MAGNACHIP SEMICONDUCTOR Corp - Quarter Report: 2022 September (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 September 30, 2022

☐	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 Preferred Stock Purchase Rights	MX	New York Stock Exchange 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 October 31, 2022, the registrant had

44,175,252 shares of common stock outstanding.

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 September 30, 2022 and December 31, 2021		3
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021		4
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021		5
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021		6
	Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021		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		25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		51
PART II OTHER INFORMATION			52
Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Mine Safety Disclosures		52
Item 5.	Other Information		52
Item 6.	Exhibits		53
SIGNATURES			54

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


	September 30, 2022			December 31, 2021

	(In thousands of U.S. dollars, except share data)

Assets
Current assets
Cash and cash equivalents	$	250,831		$	279,547
Accounts receivable, net		36,759			50,954
Inventories, net		37,298			39,370
Other receivables (Note 16)		8,248			25,895
Prepaid expenses		10,322			7,675
Hedge collateral (Note 7)		15,370			3,060
Other current assets (Note 17)		20,208			2,619

Total current assets		379,036			409,120
Property, plant and equipment, net		94,411			107,882
Operating lease right-of-use assets		4,928			4,275
Intangible assets, net		1,770			2,377
Long-term prepaid expenses		11,382			8,243
Deferred income taxes		34,299			41,095
Other non-current assets		10,382			10,662

Total assets	$	536,208		$	583,654

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	26,545		$	37,593
Other accounts payable		14,809			6,289
Accrued expenses (Note 6)		15,800			20,071
Accrued income taxes		—			11,823
Operating lease liabilities		1,324			2,323
Other current liabilities (Notes 7 and 8)		15,881			7,382

Total current liabilities		74,359			85,481
Accrued severance benefits, net		28,036			33,064
Non-current operating lease liabilities		3,811			1,952
Other non-current liabilities		16,787			10,395

Total liabilities		122,993			130,892

Commitments and contingencies (Note 17)
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 56,234,774 shares issued and 44,579,075 outstanding at September 30, 2022 and 55,905,320 shares issued and 45,659,304 outstanding at December 31, 2021		562			559
Additional paid-in capital		264,510			241,197
Retained earnings		332,535			343,542
Treasury stock, 11,655,699 shares at September 30, 2022 and 10,246,016 shares at December 31, 2021, respectively		(152,161	)		(130,306	)
Accumulated other comprehensive loss		(32,231	)		(2,230	)

Total stockholders’ equity		413,215			452,762

Total liabilities and stockholders’ equity	$	536,208		$	583,654

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

Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021

	(In thousands of U.S. dollars, except share data)
Revenues:
Net sales – standard products business	$	62,771		$	117,415		$	248,069		$	333,589
Net sales – transitional Fab 3 foundry services		8,428			9,585			28,599			30,306

Total revenues		71,199			127,000			276,668			363,895
Cost of sales:
Cost of sales – standard products business		45,497			71,641			165,197			221,297
Cost of sales – transitional Fab 3 foundry services		8,477			8,772			26,305			27,659

Total cost of sales		53,974			80,413			191,502			248,956

Gross profit		17,225			46,587			85,166			114,939
Operating expenses:
Selling, general and administrative expenses		11,411			12,550			38,310			39,185
Research and development expenses		13,321			12,270			38,685			39,015
Merger-related costs		—			1,552			—			13,842
Other charges, net		2,501			214			3,298			3,360

Total operating expenses		27,233			26,586			80,293			95,402

Operating income (loss)		(10,008	)		20,001			4,873			19,537
Interest expense		(278	)		(113	)		(888	)		(1,239	)
Foreign currency loss, net		(12,809	)		(7,579	)		(20,511	)		(12,000	)
Other income, net		1,958			1,608			4,163			2,839

Income (loss) before income tax expense		(21,137	)		13,917			(12,363	)		9,137
Income tax expense (benefit)		(3,942	)		3,149			(1,356	)		6,040

Net income (loss)	$	(17,195	)	$	10,768		$	(11,007	)	$	3,097

Basic earnings (loss) per common share—	$	(0.38	)	$	0.23		$	(0.24	)	$	0.07
Diluted earnings (loss) per common share—	$	(0.38	)	$	0.23		$	(0.24	)	$	0.07
Weighted average number of shares—
Basic		44,865,266			46,449,234			45,119,214			44,377,250
Diluted		44,865,266			47,808,457			45,119,214			45,811,792

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

Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021

	(In thousands of U.S. dollars)
Net income (loss)	$	(17,195	)	$	10,768		$	(11,007	)	$	3,097

Other comprehensive income (loss)
Foreign currency translation adjustments		(5,974	)		(860	)		(15,881	)		(2,809	)
Derivative adjustments
Fair valuation of derivatives		(11,757	)		(3,271	)		(19,498	)		(4,964	)
Reclassification adjustment for loss (gain) on derivatives included in net income (loss)		2,820			653			5,378			(333	)

Total other comprehensive loss		(14,911	)		(3,478	)		(30,001	)		(8,106	)

Total comprehensive income (loss)	$	(32,106	)	$	7,290		$	(41,008	)	$	(5,009	)

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

Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)


	Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
(In thousands of U.S. dollars, except share data)	Shares			Amount		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Three Months Ended September 30, 2022:
Balance at June 30, 2022		44,903,718		$	562	$	263,698		$	349,730		$	(148,523	)	$	(17,320	)	$	448,147
Stock-based compensation		—			—		861			—			—			—			861
Settlement of restricted stock units		—			—		(49	)		—			—			—			(49	)
Acquisition of treasury stock		(324,643	)		—		—			—			(3,638	)		—			(3,638	)
Other comprehensive loss, net		—			—		—			—			—			(14,911	)		(14,911	)
Net loss		—			—		—			(17,195	)		—			—			(17,195	)

Balance at September 30, 2022		44,579,075		$	562	$	264,510		$	332,535		$	(152,161	)	$	(32,231	)	$	413,215

Three Months Ended September 30, 2021:
Balance at June 30, 2021		46,350,945		$	556	$	253,244		$	279,163		$	(109,407	)	$	(925	)	$	422,631
Stock-based compensation		—			—		2,005			—			—			—			2,005
Exercise of stock options		112,944			1		1,370			—			—			—			1,371
Settlement of restricted stock units		1,000			0		(0	)		—			—			—			—
Other comprehensive loss, net		—			—		—			—			—			(3,478	)		(3,478	)
Net income		—			—		—			10,768			—			—			10,768

Balance at September 30, 2021		46,464,889		$	557	$	256,619		$	289,931		$	(109,407	)	$	(4,403	)	$	433,297


	Common Stock					Additional Paid-In			Retained Earnings			Treasury			Accumulated Other Comprehensive
(In thousands of U.S. dollars, except share data)	Shares			Amount		Capital			Retained Earnings			Stock			Income (Loss)			Total
Nine Months Ended September 30, 2022:
Balance at December 31, 2021		45,659,304		$	559	$	241,197		$	343,542		$	(130,306	)	$	(2,230	)	$	452,762
Stock-based compensation		—			—		4,487			—			—			—			4,487
Exercise of stock options		152,326			1		1,785			—			—			—			1,786
Settlement of restricted stock units		177,128			2		(176	)		—			—			—			(174	)
Acquisition of treasury stock		(378,107	)		—		—			—			(4,638	)		—			(4,638	)
Accelerated stock repurchase		(1,031,576	)		—		17,217			—			(17,217	)		—			—
Other comprehensive loss, net		—			—		—			—			—			(30,001	)		(30,001	)
Net loss		—			—		—			(11,007	)		—			—			(11,007	)

Balance at September 30, 2022		44,579,075		$	562	$	264,510		$	332,535		$	(152,161	)	$	(32,231	)	$	413,215

Nine Months Ended September 30, 2021:
Balance at December 31, 2020		35,783,347		$	450	$	163,010		$	286,834		$	(108,397	)	$	3,703		$	345,600
Stock-based compensation		—			—		6,056			—			—			—			6,056
Exchange of exchangeable senior note		10,144,131			101		83,639			—			—			—			83,740
Exercise of stock options		289,704			3		3,917			—			—			—			3,920
Settlement of restricted stock units		299,162			3		(3	)		—			—			—			—
Acquisition of treasury stock		(51,455	)		—		—			—			(1,010	)		—			(1,010	)
Other comprehensive loss, net		—			—		—			—			—			(8,106	)		(8,106	)
Net income		—			—		—			3,097			—			—			3,097

Balance at September 30, 2021		46,464,889		$	557	$	256,619		$	289,931		$	(109,407	)	$	(4,403	)	$	433,297

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

Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended
	September 30, 2022			September 30, 2021

