filings.toolsItem 1. FINANCIAL STATEMENTS
89K characters. Original on sec.gov ·
Item 1. FINANCIAL STATEMENTS
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands, except share and per share data) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 427,969 | $ | 1,179,297 | |||||||
| Short-term investments | 836,288 | — | |||||||||
| Total cash, cash equivalents and short-term investments | 1,264,257 | 1,179,297 | |||||||||
| Accounts receivable (including related party), net of allowance for credit losses of $0 and $0, respectively | 16,018 | 51,009 | |||||||||
| Inventories | 61,645 | 38,692 | |||||||||
| Income taxes receivable | 3,857 | — | |||||||||
| Prepaid expenses and other current assets | 11,004 | 7,809 | |||||||||
| Total current assets | 1,356,781 | 1,276,807 | |||||||||
| Non-current assets | |||||||||||
| Property, plant and equipment, net | 830,033 | 610,612 | |||||||||
| Other non-current assets | 2,348 | 2,247 | |||||||||
| Total non-current assets | 832,381 | 612,859 | |||||||||
| Total assets | $ | 2,189,162 | $ | 1,889,666 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and accrued liabilities | $ | 70,242 | $ | 35,734 | |||||||
| Income taxes payable | — | 3,463 | |||||||||
| Current installments of long-term debt—related party | — | 16,082 | |||||||||
| Other current liabilities | 4,504 | 4,264 | |||||||||
| Total current liabilities | 74,746 | 59,543 | |||||||||
| Non-current liabilities | |||||||||||
| Asset retirement obligations | 5,244 | 17,615 | |||||||||
| Environmental obligations | 16,584 | 16,598 | |||||||||
| Long-term debt, net of current portion | 677,563 | 674,927 | |||||||||
| Deferred income taxes | 167,028 | 104,500 | |||||||||
| Other non-current liabilities | 5,691 | 7,751 | |||||||||
| Total non-current liabilities | 872,110 | 821,391 | |||||||||
| Total liabilities | 946,856 | 880,934 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock ($0.0001 par value, 50,000,000 shares authorized, none issued and outstanding in either period) | — | — | |||||||||
| Common stock ($0.0001 par value, 450,000,000 shares authorized, 177,534,638 and 177,816,554 shares issued and outstanding, as of September 30, 2022, and December 31, 2021, respectively) | 18 | 18 | |||||||||
| Additional paid-in capital | 947,973 | 936,299 | |||||||||
| Retained earnings | 294,412 | 72,415 | |||||||||
| Accumulated other comprehensive loss | (97) | — | |||||||||
| Total stockholders’ equity | 1,242,306 | 1,008,732 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,189,162 | $ | 1,889,666 |
See accompanying notes to the Condensed Consolidated Financial Statements.
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product sales (including related party) | $ | 124,231 | $ | 98,581 | $ | 425,169 | $ | 230,842 | |||||||||||||||
| Other sales (including related party) | 214 | 1,173 | 9,096 | 2,001 | |||||||||||||||||||
| Total revenue | 124,445 | 99,754 | 434,265 | 232,843 | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales (including related party)(excluding depreciation, depletion and amortization) | 22,417 | 21,907 | 67,682 | 57,798 | |||||||||||||||||||
| Selling, general and administrative | 17,604 | 14,881 | 56,391 | 40,986 | |||||||||||||||||||
| Advanced projects, development and other | 2,743 | 1,327 | 6,229 | 2,436 | |||||||||||||||||||
| Depreciation, depletion and amortization | 2,096 | 6,951 | 12,763 | 19,767 | |||||||||||||||||||
| Accretion of asset retirement and environmental obligations | 418 | 595 | 1,255 | 1,780 | |||||||||||||||||||
| Write-down of inventories | — | — | — | 1,809 | |||||||||||||||||||
| Total operating costs and expenses | 45,278 | 45,661 | 144,320 | 124,576 | |||||||||||||||||||
| Operating income | 79,167 | 54,093 | 289,945 | 108,267 | |||||||||||||||||||
| Interest expense, net | (1,224) | (2,624) | (4,455) | (6,417) | |||||||||||||||||||
| Other income, net | 6,168 | 97 | 8,574 | 3,656 | |||||||||||||||||||
| Income before income taxes | 84,111 | 51,566 | 294,064 | 105,506 | |||||||||||||||||||
| Income tax expense | (20,934) | (8,803) | (72,067) | (19,458) | |||||||||||||||||||
| Net income | $ | 63,177 | $ | 42,763 | $ | 221,997 | $ | 86,048 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.24 | $ | 1.26 | $ | 0.50 | |||||||||||||||
| Diluted | $ | 0.33 | $ | 0.23 | $ | 1.16 | $ | 0.47 | |||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 176,543,624 | 176,053,586 | 176,476,276 | 172,577,303 | |||||||||||||||||||
| Diluted | 193,409,857 | 193,215,313 | 193,438,939 | 188,639,373 |
See accompanying notes to the Condensed Consolidated Financial Statements.
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income | $ | 63,177 | $ | 42,763 | $ | 221,997 | $ | 86,048 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Change in net unrealized gains (losses) on available-for-sale securities | 319 | — | (97) | — | |||||||||||||||||||
| Total comprehensive income | $ | 63,496 | $ | 42,763 | $ | 221,900 | $ | 86,048 |
See accompanying notes to the Condensed Consolidated Financial Statements.
