NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Our wholly-owned subsidiary, MP Mine Operations LLC, a Delaware limited liability company (“MPMO”), acquired the Mountain Pass mine and processing and separations facilities in July 2017. Our wholly-owned subsidiary, Secure Natural Resources LLC, a Delaware limited liability company (“SNR”), holds the mineral rights to the Mountain Pass mine and surrounding areas as well as intellectual property rights related to the processing and development of rare earth materials. The mine achieved commercial operations in July 2019. 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 the A&R Offtake Agreement to Shenghe (as such terms are defined in Note 4, “Relationship and Agreements with Shenghe”), a related party of the Company, that, in turn, sells that product to refiners in China. These refiners separate the constituent rare earth elements contained in our concentrate and sell the separated products to their customers. For further information, see Note 4, “Relationship and Agreements with Shenghe.” We are currently recommissioning, upgrading and enhancing the processing facility at Mountain Pass to provide for the separation of rare earth oxides (“REO”) (referred to as the “Stage II optimization project” or “Stage II”), that will allow us the opportunity to sell separated REO directly to end users. In addition, we are pursuing downstream expansion opportunities to integrate further into the business of upgrading REO into metal, alloys and magnets (referred to as “Stage III”). See Note 20, “Subsequent Events,” for additional information on Stage III. Pursuant to the terms of the Agreement and Plan of Merger, dated as of July 15, 2020, as amended on August 26, 2020 (the “Merger Agreement”), on November 17, 2020, MPMO and SNR were combined with Fortress Value Acquisition Corp., a special purpose acquisition company (“FVAC”) (the “Business Combination”), and became wholly-owned subsidiaries of FVAC, which was in turn renamed MP Materials Corp. The Business Combination was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with generally accepted accounting principles in the United States (“GAAP”). The acquisition of SNR (the “SNR Mineral Rights Acquisition”) was treated as an asset acquisition. Furthermore, MPMO was deemed to be the accounting acquirer and FVAC the accounting acquiree, which, for financial reporting purposes, results in MPMO’s historical financial information becoming that of the Company. In addition, the common stock, preferred stock, additional paid-in capital, and earnings (loss) per share amounts presented in the Consolidated Financial Statements and these accompanying notes have been restated to reflect recapitalization. For further discussion, see Note 3, “Business Combination and Reverse Recapitalization.” 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 (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s CODM 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 Consolidated Financial Statements of the Company have been prepared in accordance with GAAP and with the rules and regulations of the U.S. Securities and Exchange Commission.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include the accounts of MP Materials Corp. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Concentration of Risk: As of December 31, 2021, Shenghe accounted for more than 90% of product sales. Shenghe has entered into an arrangement to purchase substantially all of the Company’s production of rare earth concentrate. As with any contract, there is risk of nonperformance; however, we do not believe that it is reasonably possible that Shenghe would terminate the agreement as it would delay Shenghe’s recovery of non-interest-bearing advance payments that are recognized by the Company as debt. As discussed in Note 9, “Debt Obligations,” full repayment of the obligation will occur by the end of the
first quarter of 2022 whether through non-cash recoupments from sales or a cash payment based, in part, on the Company’s GAAP net income for the year ended December 31, 2021. See also Note 4, “Relationship and Agreements with Shenghe,” for additional information. Furthermore, while revenue is generated in the United States, our principal customer 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. 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.
In December 2019, a novel strain of coronavirus (known as “COVID-19”) began to impact the population of China. In March 2020, the outbreak of COVID-19 was declared a global pandemic after growing both in the United States and globally. The responses by governments, societies, and private sector entities to the COVID-19 pandemic, which include temporary closures of businesses, social distancing, travel restrictions, “shelter in place,” and other governmental regulations and various economic stimulus programs, have significantly impacted market volatility and general global economic conditions, including significant business and supply chain disruption as well as broad-based changes in supply and demand.
Since the onset of the COVID-19 pandemic in 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. However, there can be no assurance that the ongoing COVID-19 pandemic will not have a negative impact on our production, sales, or growth projects in the future.
Furthermore, as the situation continues to evolve, including as a result of new and potential future variants of COVID-19 (such as the Delta and Omicron variants), 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 and results of operations. The extent and duration of any business disruptions, and related financial impact, cannot be estimated at this time.
Use of Estimates: The preparation of the 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 Consolidated Financial Statements, and (iii) the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to the useful lives and recoverability of long-lived assets (such as the effects of mineral reserves and cash flows from operating the mine in determining the life of the mine); uncertain tax positions; the valuation allowance of deferred tax assets; asset retirement and environmental obligations; and determining the fair value of assets and liabilities in acquisitions and financial instruments in connection with transactions that require initial measurement to be at fair value. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents consist of all cash balances and highly liquid investments with a maturity of three months or less when purchased.
Restricted Cash: Restricted cash consists of funds that are contractually restricted as to usage or withdrawal due to legal agreement. The Company determines current or non-current classification based on the expected duration of the restriction. See also Note 6, “Restricted Cash.” Trade Accounts Receivable: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates its estimate of expected credit losses based on historical experience and current economic conditions for each portfolio of customers, though at present, the amounts are concentrated in a single customer. As of December 31, 2021 and 2020, the Company did not have an allowance for expected credit losses, as principally all of our receivables are from Shenghe and there is no history or expectation of uncollectible amounts. Further, as of December 31, 2021, a portion and, as of December 31, 2020, all of the amount not received in cash would have been offset by a reduction in the principal balance owed to Shenghe.
Inventories: Inventories consist of raw materials and supplies, work in process (referred to as “in-process inventory”), and finished goods. Materials and supplies consist of raw materials, spare parts, reagent chemicals, maintenance supplies, and packaging materials used in the production of rare earth products. In-process inventory primarily consists of mine ore stockpiles and bastnaesite ore in various stages of the production process. Finished goods primarily consist of packaged bastnaesite concentrate that is ready for sale.
Raw materials, in-process inventory and finished goods are carried at average cost. Supplies are carried at moving average cost. All inventories are carried at the lower of cost or net realizable value, which represents the estimated selling price of the product during the ordinary course of business based on current market conditions less costs to sell. Inventory cost includes all expenses directly attributable to the manufacturing process, including labor and stripping costs, and an appropriate portion of production overhead, including depletion, based on normal operating capacity.
Stockpiled ore tonnages are verified by periodic surveys. The Company evaluates the carrying amount of inventory on a periodic basis, considering slow-moving items, obsolescence, excess inventory levels, and other factors and recognizes related write-downs in cost of sales. See also Note 7, “Inventories.” Property, Plant and Equipment: Property, plant and equipment are recorded at cost and depreciated over their useful lives. Expenditures for new property, plant and equipment and improvements that extend the useful life or functionality of the assets are recorded at their cost of acquisition or construction. Depreciation on property, plant and equipment is recognized on a straight-line basis over their estimated useful lives, as follows:
| | | | | |
| Years |
| Land improvements | 25 |
| Buildings and building improvements | Up to 40 |
| Machinery and equipment | 3-10 |
Assets under construction include costs directly attributable to the construction or development of long-term assets. These costs may include labor and employee benefits associated with the construction of the asset, site preparation, permitting, engineering, installation and assembly, procurement, insurance, legal, commissioning, and interest on borrowings to finance the construction of the assets. Depreciation is not recorded on the related assets until they are ready for their intended use. Repair and maintenance costs that do not extend the useful life of an asset are expensed as incurred. Gains and losses arising from the disposal of property, plant and equipment are determined as the difference between the proceeds from disposal and the carrying amount of the asset.
Property, plant and equipment primarily relate to the Company’s open-pit mine and processing facility at Mountain Pass. In addition to the mine, Mountain Pass includes a crusher and mill/flotation plant, mineral recovery and separation plants, tailings processing and storage facilities, product finishing facilities, on-site evaporation ponds, a combined heat and power (“CHP”) plant, water treatment facilities, a Chlor-Alkali plant, as well as laboratory facilities to support research and development activities, offices, warehouses and support infrastructure. See also Note 8, “Property, Plant and Equipment.” Mineral Rights: The Company capitalizes costs for acquiring and leasing mining properties and expenses costs to maintain mineral rights as incurred. Depletion on mineral rights is recognized on a straight-line basis over the estimated remaining useful life of the mine, which was approximately 34 years as of December 31, 2021. Mineral rights are classified as a component of “Property, plant and equipment” within our Consolidated Balance Sheets. See also Note 8, “Property, Plant and Equipment.” In connection with the SNR Mineral Rights Acquisition, the Company recorded the additional cost of acquiring the mineral rights pertaining to the rare earth ores contained in the Mountain Pass mine, which was SNR’s sole operating asset. Prior to the SNR Mineral Rights Acquisition, MPMO and SNR were considered related parties. As discussed in Note 18, “Related-Party Transactions,” upon entering into the Royalty Agreement (as defined in Note 18, “Related-Party Transactions”), the Company recognized an asset equal to the present value of minimum royalty payments owed to SNR under the Royalty Agreement as an acquisition cost of the 97.5% working interest. Mine Development Costs: Mine development costs include drilling costs and the cost of other development work, all of which are capitalized during the development phase. Production costs are capitalized into inventory or expensed as incurred.
Leases: The Company determines if an arrangement is, or contains, a lease at contract inception. In some cases, the Company has determined that its lease arrangements include both lease and non-lease components. The Company has elected to use a practical expedient to account for each separate lease component and its associated non-lease components as a single lease component for the majority of its asset classes.
The Company recognizes lease liabilities and right-of-use (“ROU”) assets upon commencement for all leases with a lease term greater than 12 months. The Company has elected to use a practical expedient to not recognize leases with a lease term of 12 months or less in the Consolidated Balance Sheets for the majority of its asset classes. These short-term leases are expensed on a straight-line basis over the lease term.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When the rate implicit to the lease cannot be readily determined, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. Lease liabilities are accreted each period and reduced for payments. The ROU asset also includes other adjustments, such as for the effects of escalating rents, rent abatements or initial lease costs. The lease term may include periods covered by options to extend or terminate the lease when it is reasonably certain that the Company will exercise a renewal option, or reasonably certain it will not exercise an early termination option. For operating leases, lease expense is recognized on a straight-line basis over the expected lease term. For finance leases, the ROU asset amortizes on a straight-line basis over the lease term (or the useful life of the underlying asset if title transfers at the end of the lease term or there is a purchase option the Company is reasonably certain to exercise) and the lease liability accretes interest based on the interest method using the discount rate determined at lease commencement. See also Note 10, “Lease Obligations.” Impairment of Long-Lived Assets: Long-lived assets, including mineral rights, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. In estimating undiscounted cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of undiscounted cash flows from other asset groups. The Company’s estimates of undiscounted cash flows are based on numerous assumptions, and it is possible that actual cash flows may differ significantly from estimates, as actual produced reserves, prices, commodity-based and other costs, and closure costs are each subject to significant risks and uncertainties. The estimated undiscounted cash flows used to assess recoverability of long-lived assets and to measure the fair value of the Company’s mining operations are derived from current business plans, which are developed using short-term price forecasts reflective of the current price environment and the Company’s projections for long-term average prices. In addition to short- and long-term price assumptions, other assumptions include estimates of production costs; proven and probable mineral reserves estimates, including the timing and cost to develop and produce the reserves; value beyond proven and probable estimates; and estimated future closure costs.