	(In thousands of U.S. dollars)
Cash flows from operating activities
Net income (loss)	$	(11,007	)	$	3,097
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		11,225			10,576
Provision for severance benefits		5,163			5,514
Amortization of debt issuance costs and original issue discount		—			261
Loss on foreign currency, net		66,335			32,607
Provision for inventory reserves		7,730			1,484
Stock-based compensation		4,487			6,056
Other, net		631			442
Changes in operating assets and liabilities
Accounts receivable, net		7,805			6,696
Inventories		(13,208	)		(4,561	)
Other receivables		17,115			(5,287	)
Other current assets		(14,117	)		7,933
Accounts payable		(14,792	)		(16,192	)
Other accounts payable		(6,215	)		(3,729	)
Accrued expenses		5,866			(1,641	)
Accrued income taxes		(11,483	)		(8,308	)
Other current liabilities		(1,583	)		555
Other non-current liabilities		523			(666	)
Payment of severance benefits		(4,181	)		(4,772	)
Other, net		(50	)		(49	)

Net cash provided by operating activities		50,244			30,016
Cash flows from investing activities
Proceeds from settlement of hedge collateral		2,805			3,995
Payment of hedge collateral		(15,282	)		(2,744	)
Purchase of property, plant and equipment		(11,812	)		(13,368	)
Payment for intellectual property registration		(301	)		(455	)
Collection of guarantee deposits		—			3,192
Payment of guarantee deposits		(2,075	)		(4,960	)
Other, net		792			(103	)

Net cash used in investing activities		(25,873	)		(14,443	)
Cash flows from financing activities
Proceeds from exercise of stock options		1,786			3,920
Acquisition of treasury stock		(5,065	)		(1,653	)
Repayment of financing related to water treatment facility arrangement		(381	)		(427	)
Repayment of principal portion of finance lease liabilities		(50	)		(49	)

Net cash provided by (used in) financing activities		(3,710	)		1,791
Effect of exchange rates on cash and cash equivalents		(49,377	)		(21,003	)

Net decrease in cash and cash equivalents		(28,716	)		(3,639	)
Cash and cash equivalents
Beginning of the period		279,547			279,940

End of the period	$	250,831		$	276,301

Supplemental cash flow information
Cash paid for interest	$	—		$	2,094
Cash paid for income taxes	$	17,856		$	12,609
Non-cash investing activities
Property, plant and equipment additions in other accounts payable	$	3,957		$	11,513
Non-cash financing activities
Exchange of exchangeable senior notes into common stock	$	—		$	83,740
Unsettled common stock repurchases	$	(399	)	$	—

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

Table of Contents

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, computing, industrial and automotive applications.

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, computing, servers, automotive, and industrial applications.

On September 1, 2020, 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”. Following the consummation of the sale, and for up to three years, the Company is expected to provide transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3”, at an agreed upon cost plus

mark-up

(the “Transitional Fab 3 Foundry Services”).

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 nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2021 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, 2021.

There have been no material changes to the Company’s significant accounting policies as of and for the nine months ended September 30, 2022 as compared to the significant accounting policies described in the Company’s Annual Report on Form

10-K

for the fiscal year ended December 31, 2021.

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No. 2020-06,

“Debt—Debt with Conversion and Other Options (Subtopic

470-20)

and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic

815-40)”

(“ASU

2020-06”),

which updates various codification topics to simplify the accounting guidance for certain financial instruments with characteristics of liabilities and equity, with a specific focus on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and amends the diluted EPS computation for these instruments. The Company adopted ASU

2020-06

as of January 1, 2022, and the adoption of ASU

2020-06

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

In May 2021, the FASB issued ASU

No. 2021-04,

“Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic

470-50)”,

Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic

815-40):

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU

2021-04”),

ASU

2021-04

clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options so that the transaction should be treated as an exchange of the original instrument for a new instrument. The Company adopted ASU

2021-04

as of January 1, 2022, and the adoption of ASU

2021-04

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

Table of Contents

2. Inventories

Inventories as of September 30, 2022 and December 31, 2021 consist of the following (in thousands):


	September 30, 2022			December 31, 2021
Finished goods	$	6,828		$	9,594
Semi-finished goods and work-in-process		32,431			25,968
Raw materials		9,282			9,443
Materials in-transit		295			95
Less: inventory reserve		(11,538	)		(5,730	)

Inventories, net	$	37,298		$	39,370

Changes in inventory reserve for the three and nine months ended September 30, 2022 and 2021 are as follows (in thousands):


	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2022						September 30, 2021
Beginning balance	$	(10,206	)	$	(5,730	)	$	(8,101	)	$	(5,901	)
Change in reserve
Inventory reserve charged to costs of sales		(3,199	)		(10,899	)		(242	)		(5,592	)
Sale of previously reserved inventory		672			2,996			2,099			4,076

		(2,527	)		(7,903	)		1,857			(1,516	)
Write off		16			311			180			1,110
Translation adjustments		1,179			1,784			328			571

Ending balance	$	(11,538	)	$	(11,538	)	$	(5,736	)	$	(5,736	)

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.

Table of Contents

3. Property, Plant and Equipment

Property, plant and equipment as of September 30, 2022 and December 31, 2021 are comprised of the following (in thousands):


	September 30, 2022			December 31, 2021
Buildings and related structures	$	21,484		$	24,273
Machinery and equipment		94,152			105,300
Finance lease right-of-use assets		340			316
Others		29,233			32,396

		145,209			162,285
Less: accumulated depreciation		(86,281	)		(94,119	)
Land		11,513			13,898
Construction in progress		23,970			25,818

Property, plant and equipment, net	$	94,411		$	107,882

Aggregate depreciation expenses totaled $10,699 thousand and $10,018 thousand for the nine months ended September 30, 2022 and 2021, respectively.

4. Intangible Assets

Intangible assets as of September 30, 2022 and December 31, 2021 are comprised of the following (in thousands):


	September 30, 2022
	Gross amount		Accumulated amortization			Net amount
Intellectual property assets	$	8,040	$	(6,270	)	$	1,770

Intangible assets	$	8,040	$	(6,270	)	$	1,770


	December 31, 2021
	Gross amount		Accumulated amortization			Net amount
Intellectual property assets	$	9,312	$	(6,935	)	$	2,377

Intangible assets	$	9,312	$	(6,935	)	$	2,377

Aggregate amortization expenses for intangible assets totaled $526 thousand and $558 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Table of Contents

5. 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 September 30, 2022 and December 31, 2021 are as follows (in thousands):


Leases	Classification		September 30, 2022		December 31, 2021
Assets
Operating lease		Operating lease right-of-use assets	$	4,928	$	4,275
Finance lease		Property, plant and equipment, net		141		126

Total lease assets			$	5,069	$	4,401

Liabilities
Current
Operating		Operating lease liabilities	$	1,324	$	2,323
Finance		Other current liabilities		78		68
Non-current
Operating		Non-current operating lease liabilities		3,811		1,952
Finance		Other non-current liabilities		73		73

Total lease liabilities			$	5,286	$	4,416

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


	September 30, 2022			December 31, 2021
Weighted average remaining lease term
Operating leases		3.9 years			2.4 years
Finance leases		2.5 years			2.0 years
Weighted average discount rate
Operating leases		6.58	%		4.20	%
Finance leases		7.63	%		7.75	%

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


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Operating lease cost	$	557	$	691	$	1,738	$	2,098
Finance lease cost
Amortization of right-of-use assets		18		17		48		50
Interest on lease liabilities		2		4		7		11

Total lease cost	$	577	$	712	$	1,793	$	2,159

The above table does not include an immaterial cost of short-term leases for the nine months ended September 30, 2022 and 2021.

Table of Contents

Other lease information is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	561	$	691	$	1,742	$	2,098
Operating cash flows from finance leases		2		4		7		11
Financing cash flows from finance leases		18		16		50		49

The aggregate future lease payments for operating and finance leases as of September 30, 2022 are as follows (in thousands):


	Operating Leases			Finance Leases
Remainder of 2022	$	508		$	22
2023		1,449			86
2024		1,330			24
2025		1,218			23
2026		846			11
2027		585			—

Total future lease payments		5,936			166
Less: Imputed interest		(801	)		(15	)

Present value of future payments	$	5,135		$	151

6. Accrued Expenses

Accrued expenses as of September 30, 2022 and December 31, 2021 are comprised of the following (in thousands):


	September 30, 2022		December 31, 2021
Payroll, benefits and related taxes, excluding severance benefits	$	10,552	$	9,548
Withholding tax attributable to intercompany interest income		3,345		1,950
Outside service fees		1,608		1,088
Merger-related costs		—		7,035
Others		295		450

Accrued expenses	$	15,800	$	20,071

Table of Contents

7. 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 September 30, 2022 are as follows (in thousands):


Date of transaction	Total notional amount		Month of settlement
August 13, 2021	$	15,000	October 202 2 to December 2022
January 04, 2022	$	39,000	October 2022 to June 2023
March 07, 2022	$	24,000	July 2023 to December 2023
April 27, 2022	$	51,000	October 2022 to December 2023

Details of the zero cost collar contracts as of December 31, 2021 are as follows (in thousands):


Date of transaction	Total notional amount		Month of settlement
May 13, 2021	$	39,000	January 2022 to September 2022
August 13, 2021	$	48,000	January 2022 to December 2022

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 contracts.