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Three months ended September 30, 2022 and 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except share data) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2022 | — | $ | — | 177,534,132 | $ | 18 | $ | 939,900 | $ | 231,235 | $ | (416) | $ | 1,170,737 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 506 | — | 8,073 | — | — | 8,073 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares used to settle payroll tax withholding | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 63,177 | — | 63,177 | |||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on available-for-sale securities | — | — | — | — | — | — | 319 | 319 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | — | $ | — | 177,534,638 | $ | 18 | $ | 947,973 | $ | 294,412 | $ | (97) | $ | 1,242,306 | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2021 | — | $ | — | 177,748,487 | $ | 18 | $ | 925,944 | $ | (19,337) | $ | — | $ | 906,625 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 4,552 | — | — | 4,552 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares used to settle payroll tax withholding | — | — | (889) | — | (36) | — | — | (36) | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 42,763 | — | 42,763 | |||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | 291 | — | — | 291 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | — | $ | — | 177,747,598 | $ | 18 | $ | 930,751 | $ | 23,426 | $ | — | $ | 954,195 |
| Nine months ended September 30, 2022 and 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except share data) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | — | $ | — | 177,816,554 | $ | 18 | $ | 936,299 | $ | 72,415 | $ | — | $ | 1,008,732 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 60,691 | — | 25,970 | — | — | 25,970 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares used to settle payroll tax withholding | — | — | (342,607) | — | (14,296) | — | — | (14,296) | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 221,997 | — | 221,997 | |||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on available-for-sale securities | — | — | — | — | — | — | (97) | (97) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | — | $ | — | 177,534,638 | $ | 18 | $ | 947,973 | $ | 294,412 | $ | (97) | $ | 1,242,306 | |||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | — | $ | — | 170,719,979 | $ | 17 | $ | 916,482 | $ | (62,622) | $ | — | $ | 853,877 | |||||||||||||||||||||||||||||||||||||||
| Redemption of Public Warrants | — | — | 7,080,005 | 1 | (2) | — | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 54,722 | — | 14,723 | — | — | 14,723 | |||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock | — | — | (90,000) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Shares used to settle payroll tax withholding | — | — | (17,108) | — | (563) | — | — | (563) | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 86,048 | — | 86,048 | |||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | 111 | — | — | 111 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | — | $ | — | 177,747,598 | $ | 18 | $ | 930,751 | $ | 23,426 | $ | — | $ | 954,195 |
See accompanying notes to the Condensed Consolidated Financial Statements.
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the nine months ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Operating activities: | |||||||||||
| Net income | $ | 221,997 | $ | 86,048 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, depletion and amortization | 12,763 | 19,767 | |||||||||
| Accretion of asset retirement and environmental obligations | 1,255 | 1,780 | |||||||||
| Accretion of discount on short-term investments | (3,921) | — | |||||||||
| Gain on forgiveness of Paycheck Protection Loan | — | (3,401) | |||||||||
| Loss on sale or disposal of long-lived assets, net | 258 | 219 | |||||||||
| Stock-based compensation expense | 25,019 | 14,723 | |||||||||
| Accretion of debt discount and amortization of debt issuance costs | 3,153 | 5,388 | |||||||||
| Write-down of inventories | — | 1,809 | |||||||||
| Revenue recognized in exchange for debt principal reduction | (13,566) | (38,858) | |||||||||
| Deferred income taxes | 62,561 | 11,262 | |||||||||
| Decrease (increase) in operating assets: | |||||||||||
| Accounts receivable (including related party) | 34,991 | (33,506) | |||||||||
| Inventories | (22,386) | (3,663) | |||||||||
| Income taxes receivable | (3,857) | — | |||||||||
| Prepaid expenses, other current and non-current assets | 1,339 | (2,352) | |||||||||
| Increase (decrease) in operating liabilities: | |||||||||||
| Accounts payable and accrued liabilities | (1,271) | 4,304 | |||||||||
| Income taxes payable | (3,463) | 8,097 | |||||||||
| Other current and non-current liabilities | (453) | (1,153) | |||||||||
| Net cash provided by operating activities | 314,419 | 70,464 | |||||||||
| Investing activities: | |||||||||||
| Additions to property, plant and equipment | (214,332) | (86,420) | |||||||||
| Purchases of short-term investments | (1,358,390) | — | |||||||||
| Proceeds from sales of short-term investments | 313,865 | — | |||||||||
| Proceeds from maturities of short-term investments | 212,000 | — | |||||||||
| Proceeds from sale of property, plant and equipment | — | 125 | |||||||||
| Proceeds from government awards used for construction | 5,130 | 2,615 | |||||||||
| Net cash used in investing activities | (1,041,727) | (83,680) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of long-term debt | — | 690,000 | |||||||||
| Principal payments on debt obligations and finance leases | (5,139) | (1,707) | |||||||||
| Payment of debt issuance costs | — | (17,749) | |||||||||
| Tax withholding on stock-based awards | (14,296) | (563) | |||||||||
| Other | — | (371) | |||||||||
| Net cash provided by (used in) financing activities | (19,435) | 669,610 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (746,743) | 656,394 | |||||||||
| Cash, cash equivalents and restricted cash beginning balance | 1,181,157 | 532,440 | |||||||||
| Cash, cash equivalents and restricted cash ending balance | $ | 434,414 | $ | 1,188,834 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 427,969 | $ | 1,179,371 | |||||||
| Restricted cash, current | 5,915 | 339 | |||||||||
| Restricted cash, non-current | 530 | 9,124 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 434,414 | $ | 1,188,834 |
See accompanying notes to the Condensed Consolidated Financial Statements.
MP MATERIALS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business: MP Materials is the largest producer of rare earth materials in the Western Hemisphere. We own and operate the Mountain Pass Rare Earth Mine and Processing Facility (“Mountain Pass”), the only rare earth mining and processing site of scale in North America. The Company is headquartered in Las Vegas, Nevada. References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.
We currently produce a rare earth concentrate that we sell pursuant to an offtake agreement to Shenghe Resources (Singapore) International Trading Pte. Ltd. (“Shenghe”), a majority-owned subsidiary of Leshan Shenghe Rare Earth Co., Ltd. (“Leshan Shenghe”) whose ultimate parent is Shenghe Resources Holding Co., Ltd., a leading global rare earth company listed on the Shanghai Stock Exchange. We are currently recommissioning, upgrading and enhancing the processing facility at Mountain Pass to provide for the separation of the individual rare earth elements contained in our concentrate (referred to as the “Stage II optimization project” or “Stage II”), that will allow us to sell separated rare earth oxides directly to end users. Additionally, in the first quarter of 2022, we began construction on our initial rare earth, metal, alloy and magnet manufacturing facility in Fort Worth, Texas (the “Fort Worth Facility”) as a part of our Stage III downstream expansion strategy (“Stage III”). For more information on our relationship and agreements with Shenghe, see Note 3, “Relationship and Agreements with Shenghe,” and Note 14, “Related-Party Transactions.”