If the carrying amount of the long-lived asset or asset groups is not recoverable on an undiscounted cash flows basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, based on the approach the Company believes a market participant would use. An impairment loss, if any, is recorded for the excess of the asset’s (or asset group’s) carrying amount over its fair value, as determined by a valuation technique appropriate to the given circumstances. See also Note 8, “Property, Plant and Equipment.” Offtake Advances Accounted for as Debt Obligations and Debt Discount: Subsequent to the June 2020 Modification to the Original Offtake Agreement (as such terms are defined in Note 4, “Relationship and Agreements with Shenghe”), the Company accounts for net prepayments or other advances received from Shenghe prior to or in connection with the June 2020 Modification as debt. The associated debt discount is amortized to interest expense using the effective interest method over the Company’s estimated contractual term of the underlying indebtedness. The debt discount reduces the carrying amount of the associated debt. See also, Note 9, “Debt Obligations.” Asset Retirement Obligations: The Company recognizes asset retirement obligations (“AROs”) for estimated costs of legally and contractually required closure, dismantlement, and reclamation activities associated with Mountain Pass. AROs are initially recognized at their estimated fair value in the period in which the obligation originates. Fair value is based on the expected timing of reclamation activities, cash flows to perform activities, amount and uncertainty associated with the cash flows, including adjustments for a market risk premium, and discounted using a credit-adjusted risk-free rate. The liability is accreted over time through periodic charges to earnings and reduced as reclamation activities occur with differences between estimated and actual amounts recognized as an adjustment to operating expenses.
Subsequent increments in expected undiscounted cash flows are measured at their discounted values using updated estimates of the Company’s credit-adjusted risk-free rate applied to the increment only. Subsequent decrements in expected undiscounted cash flows are reduced based on the weighted-average credit-adjusted risk-free rate associated with the obligation. When increments and decrements are caused by a change in the estimated timing of settlement, the Company treats the increase in cash flows in the year of the updated estimate as an increment and the reduction in cash flows in the original year as a decrement. Associated asset retirement costs, including the effect of increments and decrements, are recognized as adjustments
to the related asset’s carrying amount and depreciated over the related asset’s remaining useful life. If a decrement is greater than the carrying amount of the related asset, the difference is recognized as a reduction to depreciation expense. See also Note 11, “Asset Retirement and Environmental Obligations.” Environmental Obligations: The Company has assumed certain environmental remediation obligations that primarily relate to groundwater monitoring activities. Estimated remediation costs are accrued based on management’s best estimate at the end of each reporting period of the costs expected to be incurred at a site to settle the obligation when those amounts are probable and estimable. Such cost estimates may include ongoing care, maintenance and monitoring costs associated with remediation activities. Changes in remediation estimates are reflected in earnings in the period an estimate is revised. Remediation costs included in environmental obligations are discounted to their present value when payments are readily estimable, and are discounted using a risk-free rate, which the Company derives from U.S. Treasury yields. See also Note 11, “Asset Retirement and Environmental Obligations.” Debt Issuance Costs: Debt issuance costs that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense using the effective interest method over the contractual term of the underlying indebtedness. Debt issuance costs reduce the carrying amount of the associated debt.
Revenue Recognition: The Company’s revenue comes from sales of rare earth products produced at Mountain Pass. The Company’s sales are primarily to an affiliate of Shenghe. The Company’s performance obligation is to deliver rare earth products to the agreed-upon delivery point, and the Company recognizes revenue at the point in time control of the products transfers to the customer, which is typically when the rare earth products are delivered to the agreed-upon shipping point. At that point, the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the products, and the customer bears the risk of loss.
For sales to third parties, the transaction price is agreed to at the time the sale is entered into. For sales entered into with the related party, the transaction price is typically 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 and certain other discounts. These ultimate market prices are forms of variable consideration. The Company typically negotiates with and bills an initial price to Shenghe; such prices are then updated based on final adjustments for quality differences and/or actual sales prices realized by Shenghe. Initial pricing is typically billed upon delivering the product to the agreed-upon shipping point and paid within 30 days or less. Final adjustments to prices may take longer to resolve.
When the final price has not been resolved by the end of a reporting period, the Company estimates the expected sales price based on the initial price, current market pricing and known quality measurements, and further constrains such amounts to an amount that is probable not to result in a significant reversal of previously-recognized revenue. Revenue from product sales is recorded net of taxes collected from customers that are remitted to governmental authorities. When appropriate, the Company applies a portfolio approach in estimating a refund obligation.
Prior to the June 2020 Modification, the Company had also received significant prepayments (referred to as “Offtake Advances”) from Shenghe. The Company had determined that the prepayments did not have a significant financing component, based on the uncertainty associated with the timing of delivery and on the relationship of the payment to the other payments required under the Original Offtake Agreement. See Note 4, “Relationship and Agreements with Shenghe,” for further information on the June 2020 Modification as well as the Offtake Advances from Shenghe. See also Note 5, “Revenue Recognition.” Government Grants: In accounting for grants received from the government, the grant proceeds are recognized when there is reasonable assurance the conditions of the grant will be met, and the grant will be received. When a grant is related to an expense item, it is recognized as income (or a reduction of expense) over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When a grant is related to an asset, the funds received are recorded as reductions of the related asset’s carrying amount, thereby reducing future depreciation expense. See also Note 8, “Property, Plant and Equipment.” Stock-Based Compensation: The cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award and the expense is recognized ratably over the requisite service period. The fair value of Stock Awards (as defined in Note 15, “Stock-based Compensation,”) is equal to the fair value of the Company’s stock on the grant date. Stock Awards with graded vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company accounts for forfeitures in the period in which they occur based on actual forfeitures. See also Note 15, “Stock-based Compensation.”
Earnings (Loss) Per Share: Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially dilutive securities such as unvested restricted stock awards. See also Note 17, “Earnings (Loss) per Share.” Commitments and Contingencies: Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the contingency and estimated range of loss, if determinable, is made in the financial statements when it is at least reasonably possible that a material loss could be incurred. Legal costs incurred in connection with loss contingencies are expensed as incurred. See also Note 13, “Commitments and Contingencies.” Income Taxes: The Company accounts for income taxes using the balance sheet method, recognizing certain temporary differences between the book basis of the liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in effect. The Company derives a deferred income tax expense or benefit by recording the change in either the net deferred income tax liability or asset balance for the year. The Company’s policy, if it were to have uncertain tax positions, is to recognize interest and/or penalties related to unrecognized tax benefits as part of its income tax expense. See also Note 12, “Income Taxes.” Valuation of Deferred Tax Assets: The Company’s deferred income tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. The Company reviews the likelihood that the benefit of the deferred tax assets will be realized and the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the Company evaluated all available positive and negative evidence.
Certain categories of evidence carry more weight in the analysis than others based upon the extent to which the evidence may be objectively verified. The Company looks to the nature and severity of cumulative pretax losses (if any) in the current three-year period ending on the evaluation date, recent pretax losses and/or expectations of future pretax losses. Other factors considered in the determination of the probability of the realization of the deferred tax assets include, but are not limited to:
•Earnings history;
•Projected future financial and taxable income based upon existing reserves and long-term estimates of commodity prices;
•The duration of statutory carry forward periods;
•Prudent and feasible tax planning strategies readily available that may alter the timing of reversal of the temporary difference;
•Nature of temporary differences and predictability of reversal patterns of existing temporary differences; and
•The sensitivity of future forecasted results to commodity prices and other factors.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. However, recent cumulative losses are not solely determinative of the need for a valuation allowance. The Company also considers all other available positive and negative evidence in its analysis. See also Note 12, “Income Taxes.” Recently Issued Accounting Pronouncements: The Jumpstart Our Business Startups Act (“JOBS Act”) allowed the Company, as an emerging growth company (“EGC”), to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were applicable to private companies. We had elected to use this extended transition period under the JOBS Act and as a result of this election, we did not have to comply with the public company effective dates until we ceased to be classified as an EGC. As a result of the market value of the Company’s publicly held common stock held by non-affiliates as of June 30, 2021, we lost our EGC status effective as of December 31, 2021, which accelerated the adoption of various accounting pronouncements. These accounting pronouncements were therefore adopted as of January 1, 2021, and we will adopt future accounting pronouncements based on the public company effective dates.
Other than the adoption of the accounting guidance mentioned below, there have been no material impacts on our Consolidated Financial Statements resulting from the adoption of new accounting pronouncements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”), which sets forth a “current expected credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. We elected to early adopt ASU 2016-13 during the first quarter of 2021 using a modified retrospective approach, which did not have a material impact on our Consolidated Financial Statements and did not result in a cumulative-effect adjustment.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. We elected to early adopt ASU 2018-15 during the first quarter of 2021 using a prospective approach, which did not have a material impact on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes,” and amends existing guidance to improve consistent application. We elected to early adopt ASU 2019-12 during the first quarter of 2021 using a prospective approach, which did not have a material impact on our Consolidated Financial Statements.
In August 2020, the FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which (i) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC Subtopic 470-20, “Debt—Debt with Conversion and Other Options,” that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (ii) revises the scope exception from derivative accounting in ASC Subtopic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (iii) revises the guidance in ASC Topic 260, “Earnings Per Share,” to require entities to calculate diluted EPS for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. We elected to early adopt ASU 2020-06 during the first quarter of 2021 using a prospective approach. See Note 9, “Debt Obligations,” for a discussion of our Convertible Notes (as defined in Note 9, “Debt Obligations”), which we issued in March 2021. In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”), which is intended to increase the transparency of government assistance including the disclosure of the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. We elected to early adopt ASU 2021-10 during the fourth quarter of 2021 using a prospective approach, which did not have a material impact on our Consolidated Financial Statements. See Note 8, “Property, Plant and Equipment,” for a discussion of our government grant. Reclassifications: Certain amounts in prior periods have been reclassified to conform to the current year presentation.
NOTE 3—BUSINESS COMBINATION AND REVERSE RECAPITALIZATION
The Business Combination was consummated on November 17, 2020, pursuant to the Merger Agreement whereby MPMO and SNR were combined with FVAC and became wholly-owned subsidiaries of FVAC, which was in turn renamed MP Materials Corp.
As of December 31, 2019, and through to the date of the Business Combination, MPMO had 1,000 voting common units with no par value and 110.98 non-voting preferred units with no par value, which were held by Leshan Shenghe (as defined in Note 4, “Relationship and Agreements with Shenghe”), outstanding. In addition, as discussed in Note 4, “Relationship and Agreements with Shenghe,” in connection with the June 2020 Modification, MPMO issued the Shenghe Warrant. Immediately prior to the Business Combination, the Shenghe Warrant was exercised and MPMO issued 89.88 non-voting preferred units with no par value to Leshan Shenghe. As a result, 200.86 non-voting preferred units were outstanding immediately prior to the Business Combination. In connection with the Business Combination and pursuant to the Merger Agreement, the Company issued shares of its Common Stock to unitholders of MPMO at an exchange ratio of approximately 59,908.35 shares of the Company’s common
stock with a par value of $0.0001 per share (“Common Stock”) for each common unit and preferred unit of MPMO, resulting in the issuance of 71,941,538 shares of our Common Stock. In addition, in connection with the SNR Mineral Rights Acquisition, 19,999,942 shares (adjusted for fractional shares) of our Common Stock were issued to SNR unitholders. See below for further discussion of the SNR Mineral Rights Acquisition.