The fair values of the Company’s outstanding zero cost collar contracts recorded as liabilities as of September 30, 2022 and December 31, 2021 are as follows (in thousands):


Derivatives designated as hedging instruments:		September 30, 2022		December 31, 2021
Liability Derivatives:
Zero cost collars	Other current liabilities	$	12,744	$	2,020
Zero cost collars	Other non-current liabilities	$	2,318	$	—

Offsetting of derivative liabilities as of September 30, 2022 is as follows (in thousands):


As of September 30, 2022	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 September 30, 2022	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	$	15,062	$	—	$	15,062	$	—	$	(14,370	)	$	692

Offsetting of derivative liabilities as of December 31, 2021 is as follows (in thousands):


As of December 31, 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 December 31, 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	$	2,020	$	—	$	2,020	$	—	$	(2,060	)	$	(40	)

Table of Contents

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 September 30, 2022 and 2021 (in thousands):


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives						Location/Amount of Loss Reclassified from AOCI Into Statement of Operations						Location/Amount of Gain Recognized in Statement of Operations on Derivatives
	Three Months Ended September 30,								Three Months Ended September 30,						Three Months Ended September 30,
	2022			2021					2022		2021				2022		2021

Zero cost collars	$	(11,757	)	$	(3,271	)		Net sales	$	(2,820)	$	(653)		Other income, net	$	146	$	237

The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2022 and 2021 (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 Recognized in Statement of Operations on Derivatives
	Nine Months Ended September 30,								Nine Months Ended September 30,						Nine Months Ended September 30,
	2022			2021					2022		2021				2022		2021

Zero cost collars	$	(19,498	)	$	(4,964	)		Net sales	$	(5,378)	$	333		Other income, net	$	201	$	94

As of September 30, 2022, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $13,262 thousand.

The Company set aside cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) 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 September 30, 2022 and December 31, 2021 are as follows (in

thousands):


Counterparties	September 30, 2022		December 31, 2021
SC	$	1,000	$	1,000

The Company is required to deposit additional cash collateral with NFIK and SC for any exposure in excess of $500 thousand. As of September 30, 2022, $11,670 thousand and $2,700 thousand of additional cash collateral was required by NFIK and SC, respectively, and recorded as hedge collateral on the consolidated balance sheet. As of December 31, 2021, $760 thousand and $1,300 thousand of additional cash collateral was required by NFIK and SC, respectively, and recorded as hedge collateral on the consolidated balance sheet.

These zero cost collar contracts may be terminated by the counterparties 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.

Table of Contents

8. Fair Value Measurements

Fair Value of Financial Instruments

As of September 30, 2022, 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 September 30, 2022		Fair Value Measurement September 30, 2022		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)	$	12,744	$	12,744		—	$	12,744		—
Derivative liabilities (other non-current liabilities)	$	2,318	$	2,318		—	$	2,318		—

As of December 31, 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 December 31, 2021		Fair Value Measurement December 31, 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)	$	2,020	$	2,020		—	$	2,020		—

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.

Table of Contents

9. 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 September 30, 2022, 97% of all employees of the Company were eligible for severance benefits.

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


	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended

	September 30, 2022						September 30, 2021




Beginning balance	$	47,586		$	51,567		$	53,105		$	54,452
Provisions		1,923			5,163			2,007			5,514
Severance payments		(1,247	)		(4,181	)		(1,936	)		(4,772	)
Translation adjustments		(4,730	)		(9,017	)		(2,441	)		(4,459	)

		43,532			43,532			50,735			50,735
Less: Cumulative contributions to severance insurance deposit accounts		(15,292	)		(15,292	)		(12,739	)		(12,739	)
The National Pension Fund		(40	)		(40	)		(55	)		(55	)
Group severance insurance plan		(164	)		(164	)		(200	)		(200	)

Accrued severance benefits, net	$	28,036		$	28,036		$	37,741		$	37,741

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 2022	$	212
2023		534
2024		769
2025		1,273
2026		1,772
2027		1,463
2028 – 2032		17,223

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 years of age or older under the Employment Promotion for the Aged Act. The Company sets the retirement age of employees at 60.

Table of Contents

10. Foreign Currency 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 September 30, 2022 and December 31, 2021, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $356,746 thousand and $344,411 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,434.8:1 and 1,185.5:1 using the first base rate as of September 30, 2022 and December 31, 2021, respectively, as quoted by the KEB Hana Bank.

11. Income Taxes

The Company and its subsidiaries file income tax returns in Korea, 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 nine months ended September 30, 2022, the Company recorded an income tax benefit of $3,942 thousand and $1,356

thousand, respectively, primarily attributable to a decrease in its Korean subsidiary’s

pre-tax

income for the respective period due to the foreign currency translation loss recorded in its Korean subsidiary in connection with intercompany loans.

For the three and nine months ended September 30, 2021, the Company recorded an income tax expense of $3,149 thousand and $6,040

thousand, respectively, primarily attributable to the Company’s Korean subsidiary based on its estimated taxable income for the respective period, combined with its ability to utilize net operating loss carryforwards

up to 60%, and interest on intercompany loan balances.

Table of Contents

12. Geographic and Other Information

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


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Revenues
Standard products business
Display Solutions	$	6,355	$	58,528	$	63,876	$	164,024
Power Solutions		56,416		58,887		184,193		169,565

Total standard products business		62,771		117,415		248,069		333,589
Transitional Fab 3 foundry services		8,428		9,585		28,599		30,306

Total revenues	$	71,199	$	127,000	$	276,668	$	363,895


	Three Months Ended					Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022		September 30, 2021
Gross Profit
Standard products business	$	17,274		$	45,773	$	82,872	$	112,291
Transitional Fab 3 foundry services		(49	)		814		2,294		2,648

Total gross profit	$	17,225		$	46,587	$	85,166	$	114,939

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				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Korea	$	23,867	$	29,664	$	86,065	$	86,966
Asia Pacific (other than Korea)		34,612		84,220		148,940		237,312
United States		2,718		1,756		8,074		4,393
Europe		1,574		1,398		4,990		3,847
Others		—		377		—		1,071

Total	$	62,771	$	117,415	$	248,069	$	333,589

For the three months ended September 30, 2022 and 2021, 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 74.2% and 72.0%, respectively, and net sales—standard products business in Vietnam represented 2.4% and 19.6%, respectively. For the nine months ended September 30, 2022 and 2021, 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 66.4% and 63.4%, respectively, and net sales—standard products business in Vietnam represented 16.2% and 29.5%, 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 64% and 81% for the three months ended September 30, 2022 and 2021, respectively, and 70% and 81% for the nine months ended September 30, 2022 and 2021, respectively.

For the three months ended September 30, 2022, the Company had one customer that represented 16.2% of its net sales – standard products business. For the nine months ended September 30, 2022, the Company had two customers that represented 20.6% and 13.9% of its net sales – standard products business. For the three months ended September 30, 2021, the Company had two customers that represented 44.7% and 10.1% of its net sales – standard products business. For the nine months ended September 30, 2021, the Company had two customers that represented 44.6% and 10.6% of its net sales – standard products business.

As of September 30, 2022, two customers of the Company’s standard products business accounted for 24.1% and 11.8% of its accounts receivable – standard products business (which does not include the Transitional Fab 3 Foundry Services), respectively. As of December 31, 2021, two customers of the Company’s standard products business accounted for 31.5% and 16.1% of its accounts receivable – standard products business (which does not include the Transitional Fab 3 Foundry Services), respectively.

Table of Contents

13. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following as of September 30, 2022 and December 31, 2021, respectively (in thousands):


	September 30, 2022			December 31, 2021
Foreign currency translation adjustments	$	(16,651	)	$	(770	)
Derivative adjustments		(15,580	)		(1,460	)

Total	$	(32,231	)	$	(2,230	)

Changes in accumulated other comprehensive loss for the three months ended September 30, 2022 and 2021 are as follows (in

thousands):


Three Months Ended September 30, 2022	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	(10,677	)	$	(6,643	)	$	(17,320	)

Other comprehensive loss before reclassifications		(5,974	)		(11,757	)		(17,731	)
Amounts reclassified from accumulated other comprehensive loss		—			2,820			2,820

Net current-period other comprehensive loss		(5,974	)		(8,937	)		(14,911	)

Ending balance	$	(16,651	)	$	(15,580	)	$	(32,231	)


Three Months Ended September 30, 2021	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	120		$	(1,045	)	$	(925	)

Other comprehensive loss before reclassifications		(860	)		(3,271	)		(4,131	)
Amounts reclassified from accumulated other comprehensive loss		—			653			653

Net current-period other comprehensive loss		(860	)		(2,618	)		(3,478	)

Ending balance	$	(740	)	$	(3,663	)	$	(4,403	)

Changes in accumulated other comprehensive loss for the nine months ended September 30, 2022 and 2021 are as follows (in

thousands):


Nine Months Ended September 30, 2022	Foreign currency translation adjustments			Derivative adjustments			Total
Beginning balance	$	(770	)	$	(1,460	)	$	(2,230	)

Other comprehensive loss before reclassifications		(15,881	)		(19,498	)		(35,379	)
Amounts reclassified from accumulated other comprehensive loss		—			5,378			5,378

Net current-period other comprehensive loss		(15,881	)		(14,120	)		(30,001	)

Ending balance	$	(16,651	)	$	(15,580	)	$	(32,231	)


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

Other comprehensive loss before reclassifications		(2,809	)		(4,964	)		(7,773	)
Amounts reclassified from accumulated other comprehensive income		—			(333	)		(333	)

Net current-period other comprehensive loss		(2,809	)		(5,297	)		(8,106	)

Ending balance	$	(740	)	$	(3,663	)	$	(4,403	)

Table of Contents

14. Stock Repurchases

On December 21, 2021, the Board of Directors authorized the Company to repurchase up to $75,000 thousand of the Company’s outstanding common stock and the Company entered into an accelerated stock repurchase agreement (the “ASR Agreement”) with JPMorgan Chase Bank, National Association (“JPM”) to repurchase an aggregate of $37,500 thousand of the Company’s common stock.