In April 2022, the Company entered into a definitive long-term supply agreement with General Motors Company (NYSE: GM) (“GM”) to supply U.S.-sourced and manufactured rare earth materials, alloy and finished magnets for the electric motors in more than a dozen models using GM’s Ultium Platform, with a gradual production ramp that is expected to begin in late 2023, starting with alloy. The definitive long-term supply agreement finalized the terms of a binding agreement announced by the Company in December 2021.
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker views the Company’s operations and manages the business as one reportable segment.
The cash flows and profitability of the Company’s operations are significantly affected by the market price of rare earth products. The prices of rare earth products are affected by numerous factors beyond the Company’s control. The products of the Company are sold globally, with a primary focus in the Asian market due to the refining capabilities of the region. Rare earth products are critical inputs in hundreds of existing and emerging clean-tech applications including electric vehicles and wind turbines as well as drones and defense applications.
Basis of Presentation: The unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of MP Materials Corp. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates**:** The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
Concentration of Risk: Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. The Company believes that its credit risk is limited because the Company’s current contracts are with companies with a reliable payment history. The Company does not believe that it is exposed to any significant risks related to its cash accounts, money market funds, or short-term investments.
As of September 30, 2022, Shenghe, a related party of the Company and our principal customer, accounted for more than 90% of product sales. Furthermore, while revenue is generated in the United States, Shenghe conducts its primary operations in China and may transport and sell products in the Chinese market. Therefore, the Company’s revenue is affected by Shenghe’s ultimate realized prices in China, including the impact of changes in the exchange rate between the Chinese Yuan and the U.S. dollar. In addition, there is an ongoing economic conflict between China and the United States that has resulted in tariffs and trade barriers that may negatively affect the Company’s business and results of operations. See Note 3, “Relationship and Agreements with Shenghe,” for additional information.
The COVID-19 pandemic remains on-going and continues to impact the global economy. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, preventative measures remain prevalent in China as a result of the Chinese government’s “Zero-COVID” policy. Since the first quarter of 2020, we have experienced, at times, significant shipping delays due to congestion and slowdowns at U.S. and international ports caused by shortages in vessels, containers, and truckers, also disrupting the global supply chain. Congestion and slowdowns have affected and may continue to affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels. Despite these factors, we have not experienced a reduction in production or sales due to the COVID-19 pandemic; however, the COVID-19 pandemic has contributed to certain cost and schedule pressures on the Stage II optimization project. The Company has worked proactively and diligently to adjust working schedules and hours to optimize logistics and shipping, which has thus far prevented a significant negative impact on our product sales and has mitigated certain impacts on Stage II construction and recommissioning progress.
As the situation continues to evolve, including as a result of new and potential future variants of COVID-19, the possibility of federal or state mandates on vaccinations, or other factors that may affect international shipping and logistics or involve responses to government actions such as strikes or other disruptions, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company’s business, results of operations, production and sales volumes, or growth projects. Accordingly, the extent and duration of any business disruptions, and related financial impact, cannot be estimated at this time.
Cash, Cash Equivalents and Short-term Investments: Cash and cash equivalents consist of all cash balances and highly liquid investments, including U.S. treasury and agency securities, with a maturity of three months or less at the time of purchase.
The Company’s short-term investments consist of U.S. treasury and agency securities that have original maturities greater than three months at the time of purchase. These investments have been classified and accounted for as available-for-sale securities and the Company reevaluates the classification each reporting period. The Company classifies its available-for-sale securities as either current or non-current based on each instrument’s underlying contractual maturity date and the Company’s expectations of sales and redemptions within the next twelve months. See Note 4, “Cash, Cash Equivalents and Investments,” for additional information.
Available-for-sale securities are recorded at fair value each reporting period. For unrealized losses in securities that the Company intends to hold and will not more likely than not be required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors. The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss when the impairment is incurred.
Unrealized non-credit related losses and unrealized gains are reported, net of income taxes, in “Accumulated other comprehensive income or loss” within the Company’s unaudited Condensed Consolidated Balance Sheets, until realized. Realized gains and losses are determined based on the specific identification method and are reported in “Other income, net” within the Company’s unaudited Condensed Consolidated Statements of Operations upon realization. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the straight-line method. Interest income is recognized when earned. These amounts are reported in “Other income, net” within the Company’s unaudited Condensed Consolidated Statements of Operations. Accrued interest receivable is included in “Accounts receivable (including related party)” within the Company’s unaudited Condensed Consolidated Balance Sheets.
Recently Issued Accounting Pronouncements: There were no new accounting pronouncements recently issued or effective during the three and nine months ended September 30, 2022, that had or would be expected to have a material impact on the Company’s unaudited Condensed Consolidated Financial Statements.
Reclassifications: Certain amounts in prior periods have been reclassified to conform to the current year presentation.
NOTE 3—RELATIONSHIP AND AGREEMENTS WITH SHENGHE
Offtake Agreement
In March 2022, the Company entered into an offtake agreement with Shenghe (the “Offtake Agreement”), which became effective upon the termination of the A&R Offtake Agreement (as discussed and defined below). The initial term of the Offtake Agreement is two years, with the option to extend the term at the Company’s discretion for an additional one-year period.
Pursuant to the Offtake Agreement, and subject to certain exclusions, Shenghe shall purchase on a “take or pay” basis the rare earth concentrate produced by the Company as the exclusive distributor in China, with certain exceptions for the Company’s direct sales globally. In addition, at the discretion of the Company, Shenghe may be required to purchase on a “take or pay” basis certain non-concentrate rare earth products, although the Company may sell all non-concentrate rare earth products in its sole discretion to customers or end users in any jurisdiction. Under the Offtake Agreement, Shenghe will be paid a variable commission on net proceeds to the Company.
Similar to the A&R Offtake Agreement, the sales price of rare earth concentrate sold to Shenghe is based on an agreed-upon price per metric ton, subject to certain quality adjustments depending on the measured characteristics of the product, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers. The sales price and other terms applicable to a quantity of offtake products are set forth in monthly purchase agreements between the Company and Shenghe.