Immediately prior to the consummation of the Business Combination and pursuant to the Parent Sponsor Warrant Exchange Agreement, entered into by FVAC and Fortress Acquisition Sponsor LLC, a Delaware limited liability company (the “Sponsor”), on July 15, 2020, the Sponsor exchanged all 5,933,333 of its private placement warrants (the “Private Placement Warrants”) for an aggregate of 890,000 shares of FVAC Class F common stock that, upon the consummation of the Business Combination, were converted into Common Stock of the Company (the “Parent Sponsor Warrant Exchange”).
In connection with the consummation of the Business Combination, the Company issued, in a private placement transaction, an aggregate of 20,000,000 shares of Common Stock for an aggregate purchase price of $200.0 million, to PIPE investors pursuant to the terms of respective subscription agreements entered into separately between the Company and each PIPE investor, each dated July 15, 2020 (the “PIPE Financing”).
After giving effect to the above, shares of our Common Stock issued and outstanding immediately after the closing of the Business Combination were as follows (including restricted stock issued to certain executives upon closing):
| | | | | | | | |
| Shareholder | | Number of Shares |
FVAC public stockholders(1) | | 34,464,151 | |
| Private Placement Warrants | | 890,000 | |
MPMO unitholders(2) | | 71,941,538 | |
| SNR unitholders | | 19,999,942 | |
| PIPE Financing | | 20,000,000 | |
| Restricted stock issued to certain MPMO executives | | 2,013,006 | |
| Total | | 149,308,637 | |
(1)Represents the outstanding shares held by FVAC’s public stockholders (Class A common stock) which were not redeemed in connection with the Business Combination. The Company received gross proceeds of $344.7 million and net proceeds of $332.6 million after $12.1 million of underwriting commissions in connection with the sale of these shares.
(2)Includes 5,384,563 shares issued relating to the Shenghe Warrant.
MPMO’s merger with FVAC was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, FVAC was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the merger was treated as the equivalent of MPMO issuing stock for the net assets of FVAC, accompanied by a recapitalization. The net assets of FVAC are stated at historical cost, with no goodwill or other intangible assets recorded. Among other factors, MPMO was determined to be the accounting acquirer principally on the basis that its unitholders would hold the greatest voting interest in the combined company, the majority of executive management of MPMO remained with the Company, and MPMO had a significantly larger employee base and substantive operations.
Pursuant to the amended and restated letter agreement dated July 15, 2020, and amended and restated on August 26, 2020, by and among FVAC and the holders of FVAC Class F common stock, all of the shares of FVAC Class A common stock issued upon the conversion of FVAC Class F common stock (held by insiders initially purchased prior to the FVAC initial public offering (“IPO”)), were subject to certain vesting and forfeiture provisions (the “Vesting Shares”) based on the achievement of certain volume weighted-average price (“VWAP”) thresholds of the Company’s Common Stock.
The holders of MPMO Holding Company, which was a Delaware corporation formed by MPMO pursuant to the Merger Agreement (“MPMO HoldCo”), preferred stock and common stock and SNR Holding Company, LLC, which was a Delaware limited liability company formed by SNR pursuant to the Merger Agreement (“SNR HoldCo”), common stock immediately prior to the closing of the Business Combination were given the contingent right to receive up to an additional 12,860,000 shares of the Company’s Common Stock (the “Earnout Shares”) based on the achievement of certain VWAP thresholds of the Company’s Common Stock.
The Company determined that the Earnout Shares issued to the Sponsor, holders of MPMO HoldCo preferred stock and common stock, and holders of SNR HoldCo common stock met the criteria for equity classification under ASC Subtopic 815-40, “Contracts in Entity’s Own Equity.” The Company estimated that the total fair value of the Earnout Shares at closing of
the Business Combination was $171.2 million, consisting of $134.0 million and $37.2 million ascribed to the MPMO and SNR earnouts, respectively.
In December 2020, 8,625,000 Vesting Shares vested, and 12,859,898 Earnout Shares (adjusted for fractional shares) were issued after achievement of the aforementioned VWAP thresholds. As of December 31, 2021 and 2020, the Vesting Shares and the Earnout Shares delivered to the equityholders were recorded as equity with an allocation between common stock at par value and additional paid-in capital, and the Earnout Shares delivered to MPMO equityholders were accounted for as a distribution. Since all Earnout Shares were determined to be equity-classified at initial recognition and through the date of achievement of the thresholds, no remeasurement was required.
SNR Mineral Rights Acquisition
The acquisition of SNR did not meet the criteria for the acquisition of a business under ASC Topic 805, “Business Combinations” (“ASC 805”), and was accounted for as an asset acquisition since substantially all of the fair value of the assets acquired was concentrated in a single asset. The principal asset acquired in the SNR Mineral Rights Acquisition was the mineral rights for the rare earth ores contained in the Company’s mine, which was SNR’s sole operating asset. The net assets acquired in the SNR Mineral Rights Acquisition were $324.1 million, which was principally comprised of a mineral rights asset of $434.7 million, net of the associated deferred tax liability of $109.1 million.
MPMO and SNR had a relationship prior to the Business Combination, specifically related to the Royalty Agreement and an intellectual property license. The Company considered the provisions of ASC 805 regarding the settlement of pre-existing relationships. Immediately prior to the consummation of the Business Combination, MPMO had a $3.9 million liability related to the minimum royalty, which was effectively settled through intercompany when MPMO and SNR became wholly-owned subsidiaries of the Company. The settlement of the liability was reflected in the cost of the acquisition due to the pre-existing contractual relationship being cancellable without penalty and no gain or loss was recognized. For further information on the Royalty Agreement and the minimum royalty liability, see Note 18, “Related-Party Transactions.” Transaction Costs
In connection with the Business Combination, the Company incurred direct and incremental costs of $33.5 million, consisting of legal and professional fees, of which $28.2 million was related to equity issuance costs and recorded to “Additional paid-in capital” as a reduction of proceeds at the time of the Business Combination, $3.3 million was recorded to “General and administrative” expenses, for the year ended December 31, 2020, and $2.0 million was related to the SNR Mineral Rights Acquisition, which was included as a component of the cost of the acquisition.
NOTE 4—RELATIONSHIP AND AGREEMENTS WITH SHENGHE
Original Commercial Agreements
In May 2017, prior to our acquisition of Mountain Pass, the Company entered into a set of commercial arrangements with 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, to fund the Company’s operations, identify operational efficiencies, and sell products to Shenghe and third parties. Shenghe and its affiliates primarily engage in the mining, separation, processing and distribution of rare earth products. As part of these arrangements, Shenghe (and its controlled affiliates) became both the principal customer and a related party when Leshan Shenghe obtained 110.98 MPMO preferred units, which represented a 9.99% non-voting preferred interest in MPMO at the time. As discussed in Note 3, “Business Combination and Reverse Recapitalization,” in connection with the Business Combination, these MPMO preferred units were exchanged for our Common Stock. See also Note 18, “Related Party Transactions.” The original commercial arrangements principally consisted of a technical services agreement (the “TSA”), an offtake agreement (the “Original Offtake Agreement”), and a distribution and marketing agreement (the “DMA”). Under the TSA, Shenghe provided technical services, know-how and other assistance to MPMO in order to facilitate the development and operations of Mountain Pass. In addition, both the TSA and the Original Offtake Agreement imposed certain funding obligations on Shenghe. The Original Offtake Agreement required Shenghe to advance us 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 (as defined below), as adjusted for Gross Profit Recoupment (as 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.”
As discussed below, the entrance into the Letter Agreement constituted a modification to the Original Offtake Agreement for accounting purposes (referred to as the “June 2017 Modification”), which ultimately resulted in the Shenghe Implied Discount (as defined below). Under the terms of these agreements, the amounts funded by Shenghe constitute prepayments for the rare earth products to be sold to Shenghe historically under the Original Offtake Agreement (and currently under the A&R Offtake Agreement, as defined below).
Under the Original Offtake Agreement, upon the mine achieving certain milestones and being deemed commercially operational (which was achieved on July 1, 2019), 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”). Under the Original Offtake Agreement, we were obliged to sell all Mountain Pass rare earth products to Shenghe until Shenghe had fully recouped all of its prepayments (i.e., the Prepaid Balance is reduced to zero), at which point the Original Offtake Agreement would terminate automatically.
As originally entered, the DMA was to become effective upon termination of the Original Offtake Agreement. The DMA provided for a distribution and marketing arrangement between the Company and Shenghe, subject to certain exceptions. MPMO retained the right to distribute its products directly to certain categories of customers. As compensation for Shenghe’s distribution and marketing services, the DMA entitled Shenghe to a portion of the net profits from the sale of rare earth products produced at Mountain Pass (the “Net Profit-Based Commission”). See below for further discussion of the DMA termination and associated accounting treatment.
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 significantly 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 either the amendment or termination of the various agreements between the parties, as discussed below.
Pursuant to the Framework Agreement, we 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, and we issued to Shenghe a warrant on June 2, 2020 (the “Shenghe Warrant”), exercisable at a nominal price for 89.88 MPMO preferred units, which, at the time, reflected approximately 7.5% of the Company’s equity on a diluted basis, subject to certain restrictions. 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 to us (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 on June 5, 2020. As discussed in Note 3, “Business Combination and Reverse Recapitalization,” the Shenghe Warrant was exchanged for our Common Stock in connection with the Business Combination. Upon the funding of the remaining obligations on June 5, 2020, among other things, (i) the TSA and the DMA were terminated (as described below) and (ii) the A&R Offtake Agreement and the Shenghe Warrant became effective (such events are collectively referred to as the “June 2020 Modification”). Thus, at the present time, Leshan Shenghe’s and Shenghe’s involvement with the Company and Mountain Pass consists of only the A&R Offtake Agreement.
The A&R Offtake Agreement maintains 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: (i) modifies the definition of “offtake products” in order to remove from the scope of that definition lanthanum, cerium and other rare earth products that do not meet the specifications agreed to under the A&R Offtake Agreement; (ii) as to the offtake products subject to the A&R Offtake Agreement, provides that if we sell such offtake products to a third party, then, until the Prepaid Balance has been reduced to zero, we will pay an agreed percentage of our revenue from such sale to Shenghe, to be credited against the amounts owed on Offtake Advances; (iii) replaces the Shenghe Sales Discount (as defined in Note 5, “Revenue Recognition”) under the Original Offtake Agreement with a fixed monthly sales charge; (iv) provides 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) will be based on market prices (net of taxes, tariffs and certain other agreed charges) less applicable discounts; (v) obliges 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 has been reduced to zero; (vi) obliges us to pay Shenghe the net after-tax profits from certain sales of assets until the Prepaid Balance has been reduced to zero (this obligation was previously contained in the TSA); and (vii) provides for certain changes to the payment, invoicing and delivery terms and procedures for products.
