MP Materials Corp. / DE - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2021


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

For the transition period from __________ to __________

Commission File Number: 001-39277

MP MATERIALS CORP.

(Exact name of registrant as specified in its charter)


Delaware						84-4465489
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

6720 Via Austi Parkway, Suite 450

Las Vegas, Nevada 89119

(702) 844-6111

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value of $0.0001 per share	MP	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☑

Smaller reporting company

☑

Emerging growth company

☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 1, 2021, the number of shares of the registrant’s common stock outstanding was 177,747,598.

MP MATERIALS CORP. AND SUBSIDIARIES

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			Page

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets (unaudited)			1
Condensed Consolidated Statements of Operations (unaudited)			2
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (unaudited)			3
Condensed Consolidated Statements of Cash Flows (unaudited)			4
Notes to Condensed Consolidated Financial Statements (unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39

PART II—OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39


Item 4. Mine Safety Disclosures			40

Item 6. Exhibits			41
Signatures			42

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References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Quarterly Report on Form 10-Q for the three months ended September 30, 2021 (this “Form 10-Q”), that are not historical facts are forward-looking statements under Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of the words such as “estimate,” “plan,” “shall,” “may,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target,” or similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements include, but are not limited to, statements regarding estimates and forecasts of other financial and performance metrics and projections of market opportunity. These statements are based on various assumptions, whether or not identified in this Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”), and on the current expectations of our management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual events and circumstances are beyond our control.

These forward-looking statements are subject to a number of risks and uncertainties, including:

•unanticipated costs or delays associated with our Stage II optimization project;

•uncertainties relating to our commercial arrangements with Shenghe Resources (Singapore) International Trading Pte. Ltd., an affiliate of Shenghe Resources Holding Co., Ltd., a global rare earth company listed on the Shanghai Stock Exchange;

•the ability to convert current commercial discussions with customers for the sale of rare earth oxide products into contracts;

•potential changes in China’s political environment and policies;

•fluctuations in demand for, and prices of, rare earth minerals and products;

•uncertainties relating to the COVID-19 pandemic, including the Delta variant or other variants;

•the intense competition within the rare earths mining and processing industry;

•uncertainties regarding the growth of existing and emerging uses for rare earth products;

•potential power shortages at the Mountain Pass facility;

•increasing costs or limited access to raw materials that may adversely affect our profitability;

•fluctuations in transportation costs or disruptions in transportation services;

•inability to meet individual customer specifications;

•diminished access to water;

•uncertainty in our estimates of rare earth oxide reserves;

•uncertainties regarding our ability to vertically integrate into further downstream processing and reach full revenue potential;

•risks associated with work stoppages;

•a shortage of skilled technicians and engineers;

•loss of key personnel;

•risks associated with the inherent dangers of mining activity;

•risks associated with events outside of our control, such as natural disasters, climate change, wars or health epidemics or pandemics;

•risks related to technology systems and security breaches;

•risks associated with our intellectual property rights;

•ability to compete with substitutions for rare earth minerals;

•ability to maintain satisfactory labor relations;

•ability to comply with various government regulations that are applicable to our business;

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•ability to maintain our governmental licenses, registrations, permits, and approvals necessary for us to operate our business;

•risks relating to extensive and costly environmental regulatory requirements;

•risks associated with the terms of our convertible notes; and

•the other factors described elsewhere in this Form 10-Q, included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors” or as described in our Form 10-K, our Form 10-Q for the quarterly period ended March 31, 2021 (the “First Quarter Form 10-Q”), or as described in the other documents and reports we file with the Securities and Exchange Commission (“SEC”).

If any of these risks materialize or our assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements.

These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Form 10-Q are more fully described within Part II, Item 1A, “Risk Factors” in this Form 10-Q and “Part I, Item 1A. Risk Factors” in our Form 10-K and our First Quarter Form 10-Q. Such risks are not exhaustive. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, statements of belief and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us, as applicable, as of the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MP MATERIALS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2021		December 31, 2020
(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents	$	1,179,371	$	519,652
Accounts receivable (including related party), net of allowance for credit losses of $0 and $0, respectively	37,095		3,589
Inventories	34,126		32,272
Prepaid expenses and other current assets	4,954		5,534
Total current assets	1,255,546		561,047
Non-current assets
Restricted cash	9,124		9,100
Property, plant and equipment, net	582,838		501,974
Finance lease right-of-use assets	847		1,028
Other non-current assets	1,099		1,139
Total non-current assets	593,908		513,241
Total assets	$	1,849,454	$	1,074,288
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	27,842	$	16,159
Income taxes payable	8,097		—
Current installments of long-term debt	—		2,403
Current installments of long-term debt—related party	30,937		22,070
Current portion of finance lease liabilities	254		266
Other current liabilities	3,637		2,163
Total current liabilities	70,767		43,061
Non-current liabilities
Asset retirement obligations	26,925		25,570
Environmental obligations	16,530		16,602
Long-term debt, net of current portion	674,050		961
Long-term debt—related party, net of current portion	—		44,380
Finance lease liabilities, net of current portion	625		736
Deferred income taxes	98,444		87,473
Other non-current liabilities	7,918		1,628
Total non-current liabilities	824,492		177,350
Total liabilities	895,259		220,411
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock ($0.0001 par value, 50,000,000 shares authorized, none issued and outstanding in either period)	—		—
Common stock ($0.0001 par value, 450,000,000 shares authorized, 177,747,598 and 170,719,979 shares issued and outstanding, as of September 30, 2021, and December 31, 2020, respectively)	18		17
Additional paid-in capital	930,751		916,482
Retained earnings (accumulated deficit)	23,426		(62,622)
Total stockholders’ equity	954,195		853,877
Total liabilities and stockholders’ equity	$	1,849,454	$	1,074,288

See accompanying notes to the Condensed Consolidated Financial Statements.

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MP MATERIALS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands, except share and per share data)	2021		2020		2021		2020
Revenue:
Product sales (including related party)	$	98,581	$	40,864	$	230,842	$	91,699

Other sales	1,173		158		2,001		433
Total revenue	99,754		41,022		232,843		92,132

Operating costs and expenses:
Cost of sales (including related party)(excluding depreciation, depletion and amortization)	21,907		15,425		57,798		44,957
General and administrative	14,881		5,635		40,986		14,477
Advanced projects, development and other	1,327		11		2,436		96
Depreciation, depletion and amortization	6,951		2,179		19,767		4,832
Accretion of asset retirement and environmental obligations	595		563		1,780		1,691
Royalty expense to SNR	—		1,055		—		1,908
Write-down of inventories	—		—		1,809		—
Settlement charge	—		—		—		66,615
Total operating costs and expenses	45,661		24,868		124,576		134,576
Operating income (loss)	54,093		16,154		108,267		(42,444)
Other income, net	97		61		3,656		298
Interest expense, net	(2,624)		(1,713)		(6,417)		(3,582)
Income (loss) before income taxes	51,566		14,502		105,506		(45,728)
Income tax benefit (expense)	(8,803)		125		(19,458)		(211)
Net income (loss)	$	42,763	$	14,627	$	86,048	$	(45,939)

Net income (loss) per share:
Basic	$	0.24	$	0.20	$	0.50	$	(0.67)
Diluted	$	0.23	$	0.20	$	0.47	$	(0.67)

Weighted-average shares outstanding:
Basic	176,053,586		71,941,538		172,577,303		68,875,874
Diluted	193,215,313		71,941,538		188,639,373		68,875,874

See accompanying notes to the Condensed Consolidated Financial Statements.