Original Commercial Agreements
In May 2017, the Company entered into a set of commercial arrangements with Shenghe, which included a technical services agreement (the “TSA”) and an offtake agreement (the “Original Offtake Agreement”). The Original Offtake Agreement required Shenghe to advance the Company an initial $50.0 million (the “Initial Prepayment Amount”) to fund the restart of operations at the mine and the TSA required Shenghe to fund any additional operating and capital expenditures required to bring Mountain Pass to full operability. Shenghe also agreed to provide additional funding of $30.0 million to the Company pursuant to a separate letter agreement dated June 20, 2017 (the “Letter Agreement”) (the “First Additional Advance”), in connection with our acquisition of Mountain Pass. In addition to the repayment of the First Additional Advance, pursuant to the Letter Agreement, the Initial Prepayment Amount increased by $30.0 million. We refer to the aggregate prepayments made by Shenghe pursuant to the Original Offtake Agreement and the Framework Agreement (defined below), as adjusted for Gross Profit Recoupment (defined below) amounts and any other qualifying repayments to Shenghe, inclusive of the $30.0 million increase to the Initial Prepayment Amount, as the “Prepaid Balance.”
Under the Original Offtake Agreement, we sold to Shenghe, and Shenghe purchased on a firm “take or pay” basis, all of the rare earth products produced at Mountain Pass. Shenghe marketed and sold these products to customers, and retained the gross profits earned on subsequent sales. The gross profits were credited against the Prepaid Balance, and provided the means by which we repaid, and Shenghe recovered, such amounts (the “Gross Profit Recoupment”).
Framework Agreement and Restructured Commercial Agreements
In May 2020, the Company entered into a framework agreement and amendment (the “Framework Agreement”) with Shenghe and Leshan Shenghe that restructured the commercial arrangements and provided for, among other things, a revised funding amount and schedule to settle Shenghe’s prepayment obligations to the Company, as well as an amendment to the Original Offtake Agreement, as discussed below.
Pursuant to the Framework Agreement, the Company entered into an amended and restated offtake agreement with Shenghe on May 19, 2020 (the “A&R Offtake Agreement”), which, upon effectiveness, superseded and replaced the Original Offtake Agreement. Pursuant to the Framework Agreement, Shenghe funded the remaining portion of the Initial Prepayment Amount and agreed to fund an additional $35.5 million advance (the “Second Additional Advance” and together with the Initial Prepayment Amount, inclusive of the $30.0 million increase pursuant to the Letter Agreement, the “Offtake Advances”), which amounts were fully funded in June 2020.
The A&R Offtake Agreement maintained the key take-or-pay, amounts owed on actual and deemed advances from Shenghe, and other terms of the Original Offtake Agreement, with the following changes, among other items: (i) as to the offtake products subject to the A&R Offtake Agreement, provided that if we sold such offtake products to a third party, then, until the Prepaid Balance was reduced to zero, we would pay an agreed percentage of our revenue from such sales to Shenghe, to be credited against the amounts owed on Offtake Advances; (ii) provided that the sales price to be paid by Shenghe for our rare earth products (a portion of which reduces the Prepaid Balance rather than being paid in cash) would be based on market prices (net of taxes, tariffs and certain other agreed charges) less applicable discounts; and (iii) obliged us to pay Shenghe, on an annual basis, an amount equal to our annual net income, less any amounts recouped through the Gross Profit Recoupment mechanism over the course of the year, until the Prepaid Balance was reduced to zero.
The sales price and other terms applicable to a quantity of offtake products were set forth in monthly purchase agreements between the Company and Shenghe. In March 2022, the Company made a $2.9 million payment to Shenghe pursuant to item (iii) discussed above. Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated.
NOTE 4—CASH, CASH EQUIVALENTS AND INVESTMENTS
The following table presents the Company’s cash, cash equivalents and short-term investments:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Amortized Cost Basis | Unrealized Gains | Unrealized Losses | Estimated Fair Value | Amortized Cost Basis | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||||
| Cash: | |||||||||||||||||||||||||||||||||||||||||||||||
| Demand deposits | $ | 18,630 | $ | — | $ | — | $ | 18,630 | $ | 26,536 | $ | — | $ | — | $ | 26,536 | |||||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | 243,602 | — | — | 243,602 | 1,152,761 | — | — | 1,152,761 | |||||||||||||||||||||||||||||||||||||||
| U.S. agency securities | 49,985 | 5 | — | 49,990 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 115,724 | 23 | — | 115,747 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total cash equivalents | 409,311 | 28 | — | 409,339 | 1,152,761 | — | — | 1,152,761 | |||||||||||||||||||||||||||||||||||||||
| Total cash and equivalents | 427,941 | 28 | — | 427,969 | 1,179,297 | — | — | 1,179,297 | |||||||||||||||||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agency securities | 225,463 | 8 | (3) | 225,468 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 610,983 | 56 | (219) | 610,820 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total short-term investments | 836,446 | 64 | (222) | 836,288 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 1,264,387 | $ | 92 | $ | (222) | $ | 1,264,257 | $ | 1,179,297 | $ | — | $ | — | $ | 1,179,297 |
The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, any investments in unrealized loss positions before recovery of their amortized cost basis. We did not recognize any credit losses related to our available-for-sale investments during the three and nine months ended September 30, 2022. The unrealized losses on our available-for-sale investments were primarily due to unfavorable changes in interest rates subsequent to initial purchase. None of the available-for-sale investments held as of September 30, 2022, were in a continuous unrealized loss position for greater than 12 months and the unrealized losses and the related risk of expected credit losses were not material. We recognized $0.1 million of gross realized gains and $0.2 million of gross realized losses during the three and nine months ended September 30, 2022.
As of September 30, 2022, all outstanding available-for-sale securities were due within one year.
NOTE 5—INVENTORIES
The Company’s inventories consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Materials and supplies(1) | $ | 27,892 | $ | 10,711 | |||||||
| In-process | 31,057 | 25,574 | |||||||||
| Finished goods | 2,696 | 2,407 | |||||||||
| Total inventory | $ | 61,645 | $ | 38,692 |
(1)Includes materials acquired during the third quarter of 2022 to support activities pertaining to the Company’s rare earth metal, alloy and magnet manufacturing facility as a part of Stage III.
During the second quarter of 2021, the Company recognized a non-cash write-down of a portion of its legacy low-grade stockpile inventory of $1.8 million, after determining that it contained a significant amount of alluvial material that did not meet the Company’s requirement for mill feed and, as a result, was deemed unusable. The write-down is included in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021, as “Write-down of inventories.” No write-down of inventories was recorded for the three and nine months ended September 30, 2022.