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. As with the Original Offtake Agreement, the A&R Offtake Agreement will terminate when Shenghe has fully recouped all of the Prepaid Balance. As discussed in Note 2, “Significant Accounting Policies,” and Note 9, “Debt Obligations,” the A&R Offtake Agreement will terminate by the end of the first quarter of 2022 through either non-cash recoupments from sales or a cash payment based, in part, on the Company’s GAAP net income for the year ended December 31, 2021. See Note 20, “Subsequent Events,” for additional information. Accounting for the June 2017 Modification
Pursuant to the Letter Agreement, Shenghe agreed to provide additional funding via a short-term, non-interest-bearing note in the amount of $30.0 million to the Company (defined above as the “First Additional Advance”), which required repayment within one year. Furthermore, under the terms of the Letter Agreement, Shenghe became entitled to an additional $30.0 million recovery through an increase to the Prepaid Balance. Therefore, under the terms of the Letter Agreement, Shenghe would ultimately receive repayment of the short-term debt instrument from the Company, and also be entitled to realize an additional $30.0 million as a part of the contractual Gross Profit Recoupment from ultimate sales to its customers.
The Company concluded that the $30.0 million proceeds received from Shenghe should be allocated between (i) the non-interest-bearing debt instrument and (ii) the existing revenue arrangement (under the terms of the Original Offtake Agreement) on a relative fair value basis. As a result of such analysis, the Company determined that the debt instrument had a relative fair value of $26.5 million and the modification to the revenue arrangement had a relative fair value of $3.5 million. The First Additional Advance was repaid in full by the Company in 2018.
Based on the relationship between (i) the deemed proceeds the Company would ultimately receive from the Initial Prepayment Amount (adjusted for (a) the fair value of the preferred interest provided to Shenghe at the time of entering into the aforementioned commercial arrangements of $2.3 million and (b) the fair value allocated to the modification of the revenue arrangement of $3.5 million) and (ii) the contractual amount owed to Shenghe (i.e., the Prepaid Balance, which included the Initial Prepayment Amount and the additional $30.0 million adjustment to the Prepaid Balance in connection with the Letter Agreement) at the time, the June 2017 Modification resulted in an implied discount on the Company’s sales prices to Shenghe under the Original Offtake Agreement, for accounting purposes (the “Shenghe Implied Discount”).
The Shenghe Implied Discount was applicable to Shenghe’s gross profit on the sales of rare earth products to its own customers (for sales made between July 2019 and early June 2020). That gross profit is a contractually determined amount based on Shenghe’s realized sales price (net of taxes, tariffs, and certain other adjustments, such as demurrage) compared to the agreed-upon cash cost Shenghe would pay to the Company. The Shenghe Implied Discount amounted to 36% of that contractually determined gross profit amount. See also Note 5, “Revenue Recognition.” Accounting for the June 2020 Modification
As noted above, in May 2020, the Company renegotiated various aspects of its relationship with Shenghe and entered into the Framework Agreement to significantly restructure the aforementioned set of arrangements. Prior to the June 2020 Modification, for accounting purposes, the Original Offtake Agreement constituted a deferred revenue arrangement; however, as a result of the June 2020 Modification, the A&R Offtake Agreement constituted a debt obligation as well as provided for the issuance of the Shenghe Warrant. For further discussion of the deferred revenue arrangement, see Note 5, “Revenue Recognition,” and for further discussion of the debt obligation, see Note 9, “Debt Obligations.” The DMA provided Shenghe with the right of first refusal to be the Company’s distribution and marketing agent for product sales after the expiration of the Original Offtake Agreement and until April 2047 in exchange for the Net Profit-Based Commission. Under the Original Offtake Agreement, Shenghe would also have been responsible for funding additional advance payments toward the Company’s Stage II optimization project. The agency relationship was not to commence until any such additional amount was also recovered under the Original Offtake Agreement. Although it had not yet commenced, the DMA was enforceable, and could only be terminated upon the mutual agreement of the parties involved.
At its inception in May 2017, the DMA was determined to be at-market, as it provided an expected commission to Shenghe for its services that was consistent with the Company’s expectations for a regular sales commission based on its revenue and cost expectations at the time. In connection with the June 2020 Modification, the Company determined that the existing
arrangement within the DMA now provided Shenghe with a favorable, off-market return for the future distribution and marketing services, due in part to (i) favorable changes in expected profitability, driven partially by changes in tariffs, as well as cost performance in Stage I, (ii) favorable estimates of the capital cost of the Stage II optimization project, and (iii) favorable changes in expected production, based on higher than forecast contained rare earth oxides production in Stage I.
Taken together, the Company concluded that the above factors would likely result in materially lower per-unit costs (including depreciation) and higher profitability versus its original estimates. Therefore, these changes in circumstances meant that the Net Profit-Based Commission would no longer be commensurate with the value of the service; and therefore, created an off-market feature. These same factors would also result in the Company fulfilling its obligations under the Original Offtake Agreement more quickly, resulting in a longer period of payments under the now-unfavorable terms of the DMA.
In addition, as noted above, Shenghe would still have had to provide the additional advances required to complete Stage II, which would have created a near-term cash commitment for Shenghe. While these costs were expected to be approximately $200 million, Shenghe would have remained exposed to the potential that actual costs exceed these estimates and remained committed to fund them. Further, these upfront payments were to be non-interest bearing, exposing Shenghe to economic cost from the time value of money. Therefore, as part of the renegotiations, the Company and Shenghe agreed to terminate the DMA. As a result of the June 2020 Modification, specifically the termination of the DMA, the Company recorded a non-cash settlement charge of $66.6 million during the year ended December 31, 2020.
| | | | | |
| (in thousands) | As of June 2020 Modification |
Deemed proceeds for fair value of debt issuance(1) | $ | 85,695 | |
| Deemed proceeds for fair value of warrant issuance | 53,846 | |
| Total deemed proceeds | 139,541 | |
| |
Derecognition of the existing deferred revenue balance(2) | (37,476) | |
Deemed payment to terminate the unfavorable DMA(3) | (66,615) | |
| Total deemed payments | (104,091) | |
| |
| Net cash received | $ | 35,450 | |
(3)This non-cash charge is included within the Consolidated Statement of Operations for the year ended December 31, 2020, as “Settlement charge.”
NOTE 5—REVENUE RECOGNITION
Sales to Shenghe Prior to Achieving Commercial Operations: Prior to achieving commercial operations in July 2019, the Company sold various products, including stockpile inventories, to Shenghe under individual sales agreements, which did not include the Shenghe Implied Discount.
Sales to Shenghe Under the Original Offtake Agreement: Beginning in July 2019, and through early June 2020, the Company and Shenghe periodically agreed on a cash sales price for each metric ton of rare earth concentrate delivered by the Company, which was recognized as revenue upon each sale. This sales price was intended to approximate the Company’s cash cost of production. Sales during this period were made under the Original Offtake Agreement and were impacted by the Shenghe Implied Discount, which is discussed in Note 4, “Relationship and Agreements with Shenghe.” The Shenghe Implied Discount amounted to 36% of the difference between Shenghe’s realized price on its sales of rare earth products to its own customers (net of taxes, tariffs, and certain other adjustments, such as demurrage) and the agreed-upon cash cost for those products (i.e., its gross profit). In addition to the revenue, we recognized from the cash sales prices, we also realized an amount of deferred revenue applicable to these sales equal to 64% of Shenghe’s gross profit. The full gross profit amount realized by Shenghe on such sales reduced the Prepaid Balance (and consequently, our contractual obligations to Shenghe), but the remaining 36% was not recognized as revenue.
In addition, sales to Shenghe under the Original Offtake Agreement between July 2019 and early June 2020 typically provided Shenghe with a discount generally in the amount of between 3% and 6% of the initial cash price of our rare earth products sold in consideration of Shenghe’s sales efforts to resell our rare earth products (the “Shenghe Sales Discount”). The Shenghe Sales Discount was considered a reduction in the transaction price and thus was not recognized as revenue. Additionally, the Shenghe Sales Discount was not applied to reduce the Prepaid Balance; however, it was considered as part of Shenghe’s cost of acquiring our product in the calculation of Shenghe’s gross profit.
Sales to Shenghe Under the A&R Offtake Agreement: Beginning after the June 2020 Modification, the sales price (and other terms applicable to the quantity of products sold) are set forth in monthly purchase agreements with Shenghe. Furthermore, the June 2020 Modification provided that the sales price to be paid by Shenghe for our rare earth products will be based on market prices (net of taxes, tariffs and certain other agreed charges) less applicable discounts. A portion of the sales price is in the form of debt repayment, with the remainder paid in cash. See Note 9, “Debt Obligations,” for further information. As a result of the June 2020 Modification, revenue recognized under the A&R Offtake Agreement after the June 2020 Modification does not include the Shenghe Implied Discount. In addition, rather than adjusting the sales price for the Shenghe Sales Discount, as was the case with sales made under the Original Offtake Agreement, revenue under the A&R Offtake Agreement is reduced by a fixed monthly sales charge (similarly accounted for as a discount).
Deferred Revenue: As mentioned in Note 4, “Relationship and Agreements with Shenghe,” the Original Offtake Agreement was accounted for as a deferred revenue arrangement and the June 2020 Modification effectively replaced this deferred revenue arrangement with a debt obligation (see Note 9, “Debt Obligations”). Prior to the June 2020 Modification, Offtake Advances received from Shenghe were accounted for as deferred revenue. Under the Original Offtake Agreement, Shenghe’s gross profit was retained by Shenghe and applied to reduce the Prepaid Balance. Activity for the deferred revenue balance (including current portion) was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
Opening balance(1) | $ | — | | | $ | 35,543 | | | $ | 28,482 | |
Prepayments received(2) | — | | | 11,050 | | | 10,311 | |
Revenue recognized(3) | — | | | (9,117) | | | (3,250) | |
Effect of June 2020 Modification(4) | — | | | (37,476) | | | — | |
| Ending balance | $ | — | | | $ | — | | | $ | 35,543 | |
(1)Of the amounts for the years ended December 31, 2020 and 2019, $6.6 million and $3.3 million, respectively, were classified as current based on when such amounts were expected to be realized.
(2)The full amount for the year ended December 31, 2020, and $9.2 million for the year ended December 31, 2019, related to the contractual commitment for Shenghe to provide funds to the Company (the Initial Prepayment Amount). After the amount pertaining to the year ended December 31, 2020, was funded, no further amount was required to be funded by Shenghe under the Initial Prepayment Amount.
(3)As discussed above, for sales made to Shenghe during the period from July 2019 through early June 2020, as a result of the Shenghe Implied Discount, we recognized an amount of deferred revenue applicable to such sales equal to 64% of the gross profit realized by Shenghe on sales of this product to its own customers. As discussed below, the amount for the year ended December 31, 2020, included a tariff rebate of $1.4 million received in May 2020; the amounts for the years ended December 31, 2020 and 2019, excluded the tariff rebates realized in August 2020.