Pursuant to the terms of the ASR Agreement dated December 21, 2021, the Company paid to JPM $37,500 thousand in cash and received an initial delivery of 994,695 shares of its common stock in the open market for an aggregate purchase price of $20,073 thousand and a price per share of $20.18 on December 22, 2021.

As of December 31, 2021, the Company accounted for the remaining portion of the ASR Agreement as a forward contract indexed to its own common stock and recorded $17,427 thousand in additional

paid-in

capital in stockholders’ equity in its consolidated balance sheets.

In March 2022, the previously announced repurchase of $37,500 thousand of the Company’s common stock was completed pursuant to the ASR Agreement, and as a result, the Company additionally received 1,031,576 shares of its common stock for an aggregate purchase price of $ 17,217 thousand at a price per share of $16.69, which was reclassified as treasury stock from additional

paid-in

capital in stockholder’s equity in the Company’s consolidated balance sheets.

On August 31, 2022, the Board of Directors has authorized an expansion of the Company’s previously announced stock repurchase program from $75,000 thousand to $87,500 thousand of the Company’s common stock.

In September 2022, the Company repurchased

324,643

shares of its common stock in the open market for an aggregate purchase price of $

3,638

thousand and a price per share of $

11.21

under the stock repurchase program.

Table of Contents

15. Earnings (Loss) Per Share

The following table illustrates the computation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2022 and

2021:


	Three Months Ended					Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021

	(In thousands of U.S. dollars, except share data)
Basic earnings (loss) per share
Net income (loss)	$	(17,195	)	$	10,768	$	(11,007	)	$	3,097
Basic weighted average common stock outstanding		44,865,266			46,449,234		45,119,214			44,377,250
Basic earnings (loss) per common share	$	(0.38	)	$	0.23	$	(0.24	)	$	0.07
Diluted earnings (loss) per share
Net income (loss)	$	(17,195	)	$	10,768	$	(11,007	)	$	3,097
Basic weighted average common stock outstanding		44,865,266			46,449,234		45,119,214			44,377,250
Net effect of dilutive equity awards		—			1,359,223		—			1,434,542

Diluted weighted average common stock outstanding		44,865,266			47,808,457		45,119,214			45,811,792
Diluted earnings (loss) per share	$	(0.38	)	$	0.23	$	(0.24	)	$	0.07

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				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021

Options		1,141,551		50,000		1,141,551		50,000
Restricted Stock Units		1,014,124		—		1,014,124		—

For the nine months ended September 30, 2021, 1,906,786 shares, 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.

Rights Plan

The Company entered into a Rights Agreement, dated as of December 13, 2021, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agreement”), and the Board of Directors of the Company authorized and declared a dividend of one preferred stock purchase right (a “Right” and collectively, the “Rights”) for each share of the Company’s common stock, par value $0.01 per share, outstanding at the close of business on December 23, 2021. Each Right, once exercisable, will entitle the registered holder to purchase from the Company one

one-thousandth

of a share of Series

A-1

Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $80, subject to adjustment (the “Purchase Price”). The Rights are not presently exercisable and remain attached to the shares of common stock unless and until the occurrence of the earlier of the following (the “Distribution Date”): (i) the tenth day after the public announcement or disclosure by the Company or any person or group of affiliated or associated persons that any person or group of affiliated or associated persons has become an “Acquiring Person” by obtaining beneficial ownership of 12.5% (or 20% in the case of a “passive institutional investor,” which is defined generally as any person who has reported beneficial ownership of shares of common stock on Schedule 13G under the Securities Exchange Act of 1934) or more of the Company’s outstanding common stock, subject to certain exceptions; or (ii) the tenth business day (or such later date as the Company’s Board of Directors may designate before a person or group of affiliated or associated persons becomes an Acquiring Person) after (and not including) the commencement of, or first public announcement of the intent of any person to commence, a tender or exchange offer by any person or group of affiliated or associated persons, which would, if consummated, result in such person or group becoming an Acquiring Person. The Board of Directors may redeem all of the Rights for $0.001 per Right at any time before any person or group of affiliated or associated persons becomes an Acquiring Person. In addition, at any time on or after any person or group of affiliated or associated persons becomes an Acquiring Person (but before any person or group of affiliated or associated persons becomes the owner of 50% or more of the Company’s outstanding common stock), the Board of Directors may exchange all or part of the Rights (other than the Rights beneficially owned by the Acquiring Person and certain affiliated persons) for shares of common stock at an exchange ratio of one share of common stock per Right. The Rights will expire at the close of business on December 12, 2022, unless redeemed or exchanged prior to that time.

Table of Contents

If any person or group of affiliated or associated persons becomes an Acquiring Person, then, after the Distribution Date, each Right (other than Rights beneficially owned by the Acquiring Person and certain affiliated persons or transferees thereof) will entitle the holder to purchase, for the Purchase Price, a number of shares of common stock having a market value of twice the Purchase Price. Alternatively, if, after any person or group of affiliated or associated persons becomes an Acquiring Person, (1) the Company is involved in a merger or other business combination in which the Company is not the surviving corporation or its common stock is changed into or exchanged for other securities or assets; or (2) the Company or one or more of its subsidiaries sell or otherwise transfer assets or earning power aggregating more than 50% of

the

assets or earning power of the Company and its subsidiaries, taken as a whole, then each Right (other than Rights beneficially owned by the Acquiring Person and certain affiliated persons) will entitle the holder to purchase, for the Purchase Price, a number of shares of common stock of the other party to such business combination or sale (or in certain circumstances, an affiliate) having a market value of twice the Purchase Price.

16. Merger Agreement

On March 25, 2021, the Company, South Dearborn Limited, an exempted company incorporated in the Cayman Islands with limited liability (“Holdco”), formed by an affiliate of Wise Road Capital LTD (“Wise Road”), and Michigan Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Holdco (“Merger Sub”), entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”), providing for, among other things and subject to the terms and conditions thereof, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Holdco.

The closing of the Merger was subject to certain conditions, including clearance by the Committee on Foreign Investment in the United States (“CFIUS”) under the Defense Production Act of 1950, as amended. The Company and Holdco were advised that CFIUS clearance of the Merger would not be forthcoming and received permission from CFIUS to withdraw their joint filing. In connection therewith, the Company and Holdco entered into a Termination and Settlement Agreement, dated December 13, 2021 (the “Termination Agreement”), pursuant to which Holdco agreed to pay

$70,200 thousand (the “Termination Fee”) to the Company on the terms specified in the Termination Agreement in satisfaction of Holdco’s obligation
to

pay a termination fee in connection with the termination of the Merger Agreement. On December 20, 2021, the Merger Agreement was terminated pursuant to the Termination Agreement after the Company’s receipt of a fee of $51,000 thousand from Holdco and a standby letter of credit, which
secures a deferred fee of $19,200 thousand from Holdco due on or before March 31, 2022. As of December 31, 2021, of the Termination Fee, $19,200 thousand deferred fee was recorded as other receivables. In connection therewith, the Company, Holdco and Wise Road entered into a First Amendment to the Termination Agreement, dated April 4, 2022, pursuant to which Holdco paid $14,400 thousand on April 4, 2022, with

$4,800 thousand remaining outstanding. The Company, Holdco and Wise Road entered into a Second Amendment to the Termination Agreement, dated August 5, 2022 pursuant to which Holdco paid $3,000 thousand on August 5, 2022, of the deferred fee and payment of the remaining $1,800 thousand is
due on or before October 31, 2022.

The Company, Holdco and Wise Road entered into a Letter Agreement, dated October 28, 2022 pursuant to which
the parties agreed to defer the remaining $1,800 thousand due on or before December 23,

2022. As of September 30, 2022, the remaining fee of $1,800 thousand was recorded as other receivables. Other than in respect of this receivable, the Company has no further relationship with Holdco.