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Land and land improvements | $ | 16,231 | $ | 7,925 | |||||||
| Buildings and building improvements | 9,263 | 8,791 | |||||||||
| Machinery and equipment | 67,479 | 61,822 | |||||||||
| Assets under construction | 352,646 | 134,327 | |||||||||
| Mineral rights | 438,395 | 437,376 | |||||||||
| Property, plant and equipment, gross | 884,014 | 650,241 | |||||||||
| Less: Accumulated depreciation and depletion | (53,981) | (39,629) | |||||||||
| Property, plant and equipment, net | $ | 830,033 | $ | 610,612 |
Additions to Property, Plant and Equipment: The Company capitalized expenditures related to property, plant and equipment of $250.1 million and $93.8 million for the nine months ended September 30, 2022 and 2021, respectively, including amounts not yet paid (see Note 15, “Supplemental Cash Flow Information”). The capitalized expenditures for the nine months ended September 30, 2022, related to assets under construction to support the Company’s Stage II optimization project and its rare earth metal, alloy and magnet manufacturing facility as a part of Stage III, including the purchase of approximately 18 acres of land in Fort Worth, Texas, in February 2022. The capitalized expenditures for the nine months ended September 30, 2021, mostly related to vehicles, machinery, equipment, and assets under construction to support the Stage II optimization project and other capital projects at Mountain Pass.
Government Awards: In November 2020, the Company was awarded a Defense Production Act Title III technology investment agreement (“TIA”) from the Department of Defense (“DOD”) to establish domestic processing for separated light rare earth elements in the amount of $9.6 million. During the nine months ended September 30, 2022 and 2021, pursuant to the TIA, the Company has received $5.1 million and $2.6 million, respectively, in reimbursements from the DOD. The funds received reduced the carrying amount of certain fixed assets associated with the Company’s Stage II optimization project, which are currently included in “Assets under construction.” As of September 30, 2022, the Company is entitled to receive an additional $0.1 million from the DOD under the TIA.
In February 2022, the Company was awarded a $35.0 million contract by the DOD’s Office of Industrial Base Analysis and Sustainment Program to design and build a facility to process heavy rare earth elements (“HREE”) at Mountain Pass (the “HREE Production Project Agreement”). The Company must utilize the funds to acquire property and equipment that will contribute to commercial-scale production of separated HREE at Mountain Pass. The Company will be paid fixed amounts upon the completion of certain project milestones. In exchange for these funds, the DOD will have certain rights to technical data following the completion of the project. The funds received pursuant to the HREE Production Project Agreement will
reduce the carrying amount of the fixed assets associated with the Company’s HREE separations facility, which will tie into the Company’s other Stage II facilities.
Change in Estimates of Asset Retirement Costs: As a result of a decrement to the Company’s asset retirement obligations (“ARO”) during the third quarter of 2022, the carrying amount of the Company’s total property, plant and equipment was reduced by $10.4 million, the majority of which pertained to buildings, machinery and equipment, and assets under construction, in the amounts of $0.6 million, $2.7 million and $6.7 million, respectively. Additionally, the Company’s depreciation expense for the three and nine months ended September 30, 2022, was reduced by $2.7 million, reflecting the excess of the decrement over the carrying amount of the related property, plant and equipment. See Note 8, “Asset Retirement and Environmental Obligations,” for further information on the decrement.
The Company’s depreciation and depletion expense were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Depreciation expense(1) | $ | (656) | $ | 2,109 | $ | 3,702 | $ | 5,528 | |||||||||||||||
| Depletion expense | $ | 2,664 | $ | 4,754 | $ | 8,808 | $ | 13,971 |
(1)As noted above, during the three months ended September 30, 2022, we recorded a reduction to depreciation expense, reflecting the excess of the ARO decrement over the carrying amount of the related property, plant and equipment, as a result of changes in our estimates of cash flows underlying our ARO.
There were no impairments recognized for the three and nine months ended September 30, 2022 and 2021.
NOTE 7—DEBT OBLIGATIONS
The Company’s current and non-current portions of long-term debt were as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Long-term debt | |||||||||||
| Convertible Notes due 2026 | $ | 690,000 | $ | 690,000 | |||||||
| Less: Unamortized debt issuance costs | (12,437) | (15,073) | |||||||||
| Net carrying amount | 677,563 | 674,927 | |||||||||
| Less: Current installments of long-term debt | — | — | |||||||||
| Long-term debt, net of current portion | $ | 677,563 | $ | 674,927 | |||||||
| Long-term debt to related party | |||||||||||
| Offtake Advances | $ | — | $ | 16,599 | |||||||
| Less: Unamortized debt discount | — | (517) | |||||||||
| Net carrying amount | — | 16,082 | |||||||||
| Less: Current installments of long-term debt to related party | — | (16,082) | |||||||||
| Long-term debt to related party, net of current portion | $ | — | $ | — |
Convertible Notes
In March 2021, the Company issued $690.0 million aggregate principal amount of 0.25% unsecured green convertible senior notes that mature, unless earlier converted, redeemed or repurchased, on April 1, 2026 (the “Convertible Notes”), at a price of par. Interest on the Convertible Notes is payable on April 1st and October 1st of each year, beginning on October 1, 2021. The Convertible Notes may, at the Company’s election, be settled in cash, shares of common stock of the Company, or a combination thereof. The Company has the option to redeem the Convertible Notes, in whole or in part, beginning on April 5, 2024.
The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $44.28 per share, or 22.5861 shares, per $1,000 principal amount of notes, subject to adjustment upon the occurrence of certain corporate events. However, in no event will the conversion price exceed 28.5714 shares of common stock per $1,000 principal
amount of notes. As of September 30, 2022, based on the conversion price, the maximum number of shares that could be issued to satisfy the conversion feature of the Convertible Notes was 19,714,266. The Convertible Notes’ if-converted value did not exceed its principal amount as of September 30, 2022.
Interest expense related to the Convertible Notes was as follows:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Coupon interest | $ | 431 | $ | 431 | $ | 1,293 | $ | 886 | |||||||||||||||
| Amortization of debt issuance costs | 881 | 876 | 2,637 | 1,799 | |||||||||||||||||||
| Convertible Notes interest expense | $ | 1,312 | $ | 1,307 | $ | 3,930 | $ | 2,685 |
The debt issuance costs are being amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 0.51%. The remaining term of the Convertible Notes was 3.5 years as of September 30, 2022.