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MP MATERIALS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)


	Three months ended September 30, 2021 and 2020
	Preferred Stock			Common Stock			Shenghe Warrant		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity (Deficit)
(in thousands, except share data)	Shares	Amount		Shares	Amount
Balance as of July 1, 2021	—	$	—	177,748,487	$	18	$	—	$	925,944	$	(19,337)	$	906,625

Stock-based compensation	—	—		—	—		—		4,552		—		4,552

Shares used to settle payroll tax withholding	—	—		(889)	—		—		(36)		—		(36)
Net income	—	—		—	—		—		—		42,763		42,763
Other	—	—		—	—		—		291		—		291
Balance as of September 30, 2021	—	$	—	177,747,598	$	18	$	—	$	930,751	$	23,426	$	954,195

Balance as of July 1, 2020	—	$	—	71,941,538	$	7	$	53,846	$	22,768	$	(101,363)	$	(24,742)

Net income	—	—		—	—		—		—		14,627		14,627
Balance as of September 30, 2020	—	$	—	71,941,538	$	7	$	53,846	$	22,768	$	(86,736)	$	(10,115)


	Nine months ended September 30, 2021 and 2020
	Preferred Stock			Common Stock			Shenghe Warrant		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity (Deficit)
(in thousands, except share data)	Shares	Amount		Shares	Amount
Balance as of January 1, 2021	—	$	—	170,719,979	$	17	$	—	$	916,482	$	(62,622)	$	853,877
Redemption of Public Warrants	—	—		7,080,005	1		—		(2)		—		(1)
Stock-based compensation	—	—		54,722	—		—		14,723		—		14,723
Forfeiture of restricted stock	—	—		(90,000)	—		—		—		—		—
Shares used to settle payroll tax withholding	—	—		(17,108)	—		—		(563)		—		(563)
Net income	—	—		—	—		—		—		86,048		86,048
Other	—	—		—	—		—		111				111
Balance as of September 30, 2021	—	$	—	177,747,598	$	18	$	—	$	930,751	$	23,426	$	954,195

Balance as of January 1, 2020	—	$	—	66,556,975	$	7	$	—	$	22,768	$	(40,797)	$	(18,022)
Issuance of Shenghe Warrant	—	—		5,384,563	—		53,846		—		—		53,846
Net loss	—	—		—	—		—		—		(45,939)		(45,939)
Balance as of September 30, 2020	—	$	—	71,941,538	$	7	$	53,846	$	22,768	$	(86,736)	$	(10,115)

See accompanying notes to the Condensed Consolidated Financial Statements.

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MP MATERIALS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the nine months ended September 30,
(in thousands)	2021		2020
Operating activities:
Net income (loss)	$	86,048	$	(45,939)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization	19,767		4,832
Accretion of asset retirement and environmental obligations	1,780		1,691
Gain on forgiveness of Paycheck Protection Loan	(3,401)		—
Loss on sale or disposal of long-lived assets, net	219		—
Stock-based compensation expense	14,723		—
Accretion of debt discount and amortization of debt issuance costs	5,388		1,866
Write-down of inventories	1,809		—
Non-cash settlement charge	—		66,615
Revenue recognized in exchange for debt principal reduction	(38,858)		(14,741)
Deferred income taxes	11,262		—
Decrease (increase) in operating assets:
Accounts receivable (including related party)	(33,506)		(3,204)
Inventories	(3,663)		(7,992)
Prepaid expenses, other current and non-current assets	(2,352)		(1,204)
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities	4,304		(2,874)
Income taxes payable	8,097		—
Refund liability to related party	—		(2,746)
Deferred revenue from related party	—		1,933
Other current and non-current liabilities	(1,153)		1,445
Net cash provided by (used in) operating activities	70,464		(318)
Investing activities:
Additions of property, plant and equipment	(86,420)		(9,695)
Proceeds from sale of property, plant and equipment	125		—
Proceeds from government awards used for construction	2,615		—
Net cash used in investing activities	(83,680)		(9,695)
Financing activities:
Proceeds from issuance of long-term debt	690,000		3,364
Proceeds from Second Additional Advance	—		35,450
Principal payments on debt obligations and finance leases	(1,707)		(1,049)
Payment of debt issuance costs	(17,749)		—
Payment of underwriting and transaction costs	—		(1,579)
Other	(934)		—
Net cash provided by financing activities	669,610		36,186
Net change in cash, cash equivalents and restricted cash	656,394		26,173
Cash, cash equivalents and restricted cash beginning balance	532,440		29,572
Cash, cash equivalents and restricted cash ending balance	$	1,188,834	$	55,745

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	1,179,371	$	30,244
Restricted cash, current	339		96
Restricted cash, non-current	9,124		25,405
Total cash, cash equivalents and restricted cash	$	1,188,834	$	55,745

See accompanying notes to the Condensed Consolidated Financial Statements.

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MP MATERIALS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business: We are the largest producer of rare earth materials in the Western Hemisphere. The Company owns and operates 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 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 minerals. The mine achieved commercial operations in July 2019 and we are currently working to restore the remainder of the facility for use in processing separated rare earth products. The Company is headquartered in Las Vegas, Nevada. References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.

The Business Combination (as defined below) was consummated on November 17, 2020, pursuant to the terms of a merger agreement entered into on July 15, 2020 (the “Merger Agreement”). Pursuant to the Merger Agreement, MPMO and SNR were combined with Fortress Value Acquisition Corp., a special purpose acquisition company (“FVAC”) (the “Business Combination”), and became indirect 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, and 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 May 2017, 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 has significant knowledge of the mining, processing, marketing and distribution of rare earth products, as well as access to customers in the Chinese market for these products. As part of these arrangements, Shenghe (and its controlled affiliates) became both the principal customer and a related party when Leshan Shenghe obtained a preferred interest in the Company, which was ultimately exchanged for shares of the Company’s common stock with a par value of $0.0001 per share (“Common Stock”) in connection with the Business Combination. See also Note 3, “Relationship and Agreements with Shenghe,” for additional information.

Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker views the Company’s operations and manages the business as one reportable segment.

The cash flows and profitability of the Company’s operations are significantly affected by the market price of rare earth products. The prices of rare earth products are affected by numerous factors beyond the Company’s control. The products of the Company are sold globally, with a primary focus in the Asian market due to the refining capabilities of the region. Rare earth products are critical inputs in hundreds of existing and emerging clean-tech applications including electric vehicles and wind turbines as well as drones and defense applications.

Basis of Presentation: The unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of MP Materials Corp. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Concentration of Risk: As of September 30, 2021, Shenghe accounted for more than 90% of product sales. Shenghe, a related party of the Company, has entered into an arrangement to purchase substantially all of the Company’s production, and has previously purchased portions of the Company’s stockpile inventory. While as with any contract there is risk of nonperformance, we do not believe that it is reasonably possible that Shenghe would terminate the agreement as it would significantly delay Shenghe’s recovery of non-interest-bearing advance payments that are recognized by the Company as debt. As discussed in Note 8, “Debt Obligations,” based on current forecasts, the Company expects to repay the obligation within the next year. See Note 3, “Relationship and Agreements with Shenghe,” for additional information.

Furthermore, while revenue is generated in the United States, our principal customer is located in China and may transport and sell products in the Chinese market; therefore, the Company’s gross profit 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, where our principal customer is located. The outbreak of COVID-19 has grown both in the United States and globally, and related government and private sector responsive actions have adversely affected the global economy, including significant business and supply chain disruption as well as broad-based changes in supply and demand. In December 2019, a series of emergency quarantine measures taken by the Chinese government disrupted domestic business activities in China during the weeks after the initial outbreak of COVID-19. These disruptions have occurred periodically since the start of COVID-19 outbreak as measures intended to impede the spread of the virus have adapted. Since the initial COVID-19 outbreak, many countries, including the United States, have imposed restrictions on travel to and from China and elsewhere, as well as general movement restrictions, business closures and other measures imposed to slow the spread of COVID-19.

At the onset of the outbreak in the first quarter of 2020, we initially experienced shipping delays due to overseas port slowdowns and container shortages, but we did not experience a reduction in production or sales. However, beginning in the fourth quarter of 2020 and continuing through the third quarter of 2021, we again saw shipping delays and container shortages from congestion at port facilities and trucking shortages, which has been exacerbated by COVID-19 and resulting supply chain disruptions. Congestion at U.S. and international ports could affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels.

As the situation continues to develop, including as a result of new variants of COVID-19 (such as the Delta variant), it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company’s business and results of operations. While the quarantine, social distancing and other regulatory measures instituted or recommended in response to COVID-19 are expected to be temporary, the duration of the business disruptions, and related financial impact, cannot be estimated at this time.

Use of Estimates: The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.

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.

Government Grants: In accounting for government contracts, 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 Note 7, “Property, Plant and Equipment,” for more information.

Recently Issued Accounting Pronouncements: As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public

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companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 unaudited Condensed 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 unaudited Condensed 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 Accounting Standards Codification (“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 earnings per share (“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 8, “Debt Obligations,” for a discussion of our Convertible Notes (as defined in Note 8, “Debt Obligations”), which we issued on March 26, 2021.

Reclassifications: Certain amounts in prior periods have been reclassified to conform to the current year presentation.

NOTE 3—RELATIONSHIP AND AGREEMENTS WITH SHENGHE

Original Commercial Agreements

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).

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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. We retained the right to distribute our 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.

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”). 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. The Shenghe Warrant was ultimately exchanged for shares of 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 4, “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 its prepayment funding. Following that termination, the Company will have no contractual arrangements with Shenghe for the distribution, marketing or sale of rare earth products.

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

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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 4, “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 4, “Revenue Recognition,” and for further discussion of the debt obligation, see Note 8, “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 next stage of the mine and facility’s development (referred to below as the “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 the Stage II optimization project, 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.

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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 second quarter of 2020.

Ultimately, the renegotiations resulted in the following exchange, which is also referenced in Note 18, “Supplemental Cash Flow Information,” as a transaction with significant non-cash components:


(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

(1)See Note 8, “Debt Obligations.”

(2)See Note 4, “Revenue Recognition.”

(3)This non-cash charge is included within the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020, as “Settlement charge.”

NOTE 4—REVENUE RECOGNITION

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 3, “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 to Shenghe is in the form of debt repayment, with the remainder paid in cash. See Note 8, “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).

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Deferred Revenue: As mentioned in Note 3, “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 8, “Debt Obligations”). Significant activity for the deferred revenue balance (including current portion) was as follows:


	For the nine months ended September 30,
(in thousands)	2021		2020
Opening balance(1)	$	—	$	35,543
Prepayments received(2)	—		11,050

Revenue recognized(3)	—		(9,117)
Effect of June 2020 Modification(4)	—		(37,476)
Ending balance	$	—	$	—

(1)Of the amount for the nine months ended September 30, 2020, $6.6 million was classified as current based on when such amount was expected to be realized.

(2)Amount for the nine months ended September 30, 2020, relates to the contractual commitment for Shenghe to provide funds to the Company (the Initial Prepayment Amount). After the amount pertaining to the nine months ended September 30, 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 nine months ended September 30, 2020, included a tariff rebate of $1.4 million received in May 2020 and excluded the tariff rebate realized in August 2020.

(4)As discussed in Note 3, “Relationship and Agreements with Shenghe,” the balance of deferred revenue was derecognized in connection with the June 2020 Modification.

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 product imports retroactive to March 2020, which affected the sales price the Company realized. In addition, Shenghe began negotiating for certain 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 on prior sales 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 these 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 August 2020 and January 2021, 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 nine months ended September 30, 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 8, “Debt Obligations.”

NOTE 5—RESTRICTED CASH

The Company’s restricted cash balances were as follows:


	September 30, 2021		December 31, 2020
(in thousands)
Restricted cash, current	$	339	$	3,688
Restricted cash, non-current	9,124		9,100
Total restricted cash	$	9,463	$	12,788

The current restricted cash, which is included in “Prepaid expenses and other current assets” within the unaudited Condensed Consolidated Balance Sheets, principally relates to cash held in various trusts. The non-current restricted cash is 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.

