard products business
Display Solutions	$	105.5		44.5	%	$	146.8		61.3	%	$	(41.3	)
Power Solutions		110.7		46.7			72.9		30.5			37.8

Total standard products business		216.2		91.3			219.7		91.8			(3.5	)
Net sales – transitional Fab 3 foundry services		20.7		8.7			19.6		8.2			1.1

Total revenues	$	236.9		100.0	%	$	239.3		100.0	%	$	(2.4	)


	Six Months Ended June 30, 2021					Six Months Ended June 30, 2020
	Amount		% of Net sales			Amount		% of Net sales			Change Amount
	(In millions)
Gross Profit
Gross profit – standard products business	$	66.5		30.8	%	$	61.3		27.9	%	$	5.3
Gross profit – transitional Fab 3 foundry services		1.8		8.9			—		—			1.8

Total gross profit	$	68.4		28.9	%	$	61.3		25.6	%	$	7.1

Revenues

Total revenues were $236.9 million for the six months ended June 30, 2021, a $2.4 million, or 1.0%, decrease compared to $239.3 million for the six months ended June 30, 2020. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.

The standard products business.

Net sales from our standard products business were $216.2 million for the six months ended June 30, 2021, a $3.5 million, or 1.6%, decrease compared to $219.7 million for the six months ended June 30, 2020. This decrease was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a continuing global shortage in manufacturing capacity, as we outsource manufacturing of these products to external

12-inch

foundries, and a strategic reduction of our lower margin

non-auto

LCD business. This decrease was offset in part by a higher demand for power products such as MOSFETs, including

high-end

MOSFETs, primarily for TVs and

e-bikes,

whereas the revenue for power products in the first half of 2020 was impacted by

COVID-19-related

supply chain issues and market softness in China.

The transitional Fab 3 foundry services.

Net sales from the transitional Fab 3 foundry services were $20.7 million and $19.6 million for the six months ended June 30, 2021 and 2020, respectively.

Gross Profit

Total gross profit was $68.4 million for the six months ended June 30, 2021 compared to $61.3 million for the six months ended June 30, 2020, a $7.1 million, or 11.6%, increase. Gross profit as a percentage of net sales for the six months ended June 30, 2021 increased to 28.9% compared to 25.6% for the six months ended June 30, 2020. The increase in gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.

The standard products business.

Gross profit from our standard products business was $66.5 million for the six months ended June 30, 2021, which represented a $5.3 million, or 8.6%, increase from gross profit of $61.3 million for the six months ended June 30, 2020. Gross profit as a percentage of net sales for the six months ended June 30, 2021 increased to 30.8% compared to 27.9% for the six months ended June 30, 2020. The increase in both gross profit and gross profit margin was primarily attributable to an improved product mix and a higher utilization rate of our internal fabrication facility in Gumi.

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Net Sales – Standard Products Business by Geographic Region


	Six Months Ended June 30, 2021					Six Months Ended June 30, 2020
	Amount		% of Net sales – standard products business			Amount		% of Net sales – standard products business			Change Amount
	(In millions)
Korea	$	57.3		26.5	%	$	52.8		24.0	%	$	4.5
Asia Pacific (other than Korea)		153.1		70.8			161.8		73.6			(8.7	)
United States		2.6		1.2			2.2		1.0			0.5
Europe		2.4		1.1			1.8		0.8			0.6
Others		0.7		0.3			1.2		0.5			(0.5	)

	$	216.2		100.0	%	$	219.7		100.0	%	$	(3.5	)

Net sales – standard products business in Korea for the six months ended June 30, 2021 increased from $52.8 million to $57.3 million compared to the six months ended June 30, 2020, or by $4.5 million, or 8.6%, primarily due to a higher demand for power products such as MOSFETs, including

high-end

12-inch

foundries, and a strategic reduction of our lower margin

non-auto

LCD business.