Offtake Advances
Under the A&R Offtake Agreement, a portion of the sales prices of products sold to Shenghe was paid in the form of debt reduction, rather than cash. In addition, the Company had to pay the following amounts to Shenghe in cash to reduce the debt obligation until repaid in full: (i) an agreed-upon percentage of sales of products to parties other than Shenghe under the A&R Offtake Agreement; (ii) 100% of net profits from asset sales; and (iii) 100% of net income determined under GAAP, less the tax-effected amount of total non-cash recoupment from sales of products to Shenghe. For the three and nine months ended September 30, 2022, zero and $14.2 million, respectively, of the sales prices of products sold to Shenghe was paid in the form of debt reduction (see Note 15, “Supplemental Cash Flow Information”), as compared to $15.9 million and $36.8 million, for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2022, the Company made payments to Shenghe of zero and $0.2 million, respectively, based on sales to other parties, as compared to $0.1 million and $0.2 million, respectively, for the three and nine months ended September 30, 2021. No amounts were required to be paid based on asset sales.
The A&R Offtake Agreement did not have a stated rate (and was non-interest-bearing), and repayment was contingent on a number of factors, including market prices realized by Shenghe, the Company’s sales to other parties, asset sales, and the Company’s annual net income. The imputed interest rate was a function of this discount taken together with our expectations about the timing of the anticipated reductions of the principal balance. The Company had determined that it would recognize adjustments from these estimates following a prospective method where the Company updated its estimate of the effective interest rate in future periods based on revised estimates of the timing of remaining principal reductions at that time. The effective rate applicable from the June 5, 2020, inception to full repayment, was between 4.41% and 24.75%.
As discussed in Note 3, “Relationship and Agreements with Shenghe,” the Company made a $2.9 million payment to Shenghe in March 2022. Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated.
Paycheck Protection Loan
In April 2020, the Company obtained a loan of $3.4 million pursuant to the Paycheck Protection Program under the CARES Act, (the “Paycheck Protection Loan”). In June 2021, the Company received notification from the Small Business Administration that the Paycheck Protection Loan and related accrued interest was forgiven. Consequently, during the nine months ended September 30, 2021, the Company recorded a gain on forgiveness of the Paycheck Protection Loan in the amount of $3.4 million, which is included in “Other income, net” within our unaudited Condensed Consolidated Statements of Operations.
Tariff-Related Rebates
In May 2020, the government of the People’s Republic of China suspended certain tariffs that had been charged to consignees of our product on imports, and provided such relief retroactive to March 2020. In addition, Shenghe began negotiating for tariff rebates from sales prior to March 2020, which affected Shenghe’s realized prices, and thus the Prepaid Balance. These, in turn, affected the Company’s realized prices on prior sales. While additional tariff rebates were possible, the Company did not have insight into Shenghe’s negotiations or their probability of success, and such negotiations were outside of the Company’s control. Thus, the Company fully constrained estimates of any future tariff rebates that may have been realized
at that time.
In January 2021, the Company received information from Shenghe regarding its successful negotiation of additional tariff rebates. Consequently, the Company revised its estimates of variable consideration and recognized $2.0 million of revenue for the nine months ended September 30, 2021. Additionally, for the nine months ended September 30, 2021, the Company recorded a reduction in the principal balance of the debt obligation and the corresponding debt discount of $2.2 million and $0.2 million, respectively.
Equipment Notes
The Company has entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery. The Company’s equipment notes, which are secured by the purchased equipment, have terms of between 4 to 5 years and interest rates of between 0.0% and 6.5% per annum.
The current and non-current portions of the equipment notes, which are included within the unaudited Condensed Consolidated Balance Sheets in “Other current liabilities” and “Other non-current liabilities,” respectively, were as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Equipment notes | |||||||||||
| Current | $ | 2,423 | $ | 2,566 | |||||||
| Non-current | 5,340 | 7,095 | |||||||||
| $ | 7,763 | $ | 9,661 |
As of September 30, 2022, none of the agreements or indentures governing our indebtedness contain financial covenants.
NOTE 8—ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
Asset Retirement Obligations
The Company estimates ARO based on the requirements to reclaim certain land and facilities associated with mining activity at Mountain Pass. Minor reclamation activities related to discrete portions of the Company’s operations are ongoing. As of September 30, 2022, the Company estimated a significant portion of the cash outflows for the major reclamation and the retirement of Mountain Pass will be incurred beginning in 2057.
In June 2021, San Bernardino County approved the Company’s re-zoning request for certain of its properties such that certain of the Company’s processing and separations facilities would be zoned for industrial end uses as opposed to the prior “resource conservation” designation. In September 2022, and as a result of the re-zoning of this land, the Company received final approval from San Bernardino County and the Division of Mine Reclamation (California) on a revised reclamation plan. The revision removed from the regulatory oversight under The Surface Mining and Reclamation Act of 1975 the majority of the buildings and equipment used in the processing and separations facilities, including the land underlying such buildings and equipment.
As a result of the final county approval, in the third quarter of 2022, the Company revised its estimated cash flows pertaining to the settlement of the reclamation and removal activities associated with Mountain Pass, including removing the previous estimates of the cash flows associated with the processing and separations facilities that no longer require reclamation. The changes in estimates resulted in an ARO decrement of $13.1 million, of which $10.4 million reduced the carrying amounts of the associated property, plant and equipment, and $2.7 million, reflecting the excess of the decrement over the carrying amount of the related property, plant and equipment, was recorded as a reduction to depreciation expense for the three and nine months ended September 30, 2022.
The following is a summary of the Company’s ARO:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Beginning balance | $ | 17,757 | $ | 25,646 | |||||||
| Obligations settled | (123) | (199) | |||||||||
| Accretion expense | 879 | 1,876 | |||||||||
| Additional ARO | — | 213 | |||||||||
| Revisions in estimated cash flows | (13,114) | (9,779) | |||||||||
| Ending balance | $ | 5,399 | $ | 17,757 |
As of September 30, 2022, the credit-adjusted risk-free rate ranged between 6.5% and 12.0% depending on the timing of expected settlement and when the layer or increment was recognized. There were no significant increments for the three and nine months ended September 30, 2022, and there were no significant increments or decrements for the three and nine months ended September 30, 2021.