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 contractual Prepaid Balance. These, in turn, affected the Company’s realized prices and, as a result, the deferred revenue and the Shenghe Implied Discount on our prior sales. The Company realized $1.4 million of revenue related to tariff rebates received in May 2020, which included amounts related to prior periods. 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 and August 2020, the Company received additional 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 and $9.3 million of revenue for the years ended December 31, 2021 and 2020, respectively, primarily related to additional tariff credits realized for sales from the pre-modification period. Since these rebates were recognized after
the June 2020 Modification, the amounts were treated as a reduction to the principal balance of the debt obligation, partially offset by a proportionate reduction in the related debt discount, as discussed in Note 9, “Debt Obligations.” Refund Liability: Prior to the mine reaching commercial operations, the Company entered into individual product sales with the same affiliate of Shenghe based on standardized product quality specifications, against which adjustments would be recognized based on actual quality measurements and settlements agreed between the Company and Shenghe. The product quality was expected to be below the standard and would result in quality adjustments for ultimate repayment of the refund liability. As such, in 2018, the Company estimated and recognized a refund liability based on expected differences.
In 2019, the Company negotiated with Shenghe to settle all outstanding quality differences for a total of $2.3 million, of which $0.5 million of the refund obligation was paid in 2019 and $1.8 million was paid in 2020. In addition, the Company agreed to repay $0.9 million of Offtake Advances based on gross profits realized on sales of rare earth fluorides, which were purchased in 2018 from Molycorp, Inc., debtors, which was paid in 2020.
NOTE 6—RESTRICTED CASH
The Company’s restricted cash balances were as follows:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Restricted cash, current | $ | 1,344 | | | $ | 3,688 | |
| Restricted cash, non-current | 516 | | | 9,100 | |
| Total restricted cash | $ | 1,860 | | | $ | 12,788 | |
Current restricted cash, which is included in “Prepaid expenses and other current assets” within the Consolidated Balance Sheets, principally relates to cash held in various trusts for both years presented. Non-current restricted cash as of December 31, 2020, pertains to cash collateral posted for closure and post-closure surety bonding for the Mountain Pass site and a trust established with the California Department of Resources Recycling and Recovery, which is the state of California’s recycling and waste management program, for a closed onsite landfill (see Note 11, “Asset Retirement and Environmental Obligations”). NOTE 7—INVENTORIES
The Company’s inventories consisted of the following:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
Materials and supplies | $ | 10,711 | | | $ | 5,124 | |
In-process | 25,574 | | | 24,524 | |
Finished goods | 2,407 | | | 2,624 | |
| Total inventory | $ | 38,692 | | | $ | 32,272 | |
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 Consolidated Statement of Operations for the year ended December 31, 2021, as “Write-down of inventories.”
NOTE 8—PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment consisted of the following:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Land and land improvements | $ | 7,925 | | | $ | 6,534 | |
| Buildings and building improvements | 8,791 | | | 2,953 | |
| Machinery and equipment | 61,822 | | | 22,911 | |
| Assets under construction | 134,327 | | | 46,814 | |
| Mineral rights | 437,376 | | | 437,654 | |
| Property, plant and equipment | 650,241 | | | 516,866 | |
| Less: Accumulated depreciation and depletion | (39,629) | | | (14,892) | |
| Property, plant and equipment, net | $ | 610,612 | | | $ | 501,974 | |
Capitalized Costs: The Company capitalized expenditures of $138.0 million, $26.2 million and $2.8 million for the years ended December 31, 2021, 2020 and 2019, respectively, mostly related to vehicles, machinery, equipment, and assets under construction to support its Stage II optimization project and other capital projects at Mountain Pass. Interest capitalized was $0.3 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively. No interest was capitalized for the year ended December 31, 2019.
CHP Plant: In December 2021, upon designating the Company’s natural gas-powered CHP plant fully operational, $27.2 million of CHP assets under construction were transferred to buildings and machinery and equipment in the amounts of $6.0 million and $21.2 million, respectively.
Technology Investment Agreement: 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 (this “project”) in the amount of $9.6 million. Pursuant to the terms of the TIA, the Company must utilize the funds to acquire property and equipment that will contribute to the mission of this project. Furthermore, in exchange for these funds, the Company is required to provide the DOD with periodic reporting specific to this project for up to approximately five years.
During the year ended December 31, 2021, pursuant to the TIA, the Company received $4.4 million 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 December 31, 2021, the Company is entitled to receive an additional $5.2 million from the DOD under the TIA.
Impact of Change in Estimate of ARO: As a result of a decrement to the Company’s ARO during the fourth quarter of 2021, the carrying amount of the Company’s total property, plant and equipment was reduced by $8.7 million, the majority of which pertained to buildings, machinery and equipment, and assets under construction, in the amounts of $2.0 million, $2.4 million and $3.2 million, respectively. Additionally, the Company’s depreciation expense for the year ended December 31, 2021, was reduced by $1.1 million, reflecting the excess of the decrement over the carrying amount of the related property, plant and equipment. See Note 11, “Asset Retirement and Environmental Obligations,” for further information on the decrement.
The Company’s depreciation and depletion expense were as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Depreciation expense | $ | 6,825 | | | $ | 4,702 | | | $ | 4,414 | |
Depletion expense(1) | $ | 17,200 | | | $ | 1,961 | | | $ | 114 | |
(1)At the beginning of the fourth quarter of 2021, as a result of an updated life of mine, we revised our estimate of the remaining useful life of the mineral rights to approximately 35 years from approximately 23 years. The effect of the change in estimate was a reduction in depletion expense for the year ended December 31, 2021, of $1.5 million.
There were no impairments recognized for the years ended December 31, 2021, 2020 and 2019.
NOTE 9—DEBT OBLIGATIONS
The Company’s current and non-current portions of long-term debt were as follows:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Long-term debt | | | |
| Convertible Notes due 2026 | $ | 690,000 | | | $ | — | |
| Paycheck Protection Loan | — | | | 3,364 | |
| Less: Unamortized debt issuance costs | (15,073) | | | — | |
| Net carrying amount | 674,927 | | | 3,364 | |
| Less: Current installments of long-term debt | — | | | (2,403) | |
| Long-term debt, net of current portion | $ | 674,927 | | | $ | 961 | |
| | | |
| Long-term debt to related party | | | |
| Offtake Advances | $ | 16,599 | | | $ | 71,843 | |
| Less: Unamortized debt discount | (517) | | | (5,393) | |
| Net carrying amount | 16,082 | | | 66,450 | |
| Less: Current installments of long-term debt to related party | (16,082) | | | (22,070) | |
| Long-term debt to related party, net of current portion | $ | — | | | $ | 44,380 | |
Convertible Notes
On March 26, 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 Company received net proceeds of $672.3 million from the issuance of the Convertible Notes.
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 exceed 28.5714 shares of Common Stock per $1,000 principal amount of notes. As of December 31, 2021, based on the initial conversion price, the maximum number of shares that could be issued to satisfy the conversion feature of the Convertible Notes was 19,714,266 and the amount by which the Convertible Notes’ if-converted value exceeded its principal amount was $205.4 million.
Prior to January 1, 2026, at their election, holders of the Convertible Notes may convert their outstanding notes under the following circumstances: (i) during any calendar quarter commencing with the third quarter of 2021 if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the
last reported sale price of the Company’s Common Stock and the conversion rate on each such trading day; (iii) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events set forth in the indenture governing the Convertible Notes. On or after January 1, 2026, and prior to the maturity date of the Convertible Notes, holders may convert their outstanding notes at any time, regardless of the foregoing circumstances.
If we undergo a fundamental change (as defined in the indenture governing the Convertible Notes), holders may require us to repurchase for cash all or any portion of their outstanding notes at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for holders who elect to convert their outstanding notes in connection with such corporate event or notice of redemption, as the case may be.
Paycheck Protection Loan
In April 2020, the Company obtained a loan of $3.4 million pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act (the “Paycheck Protection Loan” or the “Loan”). The Paycheck Protection Loan, which was in the form of a note dated April 15, 2020, issued by CIBC Bank USA, was to mature on April 14, 2022, and bore interest at a rate of 1% per annum. Under the terms of the PPP, loans may be forgiven if the funds are used for qualifying expenses as described in the CARES Act, which include payroll costs, costs used to continue group health care benefits, rent and utilities. In June 2021, the Company received notification from the Small Business Administration that the Loan and related accrued interest was forgiven. Consequently, for the year ended December 31, 2021, the Company recorded a gain on forgiveness of the Loan in the amount of $3.4 million, which is included in “Other income, net” within our Consolidated Statements of Operations.
Offtake Advances
In connection with the June 2020 Modification, which is discussed in Note 4, “Relationship and Agreements with Shenghe,” Shenghe agreed to fund an additional $35.5 million advance to the Company (previously defined as the “Second Additional Advance”) and the Company issued the Shenghe Warrant. For accounting purposes, the June 2020 Modification effectively replaced the deferred revenue arrangement relating to the Original Offtake Agreement with a debt obligation relating to the A&R Offtake Agreement and the issuance of the Shenghe Warrant. Under the A&R Offtake Agreement, a portion of the sales prices of products sold to Shenghe is paid in the form of debt reduction, rather than cash. In addition, the Company must 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, within five business days of the completion of the annual external audit of the Company’s Consolidated Financial Statements. Since these features require cash payments regardless of sales to Shenghe, the Company determined that amounts due to Shenghe under the Offtake Advances should be classified as a debt obligation. For the years ended December 31, 2021 and 2020, $52.8 million and $12.0 million of the sales prices of products sold to Shenghe was paid in the form of debt reduction, respectively (see Note 19, “Supplemental Cash Flow Information”). During the year ended December 31, 2021, the Company made a payment to Shenghe of $0.2 million based on sales to other parties. No amounts were required to be paid based on asset sales. As of the date of the June 2020 Modification, the outstanding balance on the Offtake Advances was $94.0 million. Since the debt obligation was recorded at fair value, the result was a debt discount of $8.3 million. The A&R Offtake Agreement does not have a stated rate (and is non-interest-bearing), and repayment is 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, as adjusted (discussed above). The imputed interest rate is a function of this discount taken together with our expectations about the timing of the anticipated reductions of the principal balance. As of December 31, 2021 and 2020, $16.6 million and $25.7 million of the principal amount, respectively, was classified as current based on the Company’s expectations of the timing of repayment. Furthermore, full repayment of the remaining principal amount will occur by the end of the first quarter of 2022 whether through non-cash recoupments from sales or a cash payment based, in part, on the Company’s GAAP net income for the year ended December 31, 2021.
The actual amounts repaid may differ in timing and amount from the Company’s estimates and is updated each reporting period to determine the imputed interest rate, which will likely differ from the current estimated rate. The Company has determined that it will recognize adjustments from these estimates following a prospective method. Under the prospective method, the Company will update 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 updated rate will be the discount rate that equates the present value of
those revised estimates of remaining reductions with the carrying amount of the debt, and it will be used to recognize interest expense for the remaining periods. Under the prospective method, the effective interest rate is not constant, and changes are recognized prospectively as an adjustment to the effective yield. The effective rate applicable from the June 5, 2020, inception to December 31, 2021, was between 4.41% and 16.28%. As of December 31, 2021, the Company updated its estimate of the effective interest rate to 24.75%, to be applied prospectively. However, since full repayment of the remaining principal amount will occur by the end of the first quarter of 2022, the amount of interest expense to be recognized in the first quarter of 2022 pertaining to the Offtake Advances will only consist of the remaining unamortized discount.