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NOTE 6—INVENTORIES

The Company’s inventories consisted of the following:


	September 30, 2021		December 31, 2020
(in thousands)
Materials and supplies(1)	$	9,068	$	5,124
In-process(2)	23,992		24,524
Finished goods(3)	1,066		2,624
Total inventory	$	34,126	$	32,272

(1)Comprised of raw materials, spare parts, reagent chemicals, and packaging materials used in the production of rare earth products

(2)Primarily comprised of mined ore stockpiles and bastnaesite ore in various stages of the production process that are drawn down based on the demands of our mine production plan

(3)Packaged bastnaesite ore that is ready for sale

During the second quarter of 2021, the Company recognized a non-cash write-down of a portion of its legacy low-grade stockpile inventory after determining that it contained a significant amount of alluvial material that did not meet the Company’s requirement for mill feed and, as a result, was deemed unusable. The write-down is included in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021, as “Write-down of inventories.”

NOTE 7—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:


	September 30, 2021		December 31, 2020
(in thousands)
Machinery and equipment	$	41,712	$	22,911
Buildings and building improvements	4,541		2,953
Land and land improvements	8,609		6,534
Assets under construction	124,553		46,814
Mineral rights	437,817		437,654
Property, plant and equipment	617,232		516,866
Less: Accumulated depreciation and depletion	(34,394)		(14,892)
Property, plant and equipment, net	$	582,838	$	501,974

The Company capitalized expenditures of $93.8 million and $12.3 million for the nine months ended September 30, 2021 and 2020, respectively, mostly related to vehicles, machinery, equipment, and assets under construction to support our Stage II optimization project and other capital projects at Mountain Pass. Interest capitalized was less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively. No interest was capitalized for the three and nine months ended September 30, 2020.

In February 2021, the Company acquired equipment, including trucks and loaders, in the aggregate amount of $9.4 million, which was purchased through seller-financed equipment notes. See also Note 8, “Debt Obligations,” and Note 18, “Supplemental Cash Flow Information.”

In November 2020, the Company was awarded a Defense Production Act Title III technology investment agreement (“TIA”) from the Department of Defense (“DOD”) to establish domestic processing for separated light rare earth elements in the amount of $9.6 million. During the third quarter of 2021, pursuant to the TIA, the Company has received $2.6 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.” Pursuant to the TIA, the Company is entitled to receive an additional $7.0 million from the DOD associated with Stage II optimization project capital expenditures.

The Company’s depreciation expense and depletion expense were as follows:

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	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Depreciation expense	$	2,109	$	1,277	$	5,528	$	3,711
Depletion expense	$	4,754	$	29	$	13,971	$	86

There were no impairments recognized for the three and nine months ended September 30, 2021 and 2020.

NOTE 8—DEBT OBLIGATIONS

The Company’s current and non-current portions of long-term debt were as follows:


	September 30, 2021		December 31, 2020
(in thousands)
Long-term debt
Convertible Notes due 2026	$	690,000	$	—
Paycheck Protection Loan	—		3,364
Less: Unamortized debt issuance costs	(15,950)		—
Net carrying amount	674,050		3,364
Less: Current installments of long-term debt	—		(2,403)
Long-term debt, net of current portion	$	674,050	$	961

Long-term debt to related party
Offtake Advances	$	32,575	$	71,843
Less: Unamortized debt discount	(1,638)		(5,393)
Net carrying amount	30,937		66,450
Less: Current installments of long-term debt to related party	(30,937)		(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 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 September 30, 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. The Convertible Notes’ if-converted value did not exceed its principal amount as of September 30, 2021.

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.

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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.

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 Division A, Title I of the CARES Act, which was enacted in March 2020 (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 Paycheck Protection Loan and related accrued interest was forgiven. Consequently, during the nine months ended September 30, 2021, the Company recorded a gain on forgiveness of the Loan in the amount of $3.4 million, which is included in “Other income, net” within our unaudited Condensed Consolidated Statements of Operations.

Offtake Advances

In connection with the June 2020 Modification, which is discussed in Note 3, “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. For the three and nine months ended September 30, 2021, $15.9 million and $36.8 million, respectively, of the sales prices of products sold to Shenghe was paid in the form of debt reduction (see Note 18, “Supplemental Cash Flow Information”), as compared to $4.8 million and $5.5 million for the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2021, the Company made a payment to Shenghe of $0.1 million and $0.2 million, respectively, based on sales to other parties. No amounts were required to be paid based on asset sales.

After consideration of the Second Additional Advance, the outstanding balance on the Offtake Advances, as of the date of the June 2020 Modification, 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. 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. Based on current forecasts, the Company expects to repay the obligation within the next year. As of September 30, 2021, and December 31, 2020, $32.6 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.

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

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to September 30, 2021, was between 4.41% and 11.50%. Based on the revised estimates of the timing of the remaining principal reductions as of September 30, 2021, the Company updated its estimate of the effective interest rate to 16.28% to be applied prospectively to future periods.

As discussed in Note 4, “Revenue Recognition,” in January 2021, the Company was informed of a $2.2 million tariff rebate Shenghe received, which increased the gross profit earned by Shenghe on certain prior period sales. As a result, for the nine months ended September 30, 2021, the Company recorded a reduction in the principal amount of the debt obligation of $2.2 million and the corresponding debt discount of $0.2 million.

In August 2020, the Company was informed of a $9.7 million tariff rebate Shenghe received, which increased the gross profit earned by Shenghe on certain prior period sales. In addition, after the June 2020 Modification, but relating to sales made prior the June 2020 Modification, Shenghe also 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 three and nine months ended September 30, 2020, the Company recorded reductions in the principal amount of the debt obligation of $10.1 million and the corresponding debt discount of $0.8 million.

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 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 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 unaudited Condensed Consolidated Balance Sheets in “Other current liabilities” and “Other non-current liabilities,” respectively, were as follows:


	September 30, 2021		December 31, 2020
(in thousands)
Equipment notes
Current	$	2,586	$	835
Non-current	7,732		1,267
	$	10,318	$	2,102

Interest expense, net

Interest expense, net, was as follows:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Interest expense	$	2,660	$	1,713	$	6,620	$	3,582
Capitalized interest	(36)		—		(203)		—
Interest expense, net	$	2,624	$	1,713	$	6,417	$	3,582

Interest expense related to the Convertible Notes was as follows:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Coupon interest	$	431	$	—	$	886	$	—
Amortization of debt issuance costs	876		—		1,799		—
Convertible Notes interest expense	$	1,307	$	—	$	2,685	$	—

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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 4.5 years as of September 30, 2021.

As of September 30, 2021, none of the agreements or indentures governing our indebtedness contain financial covenants.