The balance as of September 30, 2022, and December 31, 2021, included current portions of $0.2 million and $0.1 million, respectively. The total estimated future undiscounted cash flows required to satisfy the asset retirement obligations were $50.4 million and $167.3 million as of September 30, 2022, and December 31, 2021, respectively.
Environmental Obligations
The Company assumed certain environmental remediation liabilities related to the monitoring of groundwater contamination. The Company engaged an environmental consultant to develop a remediation plan and remediation cost projections based upon that plan. Utilizing the remediation plan developed by the environmental consultant, management developed an estimate of future cash payments for the remediation plan.
As of September 30, 2022, management estimated the cash outflows related to these environmental activities will be incurred annually over the next 25 years. The Company’s environmental remediation liabilities are measured at the expected value of future cash outflows discounted to their present value using a discount rate of 2.93%. There were no significant changes in the estimated remaining remediation costs for the three and nine months ended September 30, 2022 and 2021.
The total estimated aggregate undiscounted cost of $27.3 million and $27.7 million as of September 30, 2022, and December 31, 2021, respectively, was principally related to water monitoring and treatment activities required by state and local agencies. Based on management’s best estimate of the cost and timing and the assumption that payments are considered to be fixed and reliably determinable, the Company has discounted the liability. The balance as of September 30, 2022, and December 31, 2021, included current portions of $0.5 million.
Financial Assurances
The Company is required to provide the applicable government agencies with financial assurances relating to the closure and reclamation obligations. As of September 30, 2022, and December 31, 2021, the Company had financial assurance requirements of $43.4 million and $39.0 million, respectively, which were satisfied with surety bonds placed with the California state and regional agencies.
NOTE 9—INCOME TAXES
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, valuation allowance adjustments based on new evidence and enactment of tax laws, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 24.9% and 24.5% for the three and nine months ended September 30, 2022, respectively, as compared to 17.1% and 18.4% for the three and nine months ended September 30, 2021, respectively. Our effective income tax rate can vary from period to period depending on, among other factors, percentage depletion, executive compensation deduction limitations, other permanent book/tax items, and changes to our valuation allowance against deferred tax assets. Certain of these and other factors, including our history and projections of pretax earnings, are considered in assessing our ability to realize our net deferred tax assets.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases, and provides several tax incentives to promote clean energy for tax years beginning after December 31, 2022. At this time, we do not expect the minimum tax or excise tax to have a material impact on our unaudited Condensed Consolidated Financial Statements. We are continuing to evaluate the impact of the clean energy incentives.
NOTE 10—COMMITMENTS AND CONTINGENCIES
Litigation: The Company may become party to lawsuits, administrative proceedings and government investigations, including environmental, regulatory, and other matters, in the ordinary course of business. Large, and sometimes unspecified, damages or penalties may be sought in some matters, and certain matters may require years to resolve. The Company is not aware of any pending or threatened litigation that would have a material adverse effect on its unaudited Condensed Consolidated Financial Statements.
In January 2019, a former employee filed a complaint with the California Labor & Workforce Development Agency alleging numerous violations of California labor law, and subsequently filed a representative action against the Company. In October 2021, we entered into a memorandum of understanding to settle the lawsuit in the amount of $1.0 million, including legal fees, which is included in “Selling, general and administrative” within the unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. In August 2022, the court granted final approval of the class settlement, and in September 2022, the Company paid the settlement amount.
NOTE 11—STOCK-BASED COMPENSATION
2020 Incentive Plan: In November 2020, the Company’s stockholders approved the MP Materials Corp. 2020 Stock Incentive Plan (the “2020 Incentive Plan”), which permits the Company to issue stock options (incentive and/or non-qualified); stock appreciation rights; restricted stock, restricted stock units, and other stock awards; and performance awards. As of September 30, 2022, there were 6,454,233 shares available for future grants under the 2020 Incentive Plan.
Stock-Based Compensation: During the three and nine months ended September 30, 2022, the Company recognized $7.8 million and $25.0 million, respectively, of stock-based compensation expense, as compared to $4.5 million and $14.7 million for the three and nine months ended September 30, 2021, respectively, which is principally included in the unaudited Condensed Consolidated Statements of Operations in “Selling, general and administrative.” Additionally, during the three and nine months ended September 30, 2022, the Company capitalized $0.3 million and $1.0 million, respectively, of stock-based compensation to “Property, plant and equipment, net.” No stock-based compensation was capitalized to “Property, plant and equipment, net” during the three and nine months ended September 30, 2021.
NOTE 12—FAIR VALUE MEASUREMENTS
ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |||||||
| Level 2 | Quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, quoted prices or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability and model-based valuation techniques (e.g., the Black-Scholes model) for which all significant inputs are observable in active markets. | |||||||
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s accounts receivable, accounts payable, short-term debt and accrued liabilities approximates the carrying amounts because of the immediate or short-term maturity of these financial instruments.
Cash, Cash Equivalents and Restricted Cash
The Company’s cash, cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy. The carrying amounts reported in the unaudited Condensed Consolidated Balance Sheets approximate the fair value of cash, cash equivalents and restricted cash due to the short-term nature of these assets.
Short-term Investments
The fair value of the Company’s short-term investments, which are classified as available-for-sale securities, is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Convertible Notes
The fair value of the Company’s Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Offtake Advances
The Company’s Offtake Advances were classified within Level 3 of the fair value hierarchy as of December 31, 2021, because there were unobservable inputs that followed an imputed interest rate model to calculate the amortization of the embedded debt discount, which was recognized as non-cash interest expense, by estimating the timing of anticipated payments and reductions of the debt principal balance. This model-based valuation technique, for which there were unobservable inputs, was used to estimate the fair value of the liability classified within Level 3 of the fair value hierarchy as of December 31, 2021.