For the three and nine months ended September 30, 2021, the Company incurred $1,552 thousand and $13,842 thousand, respectively, of professional fees and certain transaction related-expenses incurred in connection with the Merger, which were recognized in merger-related costs in the consolidated statements of operations.

Table of Contents

17. Commitments and Contingencies

Advances to Suppliers

The Company, from time to time, may make advances in form of prepayments or deposits to suppliers, including external foundries, to meet its planned production. The Company recorded advances of $9,532 thousand and $1,708 thousand as other current assets as of September 30, 2022 and December 31, 2021, 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. The extent to which the

COVID-19

pandemic impacts the Company’s business, results of operations and financial condition will depend on future developments, which, despite progress in vaccination efforts, are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the

COVID-19

pandemic, such as new strains of the virus, including the Delta and Omicron variants and any future variants that may emerge, which may impact rates of infection and vaccination efforts, developments or perceptions regarding the safety of vaccines and the extent and effectiveness of actions to contain the

COVID-19

pandemic or treat its impact, including vaccination campaigns and lockdown measures, among others. In addition, recurrences or additional waves of

COVID-19

cases could cause other widespread or more severe impacts depending on where infection rates are highest. The Company cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if the Company or any of its customers and suppliers were to experience prolonged business shutdowns or other disruptions, its ability to conduct its business could be materially and negatively affected, which could have a material adverse impact on its business, results of operations and financial condition.

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 ongoing and uncertain global health crisis and the resulting global economic consequences.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) 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 for our fiscal year ended December 31, 2021 filed on February 23, 2022 (“2021 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 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.

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 have a proven record with more than 40 years of operating history, a portfolio of approximately 1,100 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 line of products provide 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), organic light emitting diodes (OLED) and Micro light emitting diode (Micro LED) televisions. 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), as well as high-volume display technologies such as 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 (High Definition) to WQHD (Wide Quadruple High Definition) for wide range of applications including smartphones, TVs, automotives and IT applications such as monitors, notebook PCs, tablet PCs as well as AR/VRs.

Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in communications, consumer, computing, servers, automotive, and industrial applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs), AC-DC/DC-DC converters, LED drivers, regulators and power management integrated circuits (PMICs) for a range of devices, including televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebooks, tablet PCs, other consumer electrics, automotive, and industrial applications such as power suppliers, e-bikes, solar inverters, LED lighting and motor drives.

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 operation 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. Certain of our OLED products are produced using external 12-inch foundries. Through a strategic cooperation with external 12-inch foundries, we are managing to ensure outsourcing wafers at competitive price and produce quality products.

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 continually strive to diversify 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.

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 certain 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 internally manufactured 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 and 8-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 external 12-inch foundries starting in the second half of 2015 and we have started outsourcing 8-inch wafer for OLED TV IC after the sale of our fabrication facility located in Cheongju in 2020. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED products to external 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 ensure long-term wafer capacity, if these efforts 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.

Recent Developments

Expanded Stock Repurchase Program

On August 31, 2022, our Board of Directors authorized an expansion of the previously announced stock repurchase program from $75.0 million to $87.5 million of our common stock. We have already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, we have established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.

In September 2022, we repurchased 324,643 shares of our common stock in the open market for an aggregate purchase price of $3.6 million and a price per share of $11.21 under the stock repurchase program.

Global Semiconductor Industry Trends

Increases in demand for semiconductor products resulted in a global shortage of manufacturing capacity in recent periods. 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, shortage of manufacturing capacity may lead to an increase in our manufacturing costs. Our principal pricing strategy is to pass on the increased manufacturing costs to our customers; however, we may not be fully able to do this in all cases. Total revenues for the three and nine months ended September 30, 2022 were severely impacted by these persisting supply shortages, in particular for 28nm 12-inch OLED wafers, which impacted design-in projects from our large panel customer in Korea that are typically given 9 to 12 months in advance.

In an effort to minimize the potential adverse impact of the supply shortage, we are working strategically with certain external foundries to help ensure long-term wafer capacity. If these efforts 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 shortage of manufacturing capacity will subside, but we are beginning to see some indicators of improvement of such supply shortage situation. However, the global shortage for semiconductor products over the prior two years has led to overbooking backordered demand and oversupply. As a result, the current global macroeconomic conditions, including COVID-19 lockdowns in China, higher inflation and interest rates and uncertainty caused by the Russian-Ukraine war, have led to weaker end-market demand and an oversupply of inventory. We continue to monitor these trends and uncertainties, and any decline in end-market demand and increase in inventory levels could negatively impact our financial condition and results of operations.

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.

We experienced some minor disruption in our Power Solutions business line 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 line 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. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which, despite progress in vaccination efforts, are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the COVID-19 pandemic, such as new strains of the virus, including the Delta and Omicron variants and any future variants that may emerge, which may impact rates of infection and vaccination efforts, developments or perceptions regarding the safety of vaccines and the extent and effectiveness of actions to contain the COVID-19 pandemic or treat its impact, including vaccination campaigns and lockdown measures, among others. In addition, recurrences or additional waves of COVID-19 cases could cause other widespread or more

severe impacts depending on where infection rates are highest. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of our customers and suppliers were to experience prolonged business shutdowns or other disruptions, our ability to conduct our business could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.

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 ongoing and uncertain global health crisis and the resulting global economic consequences.

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, net, (iii) derivative valuation gain, net, (iv) inventory reserve related to Huawei impact of downstream trade restrictions, (v) Merger-related costs and (vi) other charges, net. EBITDA for the periods indicated is defined as net income (loss) before interest income, net, income tax expense (benefit), 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 a 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 a 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 net income (loss) to Adjusted EBITDA is as follows:


	Three Months Ended September 30, 2022			Nine Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021

	(Dollars in millions)
Net income (loss)	$	(17.2	)	$	(11.0	)	$	10.8		$	3.1
Interest income, net		(1.5	)		(2.7	)		(0.4	)		(0.5	)
Income tax expense (benefit)		(3.9	)		(1.4	)		3.1			6.0
Depreciation and amortization		3.6			11.2			3.6			10.6

EBITDA	$	(19.0	)	$	(3.8	)	$	17.1		$	19.2
Adjustments:
Equity-based compensation expense(a)		0.9			4.5			2.0			6.1
Foreign currency loss, net(b)		12.8			20.5			7.6			12.0
Derivative valuation gain, net(c)		(0.1	)		(0.2	)		(0.2	)		(0.1	)
Inventory reserve related to Huawei impact of downstream trade restrictions(d)		—			—			(1.1	)		(1.1	)
Merger-related costs(e)		—			—			1.6			13.8
Other charges, net(f)		2.5			3.3			(0.5	)		2.6

Adjusted EBITDA	$	(3.0	)	$	24.3		$	26.4		$	52.6

(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 nine months ended September 31, 2021, this adjustment eliminates the impact of a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, as a portion of reserved inventory was subsequently sold to certain other customers. As this adjustment meaningfully impacted our operational results and are not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this adjustment is excluded.

(e)

For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses incurred in connection with the contemplated Merger transaction (see “Note 16. Merger Agreement” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements”). As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded.

(f)

For the three and nine months ended September 30, 2022, this adjustment eliminates $2.8 million of one-time employee incentives, in each period, and professional service fees and expenses of $0.2 million and $1.0 million, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses of $0.2 million and $3.4 million, respectively, incurred in connection with the regulatory requests, both of which were offset in part by a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the third quarter. As these adjustments meaningfully impacted our operating results and are not expected to represent ongoing operating expenses to us, we believe our operating performance results are more usefully compared if these adjustments 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.

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 (ii) inventory reserve related to Huawei impact of downstream trade restrictions, (iii) Merger-related costs and (iv) other charges, net.

The following table summarizes the adjustments to operating income that we make in order to calculate Adjusted Operating Income (Loss) for the periods indicated:


	Three Months Ended September 30, 2022			Nine Months Ended September 30, 2022		Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021

	(Dollars in millions)
Operating income (loss)	$	(10.0	)	$	4.9	$	20.0		$	19.5
Adjustments:
Equity-based compensation expense(a)		0.9			4.5		2.0			6.1
Inventory reserve related to Huawei impact of downstream trade restrictions(b)		—			—		(1.1	)		(1.1	)
Merger-related costs(c)		—			—		1.6			13.8
Other charges, net(d)		2.5			3.3		0.2			3.4

Adjusted Operating Income (Loss)	$	(6.6	)	$	12.7	$	22.7		$	41.7

(a)

(b)

(c)

(d)

For the three and nine months ended September 30, 2022, this adjustment eliminates $2.8 million of one-time employee incentives, in each period, and professional service fees and expenses of $0.2 million and $1.0 million, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses of $0.2 million and $3.4 million, respectively, incurred in connection with the regulatory requests. As these adjustments meaningfully impacted our operating results and are not expected to represent ongoing operating expenses to us, we believe our operating performance results are more usefully compared if these adjustments are excluded.