NOTE 9—LEASE OBLIGATIONS

The Company has operating and finance leases for certain office space, vehicles and equipment used in its operations, none of which are with related parties. Supplemental disclosure for the unaudited Condensed Consolidated Balance Sheets related to the Company’s operating and finance leases is as follows:


	Location on Unaudited Condensed Consolidated Balance Sheets	September 30, 2021		December 31, 2020
(in thousands)
Operating Leases:
Right-of-use assets	Other non-current assets	$	421	$	1,090

Operating lease liability, current	Other current liabilities	$	344	$	761
Operating lease liability, non-current	Other non-current liabilities	97		357
Total operating lease liabilities		$	441	$	1,118

Finance Leases:
Right-of-use assets	Finance lease right-of-use assets	$	847	$	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	625		736
Total finance lease liabilities		$	879	$	1,002

NOTE 10—ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS

Asset Retirement Obligations

Management estimated asset retirement obligations based on the requirements to reclaim its mine asset and related Mountain Pass facility. Minor reclamation activities related to discrete portions of our operations are ongoing. As of September 30, 2021, management estimates a significant portion of the cash outflows for the major reclamation and the retirement of the Mountain Pass facility will be incurred beginning in 2043.

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 asset retirement obligation. Upon final submission of the reclamation plan and approval, which has not yet occurred as of September 30, 2021, the Company will update the estimated cash flows underlying its asset retirement obligation, as the Company’s existing reclamation obligations will not be legally reduced until such approval is obtained.

As of September 30, 2021, the credit-adjusted risk-free rate ranged between 6.6% and 8.2% depending on the timing of expected settlement and when the layer or increment was recognized. There were no significant increments or decrements for the three and nine months ended September 30, 2021 and 2020.

The balance as of September 30, 2021, and December 31, 2020, included current portions of $0.1 million. The total estimated future undiscounted cash flows required to satisfy the asset retirement obligations were $142.3 million as of both September 30, 2021, and December 31, 2020.

The Company is required to provide the applicable government agencies with financial assurances relating to the closure and reclamation obligations. As of September 30, 2021, and December 31, 2020, the Company had financial assurance

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requirements of $38.7 million and $38.4 million, respectively, which were satisfied with surety bonds placed with the California state and regional agencies that are partially secured by restricted cash.

Environmental Obligations

The Company assumed certain environmental remediation liabilities related to the monitoring of groundwater contamination. The Company engaged an environmental consultant to develop a remediation plan and remediation cost projections based upon that plan. Utilizing the remediation plan developed by the environmental consultant, management developed an estimate of future cash payments for the remediation plan.

As of September 30, 2021, management 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 three and nine months ended September 30, 2021 and 2020.

The total estimated aggregate undiscounted cost of $27.8 million and $28.2 million as of September 30, 2021, and December 31, 2020, respectively, was principally related to water monitoring and treatment activities required by state and local agencies. Based on management’s best estimate of the cost and timing and the assumption that payments are considered to be fixed and reliably determinable, the Company has discounted the liability. The balance as of September 30, 2021, and December 31, 2020, included current portions of $0.5 million.

NOTE 11—INCOME TAXES

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, valuation allowance adjustments based on new evidence and enactment of tax laws, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 17.1% and 18.4% for the three and nine months ended September 30, 2021, respectively, as compared to (0.9)% and (0.5)% for the three and nine months ended September 30, 2020, respectively, principally due to a full valuation allowance as of September 30, 2020. Our effective income tax rate can vary from period to period depending on, among other factors, percentage depletion, executive compensation deduction limitations, other permanent book/tax items, and changes to our valuation allowance, if any. Certain of these and other factors, including our history and projections of pretax earnings, are considered in assessing our ability to realize our net deferred tax assets.

NOTE 12—COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company becomes party to lawsuits, administrative proceedings, and government investigations, including environmental, regulatory, and other matters. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

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 unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021.

NOTE 13—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, each with a par value of $0.0001 per share.

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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 unaudited Condensed 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 following 5:00 p.m. New York City time 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, holders could not exercise Public Warrants and receive Common Stock in exchange for payment in cash of the $11.50 per warrant exercise price. Instead, 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 of a Public Warrant. Accordingly, by virtue of the cashless exercise of the Public Warrants, exercising warrant holders received 0.6192 of a share of Common Stock for each Public Warrant surrendered for exercise. All Public Warrants that remained unexercised at 5:00 p.m. New York City time 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 nine months ended September 30, 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 14—STOCK-BASED COMPENSATION

2020 Incentive Plan: In November 2020, the Company’s stockholders approved the MP Materials Corp. 2020 Stock Incentive Plan (the “2020 Incentive Plan”), which permits the Company to issue stock options (incentive and/or non-qualified); stock appreciation rights; restricted stock, restricted stock units, and other stock awards; and performance awards. As of September 30, 2021, there were 7,279,207 shares available for future grants under the 2020 Incentive Plan.

Stock-Based Compensation Expense: During the three and nine months ended September 30, 2021, the Company recognized $4.5 million and $14.7 million, respectively, of stock-based compensation expense, which is principally included in the unaudited Condensed Consolidated Statements of Operations within “General and administrative.” There was no stock-based compensation expense recognized for the three and nine months ended September 30, 2020.

NOTE 15—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

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fair value of the Company’s accounts receivable, accounts payable, short-term debt and accrued liabilities approximates the carrying amounts because of the immediate or short-term maturity of these financial instruments.

Cash, Cash Equivalents and Restricted Cash

The Company’s cash, cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy. The carrying amounts reported in the unaudited Condensed Consolidated Balance Sheets approximate the fair value of cash, cash equivalents and restricted cash due to the short-term nature of these assets.

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 balance is 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:


	September 30, 2021
(in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	1,179,371	$	1,179,371	$	1,179,371	$	—	$	—
Restricted cash	$	9,463	$	9,463	$	9,463	$	—	$	—
Financial liabilities:
Convertible Notes	$	674,050	$	702,765	$	702,765	$	—	$	—
Offtake Advances	$	30,937	$	32,170	$	—	$	—	$	32,170
Equipment notes	$	10,318	$	10,405	$	—	$	10,405	$	—


	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	$	—

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NOTE 16—EARNINGS (LOSS) PER SHARE

Basic EPS is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method or the if-converted method, as applicable.

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS:


	For the three months ended September 30,		For the nine months ended September 30,
	2021	2020	2021	2020
Weighted-average shares outstanding, basic	176,053,586	71,941,538	172,577,303	68,875,874
Assumed conversion of Public Warrants	—	—	3,787,498	—
Assumed conversion of Convertible Notes	15,584,409	—	10,789,206	—
Assumed conversion of restricted stock	1,283,194	—	1,214,349	—
Assumed conversion of restricted stock units	294,124	—	271,017	—
Weighted-average shares outstanding, diluted	193,215,313	71,941,538	188,639,373	68,875,874

The following table presents the calculation of basic and diluted EPS for the Company’s Common Stock:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands, except share and per share data)	2021		2020		2021		2020
Calculation of basic EPS:
Net income (loss)	$	42,763	$	14,627	$	86,048	$	(45,939)
Weighted-average shares outstanding, basic	176,053,586		71,941,538		172,577,303		68,875,874
Basic EPS	$	0.24	$	0.20	$	0.50	$	(0.67)

Calculation of diluted EPS:
Net income (loss)	$	42,763	$	14,627	$	86,048	$	(45,939)
Interest expense, net of tax(1):
Convertible Notes	1,084		—		2,190		—
Diluted income (loss)	$	43,847	$	14,627	$	88,238	$	(45,939)
Weighted-average shares outstanding, diluted	193,215,313		71,941,538		188,639,373		68,875,874
Diluted EPS	$	0.23	$	0.20	$	0.47	$	(0.67)

(1)The three and nine months ended September 30, 2021, were tax-effected at a rate of 17.1% and 18.4%, respectively. As discussed in Note 8, “Debt Obligations,” the Convertible Notes were issued in March 2021; therefore, no adjustment is required for the three and nine months ended September 30, 2020.