As discussed in Note 5, “Revenue Recognition,” in January 2021 and August 2020, the Company was informed of tariff rebates of $2.2 million and $9.7 million, respectively, that Shenghe received, which increased the gross profit earned by Shenghe on certain sales. In addition, during the year ended December 31, 2020, after the June 2020 Modification, but relating to sales made prior the June 2020 Modification, Shenghe realized higher gross profit than estimated by the Company in the amount of $0.4 million due to higher market prices. As a result of these events, for the years ended December 31, 2021 and 2020, the Company recorded reductions in the principal amount of the debt obligation of $2.2 million and $10.1 million, respectively, and the corresponding debt discount of $0.2 million and $0.8 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, including agreements entered into in February 2021 (as further discussed below). 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.
In February 2021, we entered into several financing agreements for the purchase of equipment, including trucks and loaders, in the aggregate amount of $9.7 million, including $0.3 million for the associated extended warranties. These equipment notes, which are secured by the purchased equipment, have terms of 5 years and interest rates of 4.5% per annum with monthly payments commencing in April 2021.
The current and non-current portions of the equipment notes, which are included within the Consolidated Balance Sheets in “Other current liabilities” and “Other non-current liabilities,” respectively, were as follows:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Equipment notes | | | |
| Current | $ | 2,566 | | | $ | 835 | |
| Non-current | 7,095 | | | 1,267 | |
| $ | 9,661 | | | $ | 2,102 | |
Interest expense, net
Interest expense, net, was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Interest expense | $ | 9,168 | | | $ | 5,171 | | | $ | 3,412 | |
| Capitalized interest | (264) | | | (162) | | | — | |
| Interest expense, net | $ | 8,904 | | | $ | 5,009 | | | $ | 3,412 | |
Interest expense related to the Convertible Notes was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Coupon interest | $ | 1,318 | | | $ | — | | | $ | — | |
| Amortization of debt issuance costs | 2,675 | | | — | | | — | |
| Convertible Notes interest expense | $ | 3,993 | | | $ | — | | | $ | — | |
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 4.3 years as of December 31, 2021.
Debt Maturities
The following is a schedule of debt repayments as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Convertible Notes | | Offtake Advances | | Equipment Notes |
| Year ending December 31, | | | | | |
| 2022 | $ | — | | | $ | 16,599 | | | $ | 2,566 | |
| 2023 | — | | | — | | | 2,352 | |
| 2024 | — | | | — | | | 2,106 | |
| 2025 | — | | | — | | | 2,098 | |
| 2026 | 690,000 | | | — | | | 539 | |
| Thereafter | — | | | — | | | — | |
| Total minimum payments | $ | 690,000 | | | $ | 16,599 | | | $ | 9,661 | |
As of December 31, 2021, none of the agreements governing our indebtedness contain financial covenants.
NOTE 10—LEASE OBLIGATIONS
The Company has operating and finance leases for certain office space, vehicles and equipment used in its operations, with lease terms ranging from one month to five years, excluding any leases that have not yet commenced. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease for an additional one to five years. These optional periods have not been considered in the determination of the ROU asset or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
In November 2021, the Company entered into a lease agreement for corporate office space in a building that is currently being constructed by the landlord. The lease, which is estimated to commence on January 1, 2023, has an initial term of 91 months, with one subsequent five-year renewal option on the same terms and conditions, exercisable at the Company’s option. The initial annual base rent payment will be $1.2 million, subject to an annual escalator. Pursuant to the lease agreement, the Company is entitled to receive a tenant improvement allowance of $1.8 million. As of December 31, 2021, the Company paid $0.2 million in prepaid rent and a security deposit, which were included in “Other assets” within the Consolidated Financial Statements.
The Company’s lease agreements do not contain any termination options or material residual value guarantees, reasonably certain purchase options, or restrictive covenants. The Company does not have any lease arrangements with related parties.
Total lease cost included the following components:
| | | | | | | | | | | | | | | | | | | | | | | |
| Location on Consolidated Statements of Operations | | For the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating lease cost | Primarily Cost of sales (including related party) (excluding depreciation, depletion and amortization) | | $ | 780 | | | $ | 2,466 | | | $ | 218 | |
| Finance lease cost | | | | | | | |
| Amortization of right-of-use assets | Depreciation, depletion and amortization | | 357 | | | 268 | | | 159 | |
| Interest on lease liabilities | Interest expense, net | | 60 | | | 50 | | | 42 | |
| | | 417 | | | 318 | | | 201 | |
| | | | | | | |
| Short-term lease cost | Primarily Cost of sales (including related party) (excluding depreciation, depletion and amortization) | | 1,163 | | | 1,246 | | | 913 | |
| | | $ | 2,360 | | | $ | 4,030 | | | $ | 1,332 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows related to operating leases | $ | 790 | | | $ | 2,432 | | | $ | 223 | |
| Operating cash flows related to finance leases | $ | 60 | | | $ | 50 | | | $ | 42 | |
| Financing cash flows related to finance leases | $ | 278 | | | $ | 249 | | | $ | 121 | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | | |
| Operating leases | $ | — | | | $ | 2,932 | | | $ | 549 | |
| Finance leases | $ | 88 | | | $ | 724 | | | $ | 671 | |
Information related to lease terms and discount rates was as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Weighted-Average Remaining Lease Term | | | |
| Operating leases | 1.0 year | | 1.3 years |
| Finance leases | 2.7 years | | 3.5 years |
| Weighted-Average Discount Rate | | | |
| Operating leases | 5.2 | % | | 5.2 | % |
| Finance leases | 6.3 | % | | 6.7 | % |
As of December 31, 2021, the maturities of the Company’s operating and finance lease liabilities were as follows:
| | | | | | | | | | | |
| (in thousands) | Operating Leases | | Finance Leases |
| Year ending December 31, | | | |
| 2022 | $ | 361 | | | $ | 280 | |
| 2023 | — | | | 359 | |
| 2024 | — | | | 137 | |
| 2025 | — | | | 100 | |
| 2026 | — | | | 1 | |
| Thereafter | — | | | — | |
| Total lease payments | 361 | | | 877 | |
| Less: Imputed interest | (4) | | | (69) | |
| Total | $ | 357 | | | $ | 808 | |
Supplemental disclosure for the Consolidated Balance Sheets related to the Company’s operating and finance leases was as follows:
| | | | | | | | | | | | | | | | | |
| Location on Consolidated Balance Sheets | | December 31, |
| (in thousands) | | 2021 | | 2020 |
| Operating Leases: | | | | | |
| Right-of-use assets | Other non-current assets | | $ | 340 | | | $ | 1,090 | |
| | | | | |
| Operating lease liability, current | Other current liabilities | | $ | 357 | | | $ | 761 | |
| Operating lease liability, non-current | Other non-current liabilities | | — | | | 357 | |
| Total operating lease liabilities | | | $ | 357 | | | $ | 1,118 | |
| | | | | |
| Finance Leases: | | | | | |
| Right-of-use assets | Finance lease right-of-use assets | | $ | 758 | | | $ | 1,028 | |
| | | | | |
| Finance lease liability, current | Current portion of finance lease liabilities | | $ | 254 | | | $ | 266 | |
| Finance lease liability, non-current | Finance lease liabilities, net of current portion | | 554 | | | 736 | |
| Total finance lease liabilities | | | $ | 808 | | | $ | 1,002 | |
NOTE 11—ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
Asset Retirement Obligations
The Company estimated AROs based on the requirements to reclaim its mine pit and related processing and separations facilities at Mountain Pass. Minor reclamation activities related to discrete portions of the Company’s operations are ongoing. As of December 31, 2021, the Company estimates a significant portion of the cash outflows for the major reclamation and the retirement of Mountain Pass will be incurred beginning in 2057, which reflects an update to the Company’s life of mine and expected cessation of other processing and separations activities for Mountain Pass.
Change in Mine Life and Effect on ARO
As a result of the updated life of mine, in the fourth quarter of 2021, the Company revised its estimated timing and cash flows pertaining to the settlement of the reclamation and removal activities associated with Mountain Pass. As a result of this update, the Company determined that the estimated commencement of the reclamation and removal activities will now occur in 2056 and 2057 for a significant portion of the assets subject to the ARO. These changes in estimates resulted in a decrement of $9.8 million, of which $8.7 million reduced the carrying amounts of the associated property, plant and equipment, and $1.1 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 year ended December 31, 2021.
Re-zoning Efforts
In March 2020, the Company commenced the process of requesting a re-zoning approval of certain of its properties such that certain of the Company’s processing facilities would be zoned for industrial end uses as opposed to the prior “resource conservation” designation. In June 2021, San Bernardino County approved the re-zoning request, which may obviate the Company’s current requirement to demolish and reclaim the impacted areas. The Company is currently evaluating the impact that the re-zoning has on its reclamation plan, which must still be approved by San Bernardino County and the State of California, and its related effect on the Company’s ARO. Upon final submission of the reclamation plan and approval, which has not yet occurred as of December 31, 2021, the Company will update the estimated cash flows underlying its ARO, as the Company’s existing reclamation obligations will not be legally reduced until such approval is obtained.
Rollforward of ARO Balances
The following is a summary of the Company’s AROs:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Beginning balance | $ | 25,646 | | | $ | 23,966 | |
| Obligations settled | (199) | | | (75) | |
| Accretion expense | 1,876 | | | 1,755 | |
| Additional AROs | 213 | | | — | |
| | | |
| Revisions in estimated cash flows | (9,779) | | | — | |
| Ending balance | $ | 17,757 | | | $ | 25,646 | |
The balance as of December 31, 2021 and 2020, included current portions of $0.1 million. The total estimated future undiscounted cash flows required to satisfy the AROs for the year ended December 31, 2021 and 2020 were $167.3 million and $142.3 million, respectively. As of December 31, 2021, the credit-adjusted risk-free rate ranged between 6.5% and 8.2% depending on the timing of expected settlement and when the layer or increment was recognized. There were no significant increments for the year ended December 31, 2021, and there were no significant increments or decrements for the years ended December 31, 2020 and 2019.
Financial Assurances and Surety Bonds
The Company is required to provide the applicable government agencies with financial assurances relating to the closure and reclamation obligations. As of December 31, 2021 and 2020, the Company had financial assurance requirements of $39.0 million and $38.4 million, respectively, which were satisfied with surety bonds placed with the California state and regional agencies that have historically been partially secured by restricted cash.
The following is a summary of restricted cash for surety bonds:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Beginning balance | $ | 8,700 | | | $ | 26,619 | |
| Additions | 32 | | | 135 | |
Refunds(1) | (8,732) | | | (18,054) | |
| Ending balance | $ | — | | | $ | 8,700 | |
(1)The reduction during the year ended December 31, 2021, was principally due to the continued improvement in the Company’s creditworthiness since the Business Combination.
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, the Company developed an estimate of future cash payments for the remediation plan.
As of December 31, 2021, the Company estimated the cash outflows related to these environmental activities will be incurred annually over the next 26 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 years ended December 31, 2021, 2020 and 2019.
The total estimated aggregate undiscounted cost of $27.7 million and $28.2 million as of December 31, 2021 and 2020, respectively, was principally related to water monitoring activities required by state and local agencies. Based on the Company’s 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 December 31, 2021 and 2020, included current portions of $0.5 million.