Net sales – standard products business in Asia Pacific (other than Korea) for the six months ended June 30, 2021 decreased to $153.1 million from $161.8 million in the six months ended June 30, 2020, or by $8.7 million, or 5.4%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a continuing global shortage in manufacturing capacity, as we outsource manufacturing of these products to external

12-inch

foundries, which was offset in part by a higher demand for power products such as MOSFETs, including

high-end

MOSFETs, primarily for TVs and

e-bikes.

Operating Expenses

Selling,

General

and

Administrative

Expenses.

Selling, general and administrative expenses were $26.6 million, or 11.2% of total revenues, for the six months ended June 30, 2021, compared to $24.5 million, or 10.2% of total revenues, for the six months ended June 30, 2020. The increase of $2.1 million, or 8.7%, was primarily attributable to certain

non-income-based

Research

and

Development

Expenses.

Research and development expenses were $26.7 million, or 11.3% of total revenues, for the six months ended June 30, 2021, compared to $21.6 million, or 9.0% of total revenues, for the six months ended June 30, 2020. The increase of $5.1 million, or 23.7%, was primarily attributable to an increase in outside service fees and variable overhead expenses, and an increase in material costs for new product development.

Other Charges.

Other charges were $15.4 million for the six months ended June 30, 2021, which were consisted of

non-recurring

professional service fees and expenses incurred in connection with the Merger and regulatory requests. Other charges were $0.6 million for the six months ended June 30, 2021, which pertained to

non-recurring

professional service fees and expenses incurred in connection with certain treasury and finance initiatives.

Operating Income (Loss)

As a result of the foregoing, operating loss was $0.5 million for the six months ended June 30, 2021 compared to operating income of $14.6 million the six months ended June 30, 2020. As discussed above, the decrease in operating income of $15.1 million resulted primarily from a $14.9 million increase in other charges, a $5.1 million increase in research and development expenses, and a $2.1 million increase in selling, general and administrative expenses. This increase was offset in part by a $7.1 million increase in gross profit.

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Other Income (Expense)

Interest

Expense.

Interest expenses was $1.1 million and $11.0 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Interest expenses was incurred primarily under our 2021 Notes and Exchangeable Notes. We redeemed all outstanding 2021 Notes on October 2, 2020. Our Exchangeable Notes were exchanged for common stock prior to their maturity date of March 1, 2021. From and after October 2, 2020 and March 1, 2021, we have not incurred interest expense associated with the 2021 Notes and Exchangeable Notes, respectively.

Foreign

Currency

Loss,

Net.

Net foreign currency loss for the six months ended June 30, 2021 was $4.4 million compared to net foreign currency loss of $22.5 million for the six months ended June 30, 2020. The net foreign currency loss for the six months ended June 30, 2021 and June 30, 2020 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.

A substantial portion of our net foreign currency gain or loss is

non-cash

Others,

Net.

Others were comprised of rental income, interest income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the six months ended June 30, 2021 and June 30, 2020 was $1.2 million and $1.6 million, respectively.

Income Tax Expense

Income tax expense was $2.9 million for the six months ended June 30, 2021, which was primarily attributable to interest on intercompany loan balances and certain income-based tax assessments of $0.6 million as a result of a regular tax examination completed during the second quarter of 2021 for our Korean subsidiary for multiple tax years. Income tax expense was $2.0 million for the six months ended June 30, 2020, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.

Loss from Continuing Operations

Loss from continuing operations for the six months ended June 30, 2021 was $7.7 million compared to loss from continuing operations of $19.3 million for the six months ended June 30, 2020. The $11.6 million improvement in results from continuing operations was primarily attributable to an $18.1 million improvement in net foreign currency loss and a $9.9 million decrease in interest expense, which were offset in part by a $15.1 million decrease in operating income.

Income from Discontinued Operations, Net of Tax

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented. Income from discontinued operations, net of tax was $24.7 million for the six months ended June 30, 2020. On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 for a purchase price equal to approximately $350.6 million in cash. We have not incurred a gain or loss from discontinued operations in 2021 as the sale of the Foundry Service Group business and Fab 4 was completed in 2020.