NOTE 17—RELATED-PARTY TRANSACTIONS

Product Sales and Cost of Sales: The Company and Shenghe enter into separate product sales agreements in which Shenghe purchases all newly-produced material at specified prices. Product sales from these agreements were $97.3 million and $229.2 million for the three and nine months ended September 30, 2021, respectively, as compared to $40.9 million and $91.7 million for the three and nine months ended September 30, 2020, respectively, and are discussed in more detail in Note 4, “Revenue Recognition,” including amounts recognized as deferred revenue.

Cost of sales, which includes shipping and freight, related to these agreements with Shenghe was $21.5 million and $57.2 million for the three and nine months ended September 30, 2021, respectively, as compared to $15.3 million and $44.6 million for the three and nine months ended September 30, 2020, respectively.

Purchases: The Company purchases certain reagent products (produced by an unrelated third party manufacturer) used in the flotation process from Shenghe. Total purchases were $1.2 million and $3.3 million for the three and nine months ended

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September 30, 2021, respectively, as compared to $0.7 million and $2.3 million for the three and nine months ended September 30, 2020, 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.

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 are both 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.

Excluding payments of these minimums (which were treated as a reduction to the obligation), royalty expense was $1.0 million and $1.9 million, and the Company paid out $0.9 million and $2.8 million for the three and nine months ended September 30, 2020, respectively.

Accounts Receivable: As of September 30, 2021, and December 31, 2020, $36.3 million and $3.5 million of the accounts receivable, as stated on the unaudited Condensed Consolidated Balance Sheets, respectively, were receivable from a related party due to the Company’s sales agreements with Shenghe.

Indebtedness: The Company’s related-party debt is described in Note 8, “Debt Obligations.”

NOTE 18—SUPPLEMENTAL CASH FLOW INFORMATION

In addition to the non-cash components of the June 2020 Modification, as discussed in Note 3, “Relationship and Agreements with Shenghe,” other supplemental cash flow information and non-cash investing and financing activities were as follows:


	For the nine months ended September 30,
(in thousands)	2021		2020
Supplemental cash flow information:
Cash paid for interest	$	1,116	$	433
Cash payment related to income taxes, net	$	1	$	—
Supplemental non-cash investing and financing activities:
Property, plant and equipment acquired with seller-financed equipment notes	$	9,407	$	1,216
Property, plant and equipment purchased but not yet paid	$	7,416	$	2,613
Transaction costs capitalized but not yet paid	$	—	$	4,889
Finance right-of-use assets obtained in exchange for finance lease liabilities	$	87	$	—
Revenue recognized in exchange for debt principal reduction(1)	$	38,858	$	14,741
Paycheck Protection Loan forgiveness(2)	$	3,401	$	—

(1)Of the amounts for the nine months ended September 30, 2021 and 2020, $36.8 million and $5.5 million, respectively, pertained to product sales to Shenghe, as discussed in Note 8, “Debt Obligations.” In addition, $2.0 million pertained to the tariff rebate for the nine months ended September 30, 2021, and $9.3 million pertained to the tariff rebate and changes in estimates of realized prices of prior period sales for the nine months ended September 30, 2020, as discussed in Note 4, “Revenue Recognition.”

(2)As discussed in Note 8, “Debt Obligations.”

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q (“Form 10-Q”), and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2020. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Part II. Item 1A. Risk Factors” and elsewhere in this Form 10-Q and “Part I. Item 1A. Risk Factors” and elsewhere in our Form 10-K. In addition, see “Cautionary Note Regarding Forward-Looking Statements.” References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.

Overview

We are 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. We believe the rare earth concentrate we produced and sold in 2020 represented approximately 15% of the rare earth content consumed in the global market.

Rare earth elements (“REE”) are fundamental building blocks of the modern economy, impacting trillions of dollars in global gross domestic product through the enablement of end products across industries including transportation, clean energy, robotics, national defense and consumer electronics, among others. Neodymium (“Nd”) and praseodymium (“Pr”) are rare earth elements which in combination form neodymium-praseodymium (“NdPr”), which represents the Company’s primary revenue opportunity. NdPr is most often utilized in NdPr magnets, which are also commonly referred to as “neo,” “NdFeB,” “NIB,” or permanent magnets and are made predominantly from an alloy of NdPr, iron and boron. NdPr magnets are the most widely used type of rare earth magnets and are critical for many advanced technologies that are experiencing strong secular growth, including electric vehicles (“EV”), drones, defense systems, medical equipment, wind turbines, robotics and many others. The rapid growth of these and other advanced motion technologies is expected to drive substantial demand growth for NdPr.

We produce our materials at Mountain Pass, one of the world’s richest rare earth deposits, co-located with integrated state-of-the-art processing and separation facilities. We acquired the Mountain Pass assets in 2017, restarted operations from cold-idle status and embarked on a deliberate, two-stage plan to optimize the facility and position the Company for growth and profitability. We commenced mining, comminution, beneficiation, and tailings management operations, which we designated Stage I of our multi-stage optimization plan, between December 2017 and February 2018. We currently produce a rare earth concentrate that we sell to Shenghe Resources (Singapore) International Trading Pte. Ltd. (“Shenghe”), an affiliate of Shenghe Resources Holding Co., Ltd., a leading global rare earth company that is publicly listed in China, which, in turn, sells that product to end customers in China. These customers separate the constituent REE contained in our concentrate and sell the separated products to various end users. Upon completion of our Stage II optimization project, we anticipate separating rare earth oxides (“REO”) at Mountain Pass and selling our products directly to end users, at which time we may no longer sell our concentrate.