As of December 31, 2021, the total environmental remediation costs were as follows (in thousands):
| | | | | |
| Year ending December 31, | |
| 2022 | $ | 504 | |
| 2023 | 520 | |
| 2024 | 536 | |
| 2025 | 552 | |
| 2026 | 569 | |
| Thereafter | 24,998 | |
| Total | 27,679 | |
| Effect of discounting | (10,576) | |
| Total environmental obligations | $ | 17,103 | |
NOTE 12—INCOME TAXES
As discussed in Note 3, “Business Combination and Reverse Recapitalization,” the Business Combination was treated as a reverse recapitalization and the SNR Mineral Rights Acquisition was treated as an asset acquisition. Furthermore, MPMO was deemed to be the accounting acquirer and FVAC the accounting acquiree, which, for financial reporting purposes, results in MPMO’s historical financial information becoming that of the Company. For income tax purposes, the Business Combination was treated as a tax-free reorganization whereby the taxable years of MPMO and SNR ended on November 17, 2020, and the Company became the new parent and sole filer of a tax return for the remainder of 2020 as MPMO and SNR became disregarded entities for income tax purposes. Although the SNR Mineral Rights Acquisition was treated as an asset acquisition, the assets, liabilities and other attributes took carryover basis for tax purposes because of the tax-free reorganization nature of the transaction. Income tax benefit (expense) consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | (4,818) | | | $ | — | | | $ | — | |
| State | (2,915) | | | (156) | | | (1) | |
| Total current | (7,733) | | | (156) | | | (1) | |
| Deferred: | | | | | |
| Federal | (15,851) | | | 14,088 | | | — | |
| State | (1,574) | | | 3,704 | | | — | |
| Total deferred | (17,425) | | | 17,792 | | | — | |
| Total tax benefit (expense) | $ | (25,158) | | | $ | 17,636 | | | $ | (1) | |
During the years ended December 31, 2021 and 2020, the Company recorded $0.4 million and $4.7 million, respectively, related to certain deductible expenditures incurred in connection with the Business Combination to “Additional paid-in capital.”
Income (loss) before income taxes, by tax jurisdiction, was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| United States | $ | 160,195 | | | $ | (39,461) | | | $ | (6,754) | |
Income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income (loss) as a result of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands, except tax rates) | Percent | | Amount | | Percent | | Amount | | Percent | | Amount |
| Computed income tax benefit (expense) at the statutory rate | 21.0 | % | | $ | (33,641) | | | 21.0 | % | | $ | 8,287 | | | 21.0 | % | | $ | 1,419 | |
| Changes resulting from: | | | | | | | | | | | |
| State and local income taxes, net of federal benefits | 2.7 | % | | (4,288) | | | 4.3 | % | | 1,729 | | | 6.8 | % | | 459 | |
| Limitation on officer’s compensation | 1.7 | % | | (2,638) | | | (1.2) | % | | (478) | | | — | % | | — | |
| Depletion in excess of basis | (6.1) | % | | 9,663 | | | 1.1 | % | | 425 | | | — | % | | — | |
| Paycheck Protection Loan forgiveness | (0.5) | % | | 714 | | | — | % | | — | | | — | % | | — | |
| Foreign-derived intangible income | (1.8) | % | | 2,886 | | | — | % | | — | | | — | % | | — | |
| California competes tax credit, net of federal detriment | (1.2) | % | | 1,975 | | | — | % | | — | | | — | % | | — | |
| Effect of other permanent differences | — | % | | 67 | | | (0.3) | % | | (110) | | | (0.5) | % | | (35) | |
| Valuation allowance | 0.5 | % | | (821) | | | 23.7 | % | | 9,333 | | | (25.5) | % | | (1,720) | |
| Other items | (0.6) | % | | 925 | | | (3.9) | % | | (1,550) | | | (1.8) | % | | (124) | |
| Total effective tax rate and income tax benefit (expense) | 15.7 | % | | $ | (25,158) | | | 44.7 | % | | $ | 17,636 | | | — | % | | $ | (1) | |
The tax effects of temporary differences that gave rise to significant portions of the deferred income tax assets and deferred income tax liabilities were as follows: | | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Deferred tax assets: | | | |
| Asset retirement and environmental obligations | $ | 8,744 | | | $ | 10,727 | |
| Other deferred tax assets | 636 | | | 860 | |
| Net operating losses | 2,174 | | | 4,248 | |
| Interest expense carryforward | — | | | 63 | |
| Inventory | 6,695 | | | 1,667 | |
| | | |
| | | |
| Offtake Advances, net of debt discount | 4,034 | | | 16,665 | |
| Shenghe Warrant | 2,329 | | | 10,087 | |
| | | |
| Stock-based compensation | 2,688 | | | 536 | |
| Organization costs | 860 | | | 943 | |
| Credits | 764 | | | — | |
| Gross deferred tax assets | 28,924 | | | 45,796 | |
| Less: Valuation allowance | (3,192) | | | (2,370) | |
| Net deferred tax assets | 25,732 | | | 43,426 | |
| | | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (14,077) | | | (7,653) | |
| Prepaid expenses | (1,192) | | | (273) | |
| Deferred revenue | (9,938) | | | (13,260) | |
| | | |
| Mineral rights | (104,735) | | | (109,174) | |
| Other | (290) | | | (539) | |
| Total deferred tax liabilities | (130,232) | | | (130,899) | |
| Long-term deferred tax liabilities, net | $ | (104,500) | | | $ | (87,473) | |
As of December 31, 2021 and 2020, the Company had net operating loss carryforwards for federal income tax purposes of zero and $16.3 million, respectively, and $7.4 million in both periods for state income tax purposes. Of the state carryforward amount as of December 31, 2021, $4.9 million can be used to offset taxable income and reduce income taxes payable in future
periods until its expiration in 2040, and the remaining balance of $2.5 million can be carried forward until its expiration in 2043. As of December 31, 2021, the Company considered the positive and negative evidence to determine the need for a valuation allowance to offset its deferred tax assets and has concluded that it is more likely than not that, with the exception of certain deferred tax assets related to asset retirement and environmental obligations, its deferred tax assets will be realized through future taxable temporary differences, principally resulting from the significant deferred tax liability recorded as a result of the SNR Mineral Rights Acquisition which occurred during the 2020 tax year.
During the fourth quarter of 2021, the Company received notice from the state of California that it had been awarded a California Competes Tax Credit (“CCTC”) of $14.8 million that is available to be offset against the Company’s California state income tax liability over the next several years. The credit is allocated in varying amounts over a five-year period based on the Company’s ability to meet certain milestones related to California employees hired, the annual wage of these employees, and the capital investments made by the Company in California. Once the annual milestones are met, a credit amount is awarded. However, a portion of the credit could be “clawed back” if the milestones are not continually met for each of the three following years. For the year ended December 31, 2021, it was determined that the Company had met the first year’s milestones for the CCTC and recorded a credit of $2.5 million in the fourth quarter of 2021 that resulted in an income tax benefit and a reduction to the Company’s California state income tax payable for the 2021 tax year.
The Company has evaluated its tax positions for the years ended December 31, 2021, 2020 and 2019 and determined that there were no uncertain tax positions requiring recognition in the Consolidated Financial Statements. The tax years from 2018 onward remain open to examination by the taxing jurisdictions to which the Company is subject.
NOTE 13—COMMITMENTS AND CONTINGENCIES
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.
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 approximately $1 million, including legal fees, subject to the court’s approval of the class settlement. This amount is included in “General and administrative” within the Consolidated Statement of Operations for the year ended December 31, 2021.
NOTE 14—STOCKHOLDERS’ EQUITY
Common Stock and Preferred Stock
On November 17, 2020, in connection with the consummation of the Business Combination, FVAC amended and restated its first amended and restated certificate of incorporation (the “Second Amended and Restated Certificate of Incorporation”). Pursuant to the terms of the Second Amended and Restated Certificate of Incorporation, the Company increased the number of authorized shares of all classes of capital stock from 221,000,000 shares to 500,000,000, consisting of (i) 450,000,000 shares of common stock (previously defined as “Common Stock”) and (ii) 50,000,000 shares of preferred stock (“Preferred Stock”), each with a par value of $0.0001 per share.
As discussed in Note 3, “Business Combination and Reverse Recapitalization,” there were 149,308,637 shares of the Company’s Common Stock issued and outstanding immediately after the closing of the Business Combination (including restricted stock issued to certain executives upon closing). Furthermore, in December 2020, the criteria for the Vesting Shares and the Earnout Shares were attained, which resulted in the issuance of 8,625,000 and 12,859,898 shares, respectively, of the Company’s Common Stock. Public Warrants
Warrants to purchase 11,499,968 shares of the Company’s Common Stock at $11.50 per share were issued in connection with FVAC’s initial public offering (“IPO”) (the “Public Warrants”) pursuant to the Warrant Agreement, dated April 29, 2020 (the “Warrant Agreement”), by and between the Company and Continental Stock Transfer & Trust Company (“CST”), as warrant agent. These warrants qualified as equity instruments as they were indexed to the Company’s stock and settlement in shares was within the Company’s control. Accordingly, the Public Warrants were included in “Additional paid-in capital” within the Company’s Consolidated Balance Sheet as of December 31, 2020.
On May 4, 2021, at the direction of the Company, CST, in its capacity as warrant agent, delivered a notice of redemption to each of the registered holders of the outstanding Public Warrants for a redemption price of $0.01 per warrant (the “Redemption Price”), that remained outstanding on June 7, 2021 (the “Redemption Date”). In accordance with the Warrant Agreement, the Company’s Board of Directors elected to require that, upon delivery of the notice of redemption, all Public Warrants were to be exercised only on a “cashless basis.” Accordingly, a holder exercising a Public Warrant was deemed to pay the $11.50 per warrant exercise price by the surrender of 0.3808 of a share of Common Stock that such holder would have been entitled to receive upon a cash exercise, resulting in exercising warrant holders receiving 0.6192 of a share of Common Stock for each Public Warrant surrendered for exercise. All Public Warrants that remained unexercised on the Redemption Date were delisted, voided and no longer exercisable, and the holders had no rights with respect to those Public Warrants, except to receive the Redemption Price.
During the year ended December 31, 2021, the Company issued 7,080,005 shares of its Common Stock as a result of the cashless exercise of 11,434,455 Public Warrants. The Company redeemed the remaining 65,513 Public Warrants outstanding at the Redemption Date for a nominal amount.
NOTE 15—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 (“SARs”); restricted stock, restricted stock units (“RSUs”) and other stock awards (“Stock Awards”); and performance awards. As of December 31, 2021, the Company has not issued any stock options, SARs or performance awards.
Pursuant to the 2020 Incentive Plan, 9,653,671 shares of Common Stock were initially available for issuance. The number of shares of Common Stock available under the 2020 Incentive Plan may be increased annually on the first day of each calendar year, beginning with the year ended December 31, 2021, and continuing until (and including) the year ending December 31, 2030, with such annual increase equal to the lesser of (i) 2% of the number of shares of stock issued and outstanding on December 31st of the immediately preceding fiscal year and (ii) an amount determined by the Board of Directors. The number of shares of Common Stock that remain available for future grants under the 2020 Incentive Plan shall be reduced by the sum of the aggregate number of shares of Common Stock that become subject to outstanding options, outstanding free-standing SARs, outstanding Stock Awards, and outstanding performance awards denominated in shares of Common Stock, other than substitute awards. As of December 31, 2021, there were 6,454,702 shares available for future grants under the 2020 Incentive Plan.