Net Income (Loss)

As a result of the foregoing, a net loss of $7.7 million was recorded for the six months ended June 30, 2021 compared to a net income of $5.4 million for the six months ended June 30, 2020. As discussed above, the decrease in net income of $13.1 million primarily resulted from a $24.7 million decrease in income from discontinued operations, net of tax, which was offset by an $11.6 million improvement in loss from continuing operations.

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Liquidity and Capital Resources

Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment and to fund working capital needs. We calculate working capital as current assets less current liabilities.

Our principal sources of liquidity are our cash, cash equivalents, cash flows from operations and financing activities. Our ability to manage cash and cash equivalents may be limited, as our primary cash flows are dictated from time to time by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of June 30, 2021, we do not have any accounts payable on extended terms or payment deferment with our vendors.

On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 to Key Foundry Co., Ltd. in exchange for a purchase price equal to approximately $350.6 million in cash. The purchase price was paid in a combination of U.S. Dollars in the amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion.

On October 2, 2020, we redeemed of all of our outstanding 2021 Notes. We paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal amount plus accrued and unpaid interest thereon.

On January 17, 2017, we issued an aggregate of $86.3 million in principal amount of our Exchangeable Notes. Prior to the March 1, 2021 maturity of our Exchangeable Notes, holders elected to exchange for an aggregate of 10,144,131 shares of our common stock in satisfaction in full of the remaining outstanding obligations under the Exchangeable Notes.

We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next 12 months and the foreseeable future.

Working Capital

Our working capital balance as of June 30, 2021 was $312.9 million compared to $236.0 million as of December 31, 2020. The $76.9 million increase was primarily attributable to the exchange of our Exchangeable Notes for common stock prior to their maturity date of March 1, 2021.

Cash Flows

The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations for the six months ended June 30, 2020, but the material items in the operating and investing activities of cash flows relating to discontinued operations in the referred period are disclosed in “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 3 – Discontinued Operations” included elsewhere in this Report.

Cash Flows from Operating Activities

Cash inflow provided by operating activities totaled $10.4 million for the six months ended June 30, 2021, compared to $57.1 million of cash inflow provided by operating activities for the six months ended June 30, 2020. The net operating cash inflow for the six months ended June 30, 2021 reflects our net loss of $7.7 million, as adjusted favorably by $35.1 million, which mainly consisted of depreciation and amortization, provision for severance benefits, restructuring and other charges, stock-based compensation and net foreign currency loss, and net unfavorable impact of $17.0 million from changes of operating assets and liabilities.

Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $9.6 million for the six months ended June 30, 2021, compared to $11.8 million of cash outflow used in investing activities for the six months ended June 30, 2020. The $2.3 million decrease was primarily attributable to a $4.0 million decrease in purchase of property, plant and equipment and a $2.4 million net decrease in hedge collateral, which were offset in part by a $4.1 million net increase in guarantee deposits.

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Cash Flows from Financing Activities

Cash inflow provided by financing activities totaled $0.6 million for the six months ended June 30, 2021, compared to $0.7 million of cash outflow used in financing activities for the six months ended June 30, 2020. The financing cash inflow for the six months ended June 30, 2021 was primarily attributable to $2.5 million of proceeds received from the issuance of common stock in connection with the exercise of stock options, which was offset in part by a payment of $1.7 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units. The financing cash outflow for the six months ended June 30, 2020 was primarily attributable to a payment of $1.0 million for the repurchase of our common stock to satisfy tax withholding obligation in connection with the vesting of restricted stock units, which was offset in part by a $0.7 million of proceeds received from the issuance of common stock in connection with the exercise of stock options.

Capital Expenditures

We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facilities and reinforcement of our global research and development capability. For the six months ended June 30, 2021, capital expenditures for property, plant and equipment were $4.9 million, a $4.0 million, or 45.0%, decrease from $8.8 million, including a $4.4 million capital expenditures for discontinued operations, for the six months ended June 30, 2020. The capital expenditures for the six months ended June 30, 2021 and 2020 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facilities.