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 net income (loss) 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 net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net, (iv) inventory reserve related to Huawei impact of downstream trade restrictions, (v) Merger-related costs, (vi) other charges, net and (vii) income tax effect on non-GAAP adjustments.

The following table summarizes the adjustments to net income (loss) 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 September 30, 2022			Nine Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021

	(Dollars in millions, except per share data)
Net income (loss)	$	(17.2	)	$	(11.0	)	$	10.8		$	3.1
Adjustments:
Equity-based compensation expense(a)		0.9			4.5			2.0			6.1
Foreign currency loss, net(b)		12.8			20.5			7.6			12.0
Derivative valuation gain, net(c)		(0.1	)		(0.2	)		(0.2	)		(0.1	)
Inventory reserve related to Huawei impact of downstream trade restrictions(d)		—			—			(1.1	)		(1.1	)
Merger-related costs(e)		—			—			1.6			13.8
Other charges, net(f)		2.5			3.3			(0.5	)		2.6
Income tax effect on non-GAAP adjustments(g)		2.3			7.5			—			—

Adjusted Net Income	$	1.1		$	24.6		$	20.1		$	36.5

Reported earnings (loss) per share – basic	$	(0.38	)	$	(0.24	)	$	0.23		$	0.07
Reported earnings (loss) per share – diluted	$	(0.38	)	$	(0.24	)	$	0.23		$	0.07
Weighted average number of shares – basic		44,865,266			45,119,214			46,449,234			44,377,250
Weighted average number of shares – diluted		44,865,266			45,119,214			47,808,457			45,811,792
Adjusted earnings per share – basic	$	0.02		$	0.55		$	0.43		$	0.82
Adjusted earnings per share – diluted	$	0.02		$	0.53		$	0.42		$	0.78
Weighted average number of shares – basic		44,865,266			45,119,214			46,449,234			44,377,250
Weighted average number of shares – diluted		45,747,255			46,134,231			47,808,457			47,718,578

(a)

(b)

(c)

(d)

(e)

(f)

(g)

For the three and nine months ended September 30, 2022, this adjustment eliminates the income tax effect on non-GAAP adjustments of $2.3 million and $7.5 million, respectively, which mainly related to our Korean subsidiary using a calculation method that we compare the tax expense with and without the non-GAAP adjustments.

We believe that all adjustments to net income (loss) 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.

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 mobile 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, Taiwan 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 nine months ended September 30, 2022 and 2021, we sold products to 169 and 175 customers, respectively, and our net sales to our ten largest customers represented 70% and 81% 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.

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 September 30, 2022, approximately 97% 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.

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.

Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and cost of sales and greater than the majority of our operating expenses 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 September 30, 2022, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $356.7 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 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. See “Note 7. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” for additional information regarding our foreign exchange hedging activities.

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.

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.

Results of Operations – Comparison of Three Months Ended September 30, 2022 and 2021

The following table sets forth consolidated results of operations for the three months ended September 30, 2022 and 2021:


	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
	Amount			% of Total revenues			Amount			% of Total revenues			Change Amount

	(Dollars in millions)
Revenues
Net sales – standard products business	$	62.8			88.2	%	$	117.4			92.5	%	$	(54.6	)
Net sales – transitional Fab 3 foundry services		8.4			11.8			9.6			7.5			(1.2	)

Total revenues		71.2			100.0			127.0			100.0			(55.8	)
Cost of sales
Cost of sales – standard products business		45.5			63.9			71.6			56.4			(26.1	)
Cost of sales – transitional Fab 3 foundry services		8.5			11.9			8.8			6.9			(0.3	)

Total cost of sales		54.0			75.8			80.4			63.3			(26.4	)

Gross profit		17.2			24.2			46.6			36.7			(29.4	)
Selling, general and administrative expenses		11.4			16.0			12.6			9.9			(1.1	)
Research and development expenses		13.3			18.7			12.3			9.7			1.1
Merger-related costs		—			—			1.6			1.2			(1.6	)
Other charges, net		2.5			3.5			0.2			0.2			2.3

Operating income (loss)		(10.0	)		(14.1	)		20.0			15.7			(30.0	)
Interest expense		(0.3	)		(0.4	)		(0.1	)		(0.1	)		(0.2	)
Foreign currency loss, net		(12.8	)		(18.0	)		(7.6	)		(6.0	)		(5.2	)
Others, net		2.0			2.8			1.6			1.3			0.4

		(11.1	)		(15.6	)		(6.1	)		(4.8	)		(5.0	)

Income (loss) before income tax expense		(21.1	)		(29.7	)		13.9			11.0			(35.1	)
Income tax expense (benefit)		(3.9	)		(5.5	)		3.1			2.5			(7.1	)

Net income (loss)	$	(17.2	)		(24.2	)	$	10.8			8.5		$	(28.0	)


	Three Months Ended September 30, 2022					Three Months Ended September 30, 2021
	Amount		% of Total revenues			Amount		% of Total revenues			Change Amount

	(Dollars in millions)
Revenues
Net sales – standard products business
Display Solutions	$	6.4		8.9	%	$	58.5		46.1	%	$	(52.2	)
Power Solutions		56.4		79.2			58.9		46.4			(2.5	)

Total standard products business		62.8		88.2			117.4		92.5			(54.6	)
Net sales – transitional Fab 3 foundry services		8.4		11.8			9.6		7.5			(1.2	)

Total revenues	$	71.2		100.0	%	$	127.0		100.0	%	$	(55.8	)


	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
	Amount			% of Net sales			Amount		% of Net sales			Change Amount

	(Dollars in millions)
Gross Profit
Gross profit – standard products business	$	17.3			27.5	%	$	45.8		39.0	%	$	(28.5	)
Gross profit – transitional Fab 3 foundry services		(0.0	)		(0.6	)		0.8		8.5			(0.9	)

Total gross profit	$	17.2			24.2	%	$	46.6		36.7	%	$	(29.4	)

Revenues

Total revenues were $71.2 million for the three months ended September 30, 2022, a $55.8 million, or 43.9%, decrease compared to $127.0 million for the three months ended September 30, 2021. 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 $62.8 million for the three months ended September 30, 2022, a $54.6 million, or 46.5%, decrease compared to $117.4 million for the three months ended September 30, 2021. The significant decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for our auto-LCD display driver ICs and OLED TV display driver ICs. The decrease in net sales from our Power Solutions business line was attributable to a lower demand for MOSFETs primarily for smartphone and e-bikes, which was affected by COVID-19 lockdowns in China. This decrease was almost offset by a strong demand for IGBTs mainly for solar inverters.

The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $8.4 million and $9.6 million for the three months ended September 30, 2022 and 2021, respectively.

Gross Profit

Total gross profit was $17.2 million for the three months ended September 30, 2022 compared to $46.6 million for the three months ended September 30, 2021, a $29.4 million, or 63.0%, decrease. Gross profit as a percentage of net sales for the three months ended September 30, 2022 decreased to 24.2% compared to 36.7% for the three months ended September 30, 2021. The decrease in both 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 $17.3 million for the three months ended September 30, 2022, which represented a $28.5 million, or 62.3%, decrease from gross profit of $45.8 million for the three months ended September 30, 2021. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our Display Solutions business line as explained above. Gross profit as a percentage of net sales for the three months ended September 30, 2022 decreased to 27.5% compared to 39.0% for the three months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was primarily attributable to certain inventory reserve and scrap cost related to 12-inch display products resulted from lower demand for China smartphones and a lower utilization rate of our internal fabrication facility. For the three months ended September 30, 2021, a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, favorably affected both gross profit and gross profit as a percentage of net sales, as such reserved inventory was subsequently sold to certain other customers in the third quarter of 2021.

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 September 30, 2022 and 2021:


	Three Months Ended September 30, 2022					Three Months Ended September 30, 2021
	Amount		% of Net sales – standard products business			Amount		% of Net sales – standard products business			Change Amount

	(Dollars in millions)
Korea	$	23.9		38.0	%	$	29.7		25.3	%	$	(5.8	)
Asia Pacific (other than Korea)		34.6		55.1			84.2		71.7			(49.6	)
United States		2.7		4.3			1.8		1.5			1.0
Europe		1.6		2.5			1.4		1.2			0.2
Others		—		—			0.4		0.3			(0.4	)

	$	62.8		100.0	%	$	117.4		100.0	%	$	(54.6	)

Net sales – standard products business in Korea for the three months ended September 30, 2022 decreased from $29.7 million to $23.9 million compared to the three months ended September 30, 2021, or by $5.8 million, or 19.5%, primarily due to a decrease in revenue from our mobile OLED display driver ICs and weaker demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and smartphone applications, which was offset in part by higher demand for OLED TV display driver ICs.

Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended September 30, 2022 decreased to $34.6 million from $84.2 million in the three months ended September 30, 2021, or by $49.6 million, or 58.9%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for power products such as IGBTs mainly for solar inverters. The increased demand for our auto-LCD display driver ICs also favorably affected in this quarter.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.4 million, or 16.0% of total revenues, for the three months ended September 30, 2022, compared to $12.6 million, or 9.9% of total revenues, for the three months ended September 30, 2021. The decrease of $1.1 million, or 9.1%, was primarily attributable to a decrease in estimated employee compensation reflecting the current year’s financial performance.

Research and Development Expenses. Research and development expenses were $13.3 million, or 18.7% of total revenues, for the three months ended September 30, 2022, compared to $12.3 million, or 9.7% of total revenues, for the three months ended September 30, 2021. The increase of $1.1 million, or 8.6%, was primarily attributable to increase in outside service fees, including those for software design tools, and variable overhead expenses.

Merger-related Costs. For the three months ended September 30, 2021, we recorded $1.6 million of professional service fees and expenses incurred in connection with the contemplated Merger transaction.

Other Charges, Net. For the three months ended September 30, 2022, we recorded $2.8 million of one-time employee incentives and $0.2 million of professional service fees and expenses incurred in connection with certain strategic evaluations, which was offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three months ended September 30, 2021, we recorded $0.2 million of non-recurring professional service fees and expenses incurred in connection with the regulatory requests.

Operating Income (Loss)

As a result of the foregoing, operating loss was $10.0 million for the three months ended September 30, 2022 compared to operating income of $20.0 million the three months ended September 30, 2021. As discussed above, the decrease in operating income of $30.0 million resulted primarily from a $29.4 million decrease in gross profit, a $2.3 million increase in other charge, net, and a $1.1 million increase in research and development expenses. This increase was offset in part by a $1.6 million decrease in Merger-related costs and a $1.1 million decrease in selling, general and administrative expenses.

Other Income (Expense)

Interest Expense. Interest expenses was $0.3 million and $0.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively.

Foreign Currency Loss, Net. Net foreign currency loss for the three months ended September 30, 2022 was $12.8 million compared to net foreign currency loss of $7.6 million for the three months ended September 30, 2021. The net foreign currency loss for the three months ended September 30, 2022 and September 30, 2021 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 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 September 30, 2022 and September 30, 2021, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $357 million and $393 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 primarily comprised of interest income, rental income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the three months ended September 30, 2022 and September 30, 2021 was $2.0 million and $1.6 million, respectively. In the third quarter of 2021, others, net included a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the current quarter.

Income Tax Expense (Benefit)

Income tax benefit was $3.9 million for the three months ended September 30, 2022, which was primarily attributable to the decrease in the pre-tax income due to foreign currency translation losses associated with intercompany long-term loans in our Korean subsidiary for the respective period.

Income tax expense was $3.1 million for the three months ended September 30, 2021, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for the respective period in our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.

Net Income (Loss)

As a result of the foregoing, a net loss of $17.2 million was recorded for the three months ended September 30, 2022 compared to a net income of $10.8 million for the three months ended September 30, 2021. As discussed above, the $28.0 million decrease in net income was primarily attributable to a $30.0 million decrease in operating income and $5.2 million increase in net foreign currency loss, which was offset in part by a $7.1 million decrease in income tax expense.

Results of Operations – Comparison of Nine Months Ended September 30, 2022 and 2021

The following table sets forth consolidated results of operations for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Amount			% of Total revenues			Amount			% of Total revenues			Change Amount

	(Dollars in millions)
Revenues
Net sales – standard products business	$	248.1			89.7	%	$	333.6			91.7	%	$	(85.5	)
Net sales – transitional Fab 3 foundry services		28.6			10.3			30.3			8.3			(1.7	)

Total revenues		276.7			100.0			363.9			100.0			(87.2	)
Cost of sales
Cost of sales – standard products business		165.2			59.7			221.3			60.8			(56.1	)
Cost of sales – transitional Fab 3 foundry services		26.3			9.5			27.7			7.6			(1.4	)

Total cost of sales		191.5			69.2			249.0			68.4			(57.5	)

Gross profit		85.2			30.8			114.9			31.6			(29.8	)
Selling, general and administrative expenses		38.3			13.8			39.2			10.8			(0.9	)
Research and development expenses		38.7			14.0			39.0			10.7			(0.3	)
Merger-related costs		—			—			13.8			3.8			(13.8	)
Other charges, net		3.3			1.2			3.4			0.9			(0.1	)

Operating income		4.9			1.8			19.5			5.4			(14.7	)
Interest expense		(0.9	)		(0.3	)		(1.2	)		(0.3	)		0.4
Foreign currency loss, net		(20.5	)		(7.4	)		(12.0	)		(3.3	)		(8.5	)
Others, net		4.2			1.5			2.8			0.8			1.3

		(17.2	)		(6.2	)		(10.4	)		(2.9	)		(6.8	)

Income (loss) before income tax expense		(12.4	)		4.5			9.1			2.5			(21.5	)
Income tax expense (benefit)		(1.4	)		(0.5	)		6.0			1.7			(7.4	)

Net income (loss)	$	(11.0	)		(4.0	)	$	3.1			0.9		$	(14.1	)


	Nine Months Ended September 30, 2022					Nine Months Ended September 30, 2021
	Amount		% of Total revenues			Amount		% of Total revenues			Change Amount

	(Dollars in millions)
Revenues
Net sales – standard products business
Display Solutions	$	63.9		23.1	%	$	164.0		45.1	%	$	(100.1	)
Power Solutions		184.2		66.6			169.6		46.6			14.6

Total standard products business		248.1		89.7			333.6		91.7			(85.5	)
Net sales – transitional Fab 3 foundry services		28.6		10.3			30.3		8.3			(1.7	)

Total revenues	$	276.7		100.0	%	$	363.9		100.0	%	$	(87.2	)


	Nine Months Ended September 30, 2022					Nine Months Ended September 30, 2021
	Amount		% of Net sales			Amount		% of Net sales			Change Amount

	(Dollars in millions)
Gross Profit
Gross profit – standard products business	$	82.9		33.4	%	$	112.3		33.7	%	$	(29.4	)
Gross profit – transitional Fab 3 foundry services		2.3		8.0			2.6		8.7			(0.4	)

Total gross profit	$	85.2		30.8	%	$	114.9		31.6	%	$	(29.8	)

Revenues

Total revenues were $276.7 million for the nine months ended September 30, 2022, a $87.2 million, or 24.0%, decrease compared to $363.9 million for the nine months ended September 30, 2021. 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 $248.1 million for the nine months ended September 30, 2022, an $85.5 million, or 25.6%, decrease compared to $333.6 million for the nine months ended September 30, 2021. The significant decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for our OLED TV display driver ICs and auto-LCD display driver ICs. The increase in net sales from our Power Solutions business line was attributable to a strong demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and e-bikes, and IGBTs mainly for solar inverters.

The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $28.6 million and $30.3 million for the nine months ended September 30, 2022 and 2021, respectively.

Gross Profit

Total gross profit was $85.2 million for the nine months ended September 30, 2022 compared to $114.9 million for the nine months ended September 30, 2021, a $29.8 million, or 25.9%, decrease. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 decreased to 30.8% compared to 31.6% for the nine months ended September 30, 2021. The decrease in both 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 $82.9 million for the nine months ended September 30, 2022, which represented a $29.4 million, or 26.2%, decrease from gross profit of $112.3 million for the nine months ended September 30, 2021. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our Display Solutions business line as explained above. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 decreased slightly to 33.4% compared to 33.7% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was primarily attributable to certain inventory reserve and scrap cost related to 12-inch display products resulted from lower demand for China smartphones, which was offset in part by an improved product mix and an increase in average selling price benefited from the favorable pricing environment, primarily for our Power Solutions business line.

Net Sales – Standard Products Business by Geographic Region


	Nine Months Ended September 30, 2022					Nine Months Ended September 30, 2021
	Amount		% of Net sales – standard products business			Amount		% of Net sales – standard products business			Change Amount

	(Dollars in millions)
Korea	$	86.1		34.7	%	$	87.0		26.1	%	$	(0.9	)
Asia Pacific (other than Korea)		148.9		60.0			237.3		71.1			(88.4	)
United States		8.1		3.3			4.4		1.3			3.7
Europe		5.0		2.0			3.8		1.2			1.1
Others		—		—			1.1		0.3			(1.1	)

	$	248.1		100.0	%	$	333.6		100.0	%	$	(85.5	)

Net sales – standard products business in Korea for the nine months ended September 30, 2022 decreased from $87.0 million to $86.1 million compared to the nine months ended September 30, 2021, or by $0.9 million, or 1.0%, primarily due to weaker demand for power products such as high-end MOSFETs primarily for TVs and decrease in revenue from our mobile OLED display driver ICs, which was offset in part by an increase in revenue from OLED TV display driver ICs.

Net sales – standard products business in Asia Pacific (other than Korea) for the nine months ended September 30, 2022 decreased to $148.9 million from $237.3 million in the nine months ended September 30, 2021, or by $88.4 million, or 37.2%, primarily due to a significant decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at 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-bike, and IGBTs mainly for solar inverters. The increased demand for our auto-LCD display driver ICs also favorably affected in this year.