Directors Compensation: RSUs granted to non-employee directors vest into tax-deferred stock units (“DSUs”) upon the earlier of one year after the grant date and the next annual stockholder meeting. The DSUs are settled as shares of Common Stock of the Company upon the earlier of (i) June 15th of the fifth year after grant, (ii) a change in control of the Company, or (iii) the director’s separation from the Board, unless the director elects to defer settlement until retirement. The Company granted 12,584 and 15,992 shares of RSUs to non-employee directors for the years ended December 31, 2021 and 2020, respectively.
In December 2020, the Company adopted a director deferred compensation plan (the “2021 Director Deferred Compensation Plan”). Under the 2021 Director Deferred Compensation Plan, non-employee members of the Board may elect to defer their annual cash retainer into DSUs, which vest immediately and are settled in the same manner as the RSUs granted to non-employee directors described above. During the year ended December 31, 2021, the Company granted an additional 5,810 shares of RSUs to non-employee directors under the 2021 Director Deferred Compensation Plan.
Stock Awards: Pursuant to the terms and conditions of certain executive employment agreements, in connection with the consummation of the Business Combination, 2,013,006 shares of restricted stock were issued during the year ended December 31, 2020, of which 200,000 shares immediately vested and the remainder of shares were to vest ratably pursuant the respective employment agreements over the requisite service period of four years.
In addition, we granted 1,026,387 and 386,639 RSUs to employees, during the years ended December 31, 2021 and 2020, respectively, which, with the exception of 80,350 RSUs granted during the year ended December 31, 2021, that vested immediately, vest ratably in equal installments over the requisite service period of four years. The grant date fair value of our Stock Awards is based on the closing stock price of the Company’s shares of Common Stock on the date of grant.
The following table contains information on our Stock Awards:
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested as of January 1, 2021 | 2,215,637 | | | $ | 14.54 | |
| Granted | 1,044,781 | | | $ | 41.24 | |
| Vested | (271,828) | | | $ | 22.19 | |
| Forfeited | (118,910) | | | $ | 15.12 | |
| Nonvested as of December 31, 2021 | 2,869,680 | | | $ | 23.51 | |
As of December 31, 2021, the unamortized compensation cost not yet recognized related to Stock Awards totaled $48.4 million and the weighted-average period over which the costs are expected to be recognized was 2.3 years. The total fair value of Stock Awards that vested during the years ended December 31, 2021 and 2020, was $10.9 million and $2.9 million, respectively.
Stock-Based Compensation Expense: During the years ended December 31, 2021 and 2020, the Company recognized $22.9 million and $5.0 million, respectively, of stock-based compensation expense, which is principally included within the Consolidated Statements of Operations in “General and administrative.” The total income tax benefit recognized within the Consolidated Statements of Operations for stock-based compensation arrangements was $3.2 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively. There was no stock-based compensation expense recognized for the year ended December 31, 2019.
NOTE 16—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 Consolidated Balance Sheets approximate the fair value of cash, cash equivalents and restricted cash due to the short-term nature of these assets.
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 are classified within Level 3 of the fair value hierarchy because there are unobservable inputs that follow an imputed interest rate model to calculate the amortization of the embedded debt discount, which is 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 are unobservable inputs, was used to estimate the fair value of the liability balance classified within Level 3 of the fair value hierarchy.
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.
As required by ASC 820, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (in thousands) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 519,652 | | | $ | 519,652 | | | $ | 519,652 | | | $ | — | | | $ | — | |
| Restricted cash | $ | 12,788 | | | $ | 12,788 | | | $ | 12,788 | | | $ | — | | | $ | — | |
| Financial liabilities: | | | | | | | | | |
| Offtake Advances | $ | 66,450 | | | $ | 68,151 | | | $ | — | | | $ | — | | | $ | 68,151 | |
| Equipment notes | $ | 2,102 | | | $ | 2,077 | | | $ | — | | | $ | 2,077 | | | $ | — | |
NOTE 17—EARNINGS (LOSS) PER SHARE
Pursuant to the Second Amended and Restated Certificate of Incorporation and as a result of the Business Combination and reverse recapitalization, the Company has retrospectively adjusted the weighted-average shares outstanding prior to November 17, 2020, to give effect to the exchange ratio used to determine the number of shares of Common Stock into which the MPMO common units and preferred units, which were outstanding prior the Business Combination, converted.
Basic EPS is computed based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on 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. During the periods when there is a net loss, potentially dilutive common stock equivalents have been excluded from the calculation of diluted loss per share as their effect is anti-dilutive.
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Weighted-average shares outstanding, basic | 173,469,546 | | | 79,690,821 | | | 66,556,975 | |
| Assumed conversion of Public Warrants | 2,840,624 | | | — | | | — | |
| Assumed conversion of Convertible Notes | 11,997,860 | | | — | | | — | |
| Assumed conversion of restricted stock | 1,257,360 | | | — | | | — | |
| Assumed conversion of restricted stock units | 278,638 | | | — | | | — | |
| Weighted-average shares outstanding, diluted | 189,844,028 | | | 79,690,821 | | | 66,556,975 | |
The following table presents the calculation of basic and diluted EPS for the Company’s Common Stock:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands, except share and per share data) | 2021 | | 2020 | | 2019 |
| Calculation of basic EPS: | | | | | |
| Net income (loss) | $ | 135,037 | | | $ | (21,825) | | | $ | (6,755) | |
| Weighted-average shares outstanding, basic | 173,469,546 | | | 79,690,821 | | | 66,556,975 | |
| Basic EPS | $ | 0.78 | | | $ | (0.27) | | | $ | (0.10) | |
| | | | | |
| Calculation of diluted EPS: | | | | | |
| Net income (loss) | $ | 135,037 | | | $ | (21,825) | | | $ | (6,755) | |
Interest expense, net of tax(1): | | | | | |
| Convertible Notes | 3,366 | | | — | | | — | |
| Diluted income (loss) | $ | 138,403 | | | $ | (21,825) | | | $ | (6,755) | |
| Weighted-average shares outstanding, diluted | 189,844,028 | | | 79,690,821 | | | 66,556,975 | |
| Diluted EPS | $ | 0.73 | | | $ | (0.27) | | | $ | (0.10) | |
(1)The year ended December 31, 2021, was tax-effected at a rate of 15.7%. As discussed in Note 9, “Debt Obligations,” the Convertible Notes were issued in March 2021; therefore, no adjustment is required for the years ended December 31, 2020 and 2019. The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding as they would be anti-dilutive:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Public Warrants | — | | | 11,499,968 | | | — | |
| Restricted stock | — | | | 1,813,006 | | | — | |
| RSUs | 18,322 | | | 397,662 | | | — | |
| Total | 18,322 | | | 13,710,636 | | | — | |
NOTE 18—RELATED-PARTY TRANSACTIONS
Product Sales and Cost of Sales: Product sales to Shenghe were $326.6 million, $133.7 million and $73.0 million for the years ended December 31, 2021, 2020 and 2019, respectively, and are discussed in more detail in Note 5, “Revenue Recognition.” Cost of sales, which includes shipping and freight, related to sales made to Shenghe was $76.0 million, $63.3 million and $60.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. Purchases: The Company purchases reagent products (produced by an unrelated third party manufacturer) used in the flotation process from Shenghe. Purchases for the years ended December 31, 2021, 2020 and 2019, totaled $4.8 million, $2.6 million and $3.2 million, respectively.
Royalty Agreement: In April 2017, MPMO entered into a 30-year mineral lease and license agreement with SNR (the “Royalty Agreement”) under which MPMO paid royalties to SNR in the amount of 2.5% of the gross proceeds from the sale of rare earth products made from ores extracted from the Mountain Pass mine, subject to a minimum non-refundable royalty of $0.5 million per year. Excluding payments of these minimums (which were treated as a reduction to the obligation), royalty
expense was $2.4 million and $1.9 million, and the Company paid out $4.3 million and $1.2 million for the years ended December 31, 2020 and 2019, respectively.
At the time of entering into the Royalty Agreement, MPMO and SNR had shareholders common to both entities; however, they were not partners in business nor did they hold any other joint interest. In connection with the Business Combination, MPMO and SNR both became wholly-owned subsidiaries of the Company. Consequently, the intercompany transactions between MPMO and SNR after the date of the SNR Mineral Rights Acquisition and the Business Combination eliminate in consolidation, including the effects of the Royalty Agreement.
Accounts Receivable: As of December 31, 2021 and 2020, $49.9 million and $3.5 million of the accounts receivable, respectively, and as stated on the Consolidated Balance Sheets, were receivable from and pertained to sales made to Shenghe in the ordinary course of business.
NOTE 19—SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Supplemental cash flow information: | | | | | |
| Cash paid for interest | $ | 1,204 | | | $ | 3,089 | | | $ | 926 | |
| Cash payment related to income taxes, net | $ | 4,172 | | | $ | 255 | | | $ | 1 | |
| Supplemental non-cash investing and financing activities: | | | | | |
| Property, plant and equipment acquired with seller-financed equipment notes | $ | 9,407 | | | $ | 1,216 | | | $ | 569 | |
| Property, plant and equipment purchased but not yet paid | $ | 14,082 | | | $ | 4,054 | | | $ | — | |
| SNR Mineral Rights Acquisition | $ | — | | | $ | 324,125 | | | $ | — | |
Revenue recognized in exchange for debt principal reduction(1) | $ | 54,802 | | | $ | 21,312 | | | $ | — | |
| Decrease in estimates of asset retirement costs | $ | 8,713 | | | $ | — | | | $ | — | |
| Paycheck Protection Loan forgiveness | $ | 3,401 | | | $ | — | | | $ | — | |
| | | | | |
(1)Of the amounts for the years ended December 31, 2021 and 2020, $52.8 million and $12.0 million, respectively, pertained to product sales to Shenghe, as discussed in Note 9, “Debt Obligations.” Additionally, $2.0 million pertained to the tariff rebate for the year ended December 31, 2021, and $9.3 million pertained to the tariff rebate and changes in estimates of realized prices of prior period sales for the year ended December 31, 2020, as discussed in Note 5, “Revenue Recognition.” NOTE 20—SUBSEQUENT EVENTS
In February 2022, we were awarded a $35.0 million contract by the Department of Defense’s Office of Industrial Base Policy to design and build a facility to process heavy rare earth elements (“HREE”). Successful completion of this project will establish the first processing and separation facility of its kind for HREEs in support of commercial and defense applications in the United States. The HREE processing and separations facility will be built at Mountain Pass and tie in with the rest of our Stage II facilities.
In February 2022, the Company entered into a term sheet with Shenghe which provides that once the A&R Offtake Agreement expires, the Company will continue to sell and Shenghe will continue to purchase the Company’s rare earth concentrate under an offtake arrangement. In connection with this term sheet, the Company is currently negotiating a new offtake agreement with Shenghe. As discussed in Note 4, “Relationship and Agreements with Shenghe,” and Note 9, “Debt Obligations,” by the end of the first quarter of 2022, upon full repayment of the Prepaid Balance, which is accounted for as a debt obligation, the A&R Offtake Agreement will terminate.