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Contractual Obligations

The following summarizes our contractual obligations as of June 30, 2021:


	Payments Due by Period
	Total		Remainder of 2021		2022		2023		2024		2025		Thereafter
	(In millions)
Operating leases(1)	$	4.8	$	1.4	$	1.6	$	0.8	$	0.6	$	0.4	$	—
Finance leases(1)		0.2		0.0		0.1		0.1		—		—		—
Water Treatment Services(1)(2)		27.2		2.1		4.1		4.0		3.9		3.8		9.3
Others(3)		9.1		1.9		4.1		3.0		0.1		0.1		—

(1)	Assumes constant currency exchange rate for Korean won to U.S. dollars of 1,130:1, the exchange rate as of June 30, 2021.

(2)	Includes future payments for water treatment services for our fabrication facility in Gumi, Korea based on the contractual terms.

(3)	Includes license agreements and other contractual obligations.

We lease land, office space and equipment under various operating lease agreements that expire through 2025.

We are a party to an arrangement for the water treatment facility in Gumi, Korea, which includes a

10-year

service agreement beginning July 1, 2018.

Beginning in July 2018, we have contributed a certain percentage of severance benefits, accrued for eligible employees for their services beginning January 1, 2018, to certain severance insurance deposit accounts. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. We deduct the contributions made to these severance insurance deposit accounts from our accrued severance benefits. As of June 30, 2021, our accrued severance benefits, net, totaled $39.5 million and cumulative contributions to these severance insurance deposit accounts amounted to $13.3 million.

We follow U.S. GAAP guidance on uncertain tax positions. Our unrecognized tax benefits totaled $0.4 million as of June 30, 2021. These unrecognized tax benefits have been excluded from the above table because we cannot estimate the period of cash settlement with the respective taxing authorities.

Off-Balance

Sheet Arrangements

As of June 30, 2021, we did not have any

off-balance

sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation

S-K.

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Critical Accounting Policies and Estimates

Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.

We believe that our significant accounting policies, which are described further in Note 1 to our consolidated financial statements in our Annual Report on Form

10-K

for our fiscal year ended December 31, 2020, or our 2020 Form

10-K,

are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.

A description of our critical accounting policies that involve significant management judgement appears in our 2020 Form

10-K,

under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2020 Form

10-K.

Recent

Accounting

Pronouncements

For a full description of new accounting pronouncements and recently adopted accounting pronouncements, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 1. Business, Basis of Presentation and Significant Accounting Policies” in this Report.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates. In the normal course of our business, we are subject to market risks associated with currency movements on our assets and liabilities.

Foreign Currency Exposures

We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at June 30, 2021 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $2.2 million in our U.S. dollar financial instruments and cash balances.

See “Note 9. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” for additional information regarding our foreign exchange hedging activities.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Report, we carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of June 30, 2021, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules

13a-15(e)

and

15d-15(e)

under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

For a discussion of legal proceedings, see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 19. Commitments and Contingencies” in this Report and “Part I: Item 3. Legal Proceedings” of our 2020

Form 10-K.

See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2020

Form 10-K

for additional information.

Item 1A.

Risk Factors

The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements. You should carefully consider the risk factors disclosed in Part I, Item 1A of our 2020 Form

10-K

(including that the impact of the

COVID-19

pandemic may also exacerbate the risks discussed therein), herein and other reports we have filed with the SEC. The risks described herein and therein are not the only ones we face. This information should be considered carefully together with the other information contained in this Report and the other reports and materials the Company files with the SEC.

Risks Related to the Merger

There are risks and uncertainties associated with the Merger.