As technological innovation drives anticipated global growth in demand for REO, we also believe global economic trends, geopolitical realities and sustainability mandates are combining to further support an opportunity for us to create shareholder value. We believe businesses are increasingly prioritizing diversification and security of their global supply chains so as to reduce reliance on a single producer or region for critical supplies. This trend also has national security implications, as illustrated by the February 2021 U.S. Presidential executive order requiring the U.S. government to review supply chains for critical minerals and other identified strategic materials, including rare earth elements, in an effort to ensure that the U.S. is not reliant on other countries, such as China. According to the CRU Group, China accounted for approximately 79% of global REO production in 2020. We believe an even higher percentage of the NdPr magnet supply chain is based in China. Finally, public and private interests are increasingly demanding sustainability throughout production value chains to limit negative environmental and societal impacts from business activity, including pollution and acceleration of climate change. As the only scaled source in North America for critical rare earths, with a processing facility designed to operate with best-in-class sustainability and a competitive cost structure, we believe we are well-positioned to thrive in a transforming global economy.

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Recent Developments and Comparability of Results

Business Combination and Reverse Recapitalization

The Business Combination (as defined below) was consummated on November 17, 2020, pursuant to the terms of a merger agreement entered into on July 15, 2020 (the “Merger Agreement”). Pursuant to the Merger Agreement, MP Mine Operations LLC (“MPMO”) and Secure Natural Resources LLC (“SNR”), the company that 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 minerals, were combined with Fortress Value Acquisition Corp. (“FVAC”), a special purpose acquisition company (the “Business Combination”), and became indirect 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, and 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.

Our Relationship and Agreements with Shenghe

Original Commercial Agreements

In May 2017, prior to our acquisition of Mountain Pass, we entered into a set of commercial arrangements with Shenghe, which principally consisted of a technical services agreement (the “TSA”), an offtake agreement (the “Original Offtake Agreement”), and a distribution and marketing agreement (the “DMA”). Shenghe and its affiliates primarily engage in the mining, separation, processing and distribution of rare earth products. We also issued to Leshan Shenghe Rare Earth Co., Ltd. (“Leshan Shenghe”), the majority stockholder of Shenghe, a preferred interest in the Company, which was ultimately exchanged for shares of our common stock in connection with the Business Combination.

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Framework Agreement and Restructured Commercial Agreements

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”). 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. The Shenghe Warrant was ultimately exchanged for shares of our common stock in connection with the Business Combination.

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 discussed and defined below) 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.

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.

As discussed in more detail within Note 3, “Relationship and Agreements with Shenghe,” in the notes to the unaudited Condensed Consolidated Financial Statements, 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 and (b) the fair value allocated to the modification to the revenue arrangement) 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 applied only to sales made to Shenghe between July 2019 and early June 2020.

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Beginning in July 2019 and through early June 2020, the Company periodically agreed on a cash sales price, which was intended to approximate the Company’s cash cost of production, with Shenghe for each metric ton (“MT”) of rare earth concentrate delivered by the Company. Such sales during this period were made under the Original Offtake Agreement and also reflected the Shenghe Sales Discount. The Company recognized the cash sales prices as revenue upon each sale. In addition, since the Shenghe Implied Discount applied to sales made to Shenghe during the period from July 2019 through early June 2020, we also recognized an amount of deferred revenue applicable to these sales equal to 64% of the gross profit realized by Shenghe of this product to its own customers.

For example, for a hypothetical shipment of REO to Shenghe on which it realized gross profit of $1.00 (the difference between the sales price to its customers and its cash cost paid to us), we would recognize $0.64 as non-cash revenue through a reduction in the deferred revenue balance, and the remaining $0.36 would not be recorded as revenue. The full gross profit amount realized by Shenghe on such sales reduced the Prepaid Balance (and consequently, our contractual obligations to Shenghe). Shenghe’s gross profit is influenced by market conditions as well as import duties, which were imposed on our products by the General Administration of Customs of the People’s Republic of China during this period. See also “Key Performance Indicators” section.

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; 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.

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. In addition, as a result of the renegotiations, the accounting treatment specific to the Shenghe Implied Discount was no longer required.

In accounting for the June 2020 Modification, on June 5, 2020, we:

•Derecognized the existing deferred revenue balance of $37.5 million;

•Recognized, at fair value, a non-interest-bearing debt instrument with a principal balance of $94.0 million and a debt discount of $8.3 million (implied debt discount of 4.4%), resulting in a carrying amount of $85.7 million;

•Recorded the $35.5 million proceeds received from the Second Additional Advance;

•Recognized the issuance of the Shenghe Warrant at its fair value of $53.8 million; and

•Recorded a $66.6 million non-cash settlement charge (reflecting a deemed payment to terminate the DMA).

As noted above, 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, instead of our cash cost of production, as was the case with sales made under the Original Offtake Agreement. A portion of the sales price is in the form of debt repayment, with the remainder paid in cash. The elimination of the Shenghe Sales Discount and replacement with the aforementioned fixed monthly sales charge has not had a material impact on our results of operations (both are treated as a reduction to the transaction price).

As a result of the June 2020 Modification, the amount of revenue we recorded for periods that included any portion of the period from July 1, 2019, until June 5, 2020, is not comparable, in the aggregate or on a per unit basis, to the amount of revenue recorded in other periods that commenced after June 5, 2020. Furthermore, assuming static market prices, we would expect to record more revenue on a per unit basis subsequent to June 5, 2020. As discussed in the “Key Performance Indicators” section below, in the calculation of our realized price per REO MT, we eliminate the impact of recognizing revenue at a discount during the period between July 1, 2019, and June 5, 2020, in order to reflect a consistent basis between periods.

Tariff-Related Rebates

Starting in May 2020, the government of the People’s Republic of China granted retroactive tariff relief to certain importers of rare earth minerals including Shenghe and its affiliates and other consignees of our products, relating to periods

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prior to the formal lifting of the tariffs. As a result, Shenghe’s actual realized prices for the REO sold prior to May 2020 were higher than originally reported to us and resulted in tariff rebates to end customers, which contractually were due to Shenghe. On account of these rebates in the second and third quarters of 2020 and the first quarter of 2021, we received from Shenghe certain credits against our contractual commitments to them.

Impact of the COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (known as “COVID-19”) began to impact the population of China, where our principal customer is located. The outbreak of COVID-19 has grown both in the United States and globally, and related government and private sector responsive actions have adversely affected the global economy. In December 2019, a series of emergency quarantine measures taken by the Chinese government disrupted domestic business activities in China during the weeks after the initial outbreak of COVID-19. These disruptions have occurred periodically since the start of COVID-19 outbreak as measures intended to impede the spread of the virus have adapted. Since the initial COVID-19 outbreak, many countries, including the United States, have imposed restrictions on travel to and from China and elsewhere, as well as general movement restrictions, business closures and other measures imposed to slow the spread of COVID-19.

At the onset of the outbreak in the first quarter of 2020, we initially experienced shipping delays due to overseas port slowdowns and container shortages, but we did not experience a reduction in production or sales. However, beginning in the fourth quarter of 2020, and continuing through the third quarter of 2021, we again saw shipping delays and container shortages from congestion at port facilities and trucking shortages, which has been exacerbated by COVID-19 and resulting supply chain disruptions. Congestion at U.S. and international ports could affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels.