Equipment Notes
The Company’s equipment notes are classified within Level 2 of the fair value hierarchy because there are inputs that are directly observable for substantially the full term of the liability. Model-based valuation techniques for which all significant inputs are observable in active markets were used to calculate the fair values of liabilities classified within Level 2 of the fair value hierarchy.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
| September 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 427,969 | $ | 427,969 | $ | 427,969 | $ | — | $ | — | |||||||||||||||||||
| Short-term investments | $ | 836,288 | $ | 836,288 | $ | 836,288 | $ | — | $ | — | |||||||||||||||||||
| Restricted cash | $ | 6,445 | $ | 6,445 | $ | 6,445 | $ | — | $ | — | |||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Convertible Notes | $ | 677,563 | $ | 628,763 | $ | 628,763 | $ | — | $ | — | |||||||||||||||||||
| Equipment notes | $ | 7,763 | $ | 7,232 | $ | — | $ | 7,232 | $ | — |
| December 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,179,297 | $ | 1,179,297 | $ | 1,179,297 | $ | — | $ | — | |||||||||||||||||||
| Restricted cash | $ | 1,860 | $ | 1,860 | $ | 1,860 | $ | — | $ | — | |||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Convertible Notes | $ | 674,927 | $ | 880,026 | $ | 880,026 | $ | — | $ | — | |||||||||||||||||||
| Offtake Advances | $ | 16,082 | $ | 16,501 | $ | — | $ | — | $ | 16,501 | |||||||||||||||||||
| Equipment notes | $ | 9,661 | $ | 9,737 | $ | — | $ | 9,737 | $ | — |
NOTE 13—EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method or the if-converted method, as applicable.
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Weighted-average shares outstanding, basic | 176,543,624 | 176,053,586 | 176,476,276 | 172,577,303 | |||||||||||||||||||
| Assumed conversion of public warrants(1) | — | — | — | 3,787,498 | |||||||||||||||||||
| Assumed conversion of Convertible Notes | 15,584,409 | 15,584,409 | 15,584,409 | 10,789,206 | |||||||||||||||||||
| Assumed conversion of restricted stock | 840,786 | 1,283,194 | 944,925 | 1,214,349 | |||||||||||||||||||
| Assumed conversion of restricted stock units | 441,038 | 294,124 | 433,329 | 271,017 | |||||||||||||||||||
| Weighted-average shares outstanding, diluted | 193,409,857 | 193,215,313 | 193,438,939 | 188,639,373 |
(1)Warrants to purchase 11,499,968 shares of the Company’s common stock at $11.50 per share were issued in connection with Fortress Value Acquisition Corp.’s initial public offering pursuant to a warrant agreement, dated April 29, 2020, by and between the Company and Continental Stock Transfer & Trust Company, as warrant agent. The warrants were redeemed through a cashless exercise in the second quarter of 2021.
The following table presents the calculation of basic and diluted EPS for the Company’s common stock:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Calculation of basic EPS: | |||||||||||||||||||||||
| Net income | $ | 63,177 | $ | 42,763 | $ | 221,997 | $ | 86,048 | |||||||||||||||
| Weighted-average shares outstanding, basic | 176,543,624 | 176,053,586 | 176,476,276 | 172,577,303 | |||||||||||||||||||
| Basic EPS | $ | 0.36 | $ | 0.24 | $ | 1.26 | $ | 0.50 | |||||||||||||||
| Calculation of diluted EPS: | |||||||||||||||||||||||
| Net income | $ | 63,177 | $ | 42,763 | $ | 221,997 | $ | 86,048 | |||||||||||||||
| Interest expense, net of tax(1): | |||||||||||||||||||||||
| Convertible Notes | 985 | 1,084 | 2,967 | 2,190 | |||||||||||||||||||
| Diluted income | $ | 64,162 | $ | 43,847 | $ | 224,964 | $ | 88,238 | |||||||||||||||
| Weighted-average shares outstanding, diluted | 193,409,857 | 193,215,313 | 193,438,939 | 188,639,373 | |||||||||||||||||||
| Diluted EPS | $ | 0.33 | $ | 0.23 | $ | 1.16 | $ | 0.47 |
(1)The three and nine months ended September 30, 2022 and 2021, were tax-effected at a rate of 24.9%, 24.5%, 17.1% and 18.4%, respectively.
NOTE 14—RELATED-PARTY TRANSACTIONS
Product Sales and Cost of Sales: The Company and Shenghe enter into sales agreements in which Shenghe purchases the Company’s rare earth products at sale prices based on the ultimate market price of the product realized by Shenghe upon sales to their customers. Product sales from these agreements with Shenghe were $114.9 million and $401.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $97.3 million and $229.2 million for the three and nine months ended September 30, 2021, respectively. Additionally, in March 2022, the Company entered into a sales agreement with Shenghe for certain stockpiles of rare earth fluoride (“REF”). Sales of REF, which are included in the unaudited Condensed Consolidated Statements of Operations in “Other sales (including related party),” were $8.5 million for the nine months ended September 30, 2022. Cost of sales, which includes shipping and freight, related to these agreements with Shenghe was $21.8 million and $65.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $21.5 million and $57.2 million for the three and nine months ended September 30, 2021, respectively.
Purchases of Materials and Supplies: The Company purchases certain reagent products (produced by an unrelated third-party manufacturer) used in the flotation process as well as other materials from Shenghe in the ordinary course of business. Total purchases were $15.3 million and $18.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $1.2 million and $3.3 million for the three and nine months ended September 30, 2021, respectively.
Accounts Receivable: As of September 30, 2022, and December 31, 2021, $13.7 million and $49.9 million of the accounts receivable, respectively, and as stated on the unaudited Condensed Consolidated Balance Sheets, were receivable from and pertained to sales made to Shenghe in the ordinary course of business.
Indebtedness: The Company’s related-party debt is described in Note 7, “Debt Obligations.”
NOTE 15—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing activities were as follows:
| For the nine months ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,140 | $ | 1,116 | |||||||
| Cash payments related to income taxes | $ | 16,827 | $ | 1 | |||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Property, plant and equipment acquired with seller-financed equipment notes | $ | — | $ | 9,407 | |||||||
| Property, plant and equipment purchased but not yet paid | $ | 35,779 | $ | 7,416 | |||||||
| Revenue recognized in exchange for debt principal reduction | $ | 13,566 | $ | 38,858 | |||||||
| Paycheck Protection Loan forgiveness(1) | $ | — | $ | 3,401 | |||||||
| Decrease in estimates of asset retirement costs | $ | 10,395 | $ | — |
(1)As discussed in Note 7, “Debt Obligations.”
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