On March 25, 2021, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which, among other things, and subject to the terms and conditions thereof, Merger Sub will be merged with and into the Company, with the Company continuing its corporate existence as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. The consummation of the Merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including (i) the receipt of certain required or requested governmental approvals or authorizations (including from CFIUS and MOTIE), (ii) the absence of any order or law issued, enacted or deemed applicable by certain governmental authorities specified in the Merger Agreement that makes consummation of the Merger illegal and that remains in effect, (iii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) and (iv) other customary closing conditions, including the accuracy of each party’s representations and warranties, and each party’s compliance with its obligations under the Merger Agreement (subject in the case of this clause (iv) to certain materiality qualifiers). There is no assurance that the conditions to the Merger will be satisfied in a timely manner or at all. Additionally, if the Merger is not completed, we may suffer a number of consequences that could adversely affect our business, results of operations, and stock price. There are numerous other risks related to the Merger as well, including the following:

•

the possibility that any or all of the conditions precedent to the consummation of the proposed Merger, including the receipt of stockholder and regulatory approvals or authorizations, may not be satisfied or waived;

•

unanticipated difficulties or expenditures relating to the proposed Merger;

•

the failure to consummate the proposed Merger may result in negative publicity and a negative impression of us in the investment community;

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•

required or requested regulatory approvals or authorizations from governmental entities may delay the proposed Merger or result in the imposition of conditions that could cause Parent to abandon the Merger;

•

the occurrence of any event, change or circumstance that could give rise to the termination of the Merger Agreement;

•

the effects that any termination of the Merger Agreement may have on the Company or our business, including the risks that (a) the price of our common stock may decline significantly if the Merger is not completed, (b) the Merger Agreement may be terminated in circumstances requiring the Company to pay Parent a termination fee, or (c) the circumstances of the termination, including the possible imposition of a

12-month

tail period during which the termination fee could be payable upon certain subsequent transactions, may have a chilling effect on alternatives to the Merger;

•

the diversion of and attention of management of Magnachip on transaction-related issues;

•

legal proceedings, judgments or settlements, including those that have been and may in the future be instituted against Magnachip, our Board of Directors and executive officers and others following the announcement of the proposed Merger;

•

disruptions of current plans and operations caused by the announcement and pendency of the proposed Merger;

•

potential difficulties in employee retention (including executive and other key officers) due to the announcement and pendency of the proposed Merger;

•

the response of customers, suppliers, business partners and regulators to the announcement of the proposed Merger;

•

the effect of limitations that the Merger Agreement places on our ability to operate our business or engage in alternative transactions;

•

the Merger may be completed even though certain events occur prior to consummation of the Merger that materially and adversely affect us; and

•

other risks and uncertainties and the factors identified under “Forward-Looking Information” in our Proxy Statement on Schedule 14A filed on May 7, 2021 and under “Risk Factors” in Part I, Item 1A of Magnachip’s Annual Report on

Form 10-K

for the year ended December 31, 2020, and updated in subsequent reports filed by Magnachip with the SEC.

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated.

Lawsuits have been filed, and other lawsuits may be filed, against the Company and current or former members of our Board of Directors in connection with the Merger, and an adverse ruling in any such lawsuit may delay or prevent the completion of the Merger or result in an award of damages against the Company.

See “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—19. Commitments and Contingencies” in this Report for a description of the Merger-related lawsuits.

Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the Merger. The existence of litigation relating to the Merger could impact the likelihood of obtaining stockholder approval of the Merger. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert management’s attention away from its regular business.

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Item 6.

Exhibits.


Exhibit Number		Description

2.1		Letter Agreement, dated as of June 11, 2021, by and among Magnachip Semiconductor Corporation, South Dearborn Limited and Michigan Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on June 14, 2021).

31.1 #		Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.

31.2 #		Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Principal Financial Officer.

32.1†		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.

32.2†		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.

101.INS #		Inline XBRL Instance Document.

101.SCH #		Inline XBRL Taxonomy Extension Schema Document.

101.CAL #		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF #		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB #		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE #		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Footnotes:

#	Filed herewith

†	Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MAGNACHIP SEMICONDUCTOR CORPORATION (Registrant)

Dated: August 6, 2021	By:	/s/ Young-Joon Kim
		Young-Joon Kim
		Chief Executive Officer (Principal Executive Officer)

Dated: August 6, 2021	By:	/s/ Young Soo Woo
		Young Soo Woo
		Chief Financial Officer (Principal Financial Officer)