Net sales – standard products business in the United States for the nine months ended September 30, 2022 increased to $8.1 million from $4.4 million compared to the nine months ended September 30, 2021, or by $3.7 million, or 83.8%, primarily due to a change in billing location of a global customer who offers lighting solutions combined with the increase of high-end MOSFET design wins with the customer.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $38.3 million, or 13.8% of total revenues, for the nine months ended September 30, 2022, compared to $39.2 million, or 10.8% of total revenues, for the nine months ended September 30, 2021. The decrease of $0.9 million, or 2.2%, was primarily attributable to a decrease in running royalties recognized based on the revenue of certain mobile OLED display driver ICs.

Research and Development Expenses. Research and development expenses were $38.7 million, or 14.0% of total revenues, for the nine months ended September 30, 2022, which remained almost flat, compared to $39.0 million, or 10.7% of total revenues, for the nine months ended September 30, 2021.

Merger-related Costs. For the nine months ended September 30, 2021, we recorded $13.8 million of professional service fees and expenses incurred in connection with the contemplated Merger transaction.

Other Charges, Net. For the nine months ended September 30, 2022, we recorded $2.8 million of one-time employee incentives and $1.0 million of professional service fees and expenses incurred in connection with certain strategic evaluations, which was offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the nine months ended September 30, 2021, we recorded $3.4 million of non-recurring professional service fees and expenses incurred in connection with the regulatory requests.

Operating Income

As a result of the foregoing, operating income was $4.9 million for the nine months ended September 30, 2022 compared to operating income of $19.5 million the nine months ended September 30, 2021. As discussed above, the decrease in operating income of $14.7 million resulted primarily from a $29.8 million decrease in gross profit, which was offset in part by a $13.8 million decrease in Merger-related costs, a $0.9 million decrease in selling, general and administrative expenses and a $0.3 million decrease in research and development expenses.

Other Income (Expense)

Interest Expense. Interest expenses was $0.9 million and $1.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Foreign Currency Loss, Net. Net foreign currency loss for the nine months ended September 30, 2022 was $20.5 million compared to net foreign currency loss of $12.0 million for the nine months ended September 30, 2021. The net foreign currency loss for the nine months ended September 30, 2022 and September 30, 2021 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.

Others, Net. Others were primarily comprised of interest income, rental income and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the nine months ended September 30, 2022 and September 30, 2021 was $4.2 million and $2.8 million, respectively. In the third quarter of 2021, others, net included a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the current quarter

Income Tax Expense (Benefit)

Income tax benefit was $1.4 million for the nine months ended September 30, 2022, which was primarily attributable to the decrease in the pre-tax income due to foreign currency translation losses associated with intercompany long-term loans in our Korean subsidiary for the respective period.

Income tax expense was $6.0 million for the nine months ended September 30, 2021, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for the respective period in our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.

Net Income (Loss)

As a result of the foregoing, a net loss of $11.0 million was recorded for the nine months ended September 30, 2022 compared to a net income of $3.1 million for the nine months ended September 30, 2021. As discussed above, the $14.1 million decrease in net income was primarily attributable to a $14.7 million decrease in operating income and an $8.5 million increase in net foreign currency loss, which was offset in part by a $7.4 million decrease in income tax expense.

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 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 September 30, 2022, we did not have any accounts payable on extended terms or payment deferment with our vendors.

As of June 29, 2018, our Korean subsidiary entered into an arrangement whereby it (i) acquired a water treatment facility from SK hynix for $4.2 million to support our fabrication facility in Gumi, Korea, and (ii) subsequently sold the water treatment facility for $4.2 million to a third party management company that we engaged to run the facility for a 10-year term beginning July 1, 2018. As of September 30, 2022, the outstanding obligation of this arrangement is approximately $22.7 million for remaining service term through 2028.

As of September 30, 2022, cash and cash equivalents held by our Korean subsidiary were $241.3 million, which represents 96% of our total cash and cash equivalents on a consolidated basis. 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 September 30, 2022 was $304.7 million compared to $323.6 million as of December 31, 2021. The $19.0 million decrease was primarily attributable to a $28.7 million decrease in cash and cash equivalents and a $17.6 million decrease in other receivable mainly resulted from receipt of reverse termination fee, which was offset in part by a $11.0 million decrease in account payables, a $12.3 million net increase in hedge collateral and a $7.8 million increase in advance payments to certain suppliers, including external foundries to meet our planned production.

Cash Flows from Operating Activities

Cash inflow provided by operating activities totaled $50.2 million for the nine months ended September 30, 2022, compared to $30.0 million of cash inflow provided by operating activities for the nine months ended September 30, 2021. The net operating cash inflow for the nine months ended September 30, 2022 reflects our net loss of $11.0 million, as adjusted favorably by $95.6 million, which mainly consisted of depreciation and amortization, provision for severance benefits, stock-based compensation and net foreign currency loss, and net unfavorable impact of $34.3 million from changes of operating assets and liabilities.

Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $25.9 million for the nine months ended September 30, 2022, compared to $14.4 million of cash outflow used in investing activities for the nine months ended September 30, 2021. The $11.4 million increase in cash outflow was primarily attributable to a $13.7 million net increase in hedge collateral, which was offset in part by a $1.6 million decrease in purchase of property, plant and equipment.

Cash Flows from Financing Activities

Cash outflow used in financing activities totaled $3.7 million for the nine months ended September 30, 2022, compared to $1.8 million of cash inflow provided by financing activities for the nine months ended September 30, 2021. The financing cash outflow for the nine months ended September 30, 2022 was primarily attributable to a payment of $3.2 million for the repurchases of our common stock in September 2022 pursuant to our stock repurchase program and a payment of $1.8 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units, which was offset in part by $1.8 million of proceeds received from the issuance of common stock in connection with the exercise of stock options. The financing cash inflow for the nine months ended September 30, 2021 was primarily attributable to $3.9 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.

Capital Expenditures

We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facility and reinforcement of our global research and development capability. For the nine months ended September 30, 2022, capital expenditures for property, plant and equipment were $11.8 million, a $1.6 million, or 11.6%, decrease from $13.4 million for the nine months ended September 30, 2021. The capital expenditures for the nine months ended September 30, 2022 and 2021 were related to meeting our customer demand and supporting technology and capacity improvement at our fabrication facility.

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, 2021, or our 2021 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 2021 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 2021 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.

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 September 30, 2022 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $1.2 million in our U.S. dollar financial instruments and cash balances.

See “Note 7. 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.

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 September 30, 2022, 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 September 30, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2021 Form 10-K.

See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2021 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.

In addition to the other information contained in this Report and the other reports and materials the Company files with the SEC, investors should carefully consider the risk factors disclosed in Part I, Item 1A of our 2021 Form 10-K as well as in our subsequent filings with the SEC. The risks described herein and therein are not the only ones we face.

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2021 Form 10-K and Part II, Item 1A of our most recent Quarterly Report on Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows the monthly activity related to our repurchases of common stock for the quarter ended September 30, 2022.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands)(1)
July 2022		—		—		—		—
August 2022		—		—		—		—
September 2022		324,643	$	11.21		324,643	$	46,362

Total		324,643				324,643	$	46,362

(1)

On August 31, 2022, the Company’s Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75 million to $87.5 million of the Company’s common stock. The Company has already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, the Company has established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits.


Exhibit Number		Description

10.1‡^#		Form of Restricted Stock Units Agreement (Non-employee Directors)

10.2‡^#		Form of Restricted Stock Units Agreement (CEO and other Section 16 Officers)

10.3‡^#		Form of Restricted Stock Units Agreement—Financial Performance (CEO)

10.4‡^#		Form of Restricted Stock Units Agreement—Financial Performance (Non-CEO Section 16 Officers)

10.5‡^#		Form of Restricted Stock Units Agreement—TSR Performance (CEO)

10.6‡^#		Form of Restricted Stock Units Agreement—TSR Performance (Non-CEO Section 16 Officers)

10.7^#		Second Amendment to Termination and Settlement Agreement, dated as of August 5, 2022, by and between Magnachip Semiconductor Corporation, South Dearborn Limited and Wise Road Capital LTD.

10.8^#+		Patent Cross-License Agreement, with an effective date as of June 15, 2017, by and between Infineon Technologies AG and Magnachip Semiconductor, Ltd.

10.9^#+		First Amendment to the Patent Cross-License Agreement, with an effective date as of January 1, 2022, by and between Infineon Technologies AG and Magnachip Semiconductor, Ltd.

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 Chief 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

‡	Management contract or compensatory plan or arrangement

Certain identified information in such exhibit has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) information that the registrant treats as private or confidential. The registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC.

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: November 8, 2022	By:	/s/ Young-Joon Kim
		Young-Joon Kim
		Chief Executive Officer (Principal Executive Officer)

Dated: November 8, 2022	By:	/s/ Shin Young Park
		Shin Young Park
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)