10-Q 1 d306034d10q.htm 10-Q 10-Q
Table of Contents
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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
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number:
001-34791
 
 
 

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.
 
Large accelerated filer  
   Accelerated filer  
       
Non-accelerated filer      Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 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.
 
 
 
 


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page No.  
PART I FINANCIAL INFORMATION      3  

Item 1.

  Interim Consolidated Financial Statements (Unaudited)      3  
  Magnachip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of 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  

 

2


Table of Contents
http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesCurrent
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.
 
3

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.
 
4

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.
 
5

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
 
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
 
 
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.
 
6

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.
 
7

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.
 
8

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.
 
9

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.
 
10

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.
 
11

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  
    
 
 
    
 
 
 
 
12

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
 
  
Financial
instruments
 
  
Cash collateral
pledged
 
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
 
  
Financial
instruments
 
  
Cash collateral
pledged
 
Liability Derivatives:
                                                    
Zero cost collars
   $ 2,020      $         $ 2,020      $         $ (2,060   $ (40

1
3

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