As the situation continues to develop, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company’s business and results of operations. While the quarantine, social distancing and other regulatory measures instituted or recommended in response to COVID-19 are expected to be temporary, the duration of the business disruptions, and related financial impact, cannot be estimated at this time.

Key Performance Indicators

We use the following key performance indicators to evaluate the performance of our business. Our calculations of these performance indicators may differ from similarly-titled measures presented by other companies in our industry or in other industries. The following table presents our key performance indicators:


	For the three months ended September 30,				Change				For the nine months ended September 30,				Change
(in whole units or dollars, except percentages)	2021		2020		$		%		2021		2020		$		%
REO production volume (MTs)	11,998		10,197		1,801		18	%	32,152		29,166		2,986		10	%
REO sales volume (MTs)	12,814		9,429		3,385		36	%	32,484		28,047		4,437		16	%
Realized price per REO MT	$	7,693	$	3,393	$	4,300	127	%	$	7,043	$	3,031	$	4,012	132	%
Production cost per REO MT	$	1,449	$	1,389	$	60	4	%	$	1,484	$	1,371	$	113	8	%

REO Production Volume

We measure our REO-equivalent production volume for a given period in metric tons, our principal unit of sale. This measure refers to the REO content contained in the rare earth concentrate we produce. Our REO production volume is a key indicator of our mining and processing capacity and efficiency.

The rare earth concentrate we currently produce is a processed, concentrated form of our mined rare earth-bearing ores. While our unit of production and sale is a MT of embedded REO, the actual weight of our rare earth concentrate is significantly greater, as the concentrate also contains non-REO minerals and water. We target REO content of greater than 60% per dry MT of concentrate (referred to as “REO grade”). The elemental distribution of REO in our concentrate is relatively consistent over time and production lot. We consider this the natural distribution, as it reflects the distribution of elements contained, on average, in our ore. As discussed in “Key Factors Affecting Our Performance” below, upon completion of our Stage II optimization project, we expect to refine our rare earth concentrate to produce separated rare earths, including separated NdPr oxide.

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REO Sales Volume

Our REO sales volume for a given period is calculated in MTs. A unit, or MT, is considered sold once we recognize revenue on its sale. Our REO sales volume is a key measure of our ability to convert our production into revenue.

Realized Price per REO MT

We calculate the realized price per REO MT for a given period as the quotient of: (i) our Total Value Realized (see below) for a given period and (ii) our REO sales volume for the same period. We define Total Value Realized, which is a non-GAAP financial measure, as our product sales adjusted for the revenue impact of tariff-related rebates from Shenghe on account of prior sales, and, in connection with our sales of REO to Shenghe between July 1, 2019, and June 5, 2020, the Shenghe Implied Discount. The Shenghe Implied Discount is equal to the difference between (i) Shenghe’s average realized price, net of taxes, tariffs and certain other agreed-upon charges (such as one-time demurrage charges) on our products once sold to their ultimate customers and (ii) the amount of revenue we recognized on the sales of those products to Shenghe for sales between July 1, 2019, and June 5, 2020, which includes the non-cash portion discussed above.

Under the terms of the Original Offtake Agreement, for the period between July 1, 2019, and June 5, 2020, Shenghe purchased our rare earth products at an agreed-upon cash price per MT, which was intended to approximate our cash cost of production, and in turn resold it at market prices to its customers. As discussed above, 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. Upon entrance into the A&R Offtake Agreement, we began to recognize revenue at the full value of our product. See also “Recent Developments and Comparability of Results” section above.

Realized price per REO MT is an important measure of the market price of our product. Accordingly, we calculate realized price per REO MT to reflect a consistent basis between periods by eliminating the impact of recognizing revenue at a discount during the period between July 1, 2019, and June 5, 2020, and the revenue impact of tariff-related rebates. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Total Value Realized, which is a non-GAAP financial measure, to our product sales, which is determined in accordance with GAAP, as well as the calculation of realized price per REO MT.

Production Cost per REO MT

We calculate the production cost per REO MT for a given period as the quotient of: (i) our Production Costs (see below) for a given period and (ii) our REO sales volume for the same period. We define Production Costs, which is a non-GAAP financial measure, as our cost of sales (excluding depletion, depreciation and amortization) less stock-based compensation expense included in cost of sales, shipping and freight costs, and costs attributable to certain other sales, for a given period.

Production cost per REO MT is a key indicator of our production efficiency. As a significant portion of our cash costs of Stage I production are fixed, our production cost per REO MT is influenced by mineral recovery, REO grade, plant feed rate and production uptime. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Production Costs, which is a non-GAAP financial measure, to our cost of sales (excluding depletion, depreciation and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT.

Key Factors Affecting Our Performance

We believe we are uniquely positioned to capitalize on the key trends of electrification and supply chain security, particularly as domestic EV production grows. Our success depends to a significant extent on our ability to take advantage of the following opportunities and meet the challenges associated with them.

Demand for REE

The key demand driver for REE is their use in a diverse array of growing end markets, including: clean-energy and transportation technologies (e.g., traction motors in EVs and generators in wind power turbines); high-technology applications (e.g., miniaturization of smart phones and other mobile devices, fiber optics, lasers, robotics, medical devices, etc.); critical defense applications (e.g., guidance and control systems, global positioning systems, radar and sonar, drones, etc.); and essential industrial infrastructure (e.g., advanced catalyst applications in oil refining and pollution-control systems in traditional internal-combustion automobiles, etc.). We believe these drivers will fuel the continued growth of the rare earth market, particularly the market for NdPr.

We believe we benefit from several demand tailwinds for REE, and particularly for NdPr. These include the trend toward geographic supply chain diversification, particularly in relation to China, which accounted for approximately 79% of global

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REE production in 2020, the U.S. government strategy to restore domestic supply of key minerals, and increasing acceptance of environmental, social and governance mandates, which impact global capital allocation throughout production value chains to limit negative environmental and societal impacts. However, changes in technology may also drive down the use of REE, including NdPr, in the components in which they are now used, or lead to a decline in reliance on such components altogether. We also operate in a competitive industry, and many of our key competitors are based in China, where production costs are typically lower than in the United States.

Our Mineral Reserves

Our ore body has proven over more than 60 years of operations to be one of the world’s largest and highest-grade rare earth resources. As of July 1, 2020, SRK Consulting (U.S.), Inc., an independent consulting firm that we have retained to assess our reserves, estimates total proven and probable reserves of 1.5 million short tons of REO contained in 21.1 million short tons of ore at Mountain Pass, with an average ore grade of 7.06%. These estimates use an estimated economical cut-off of 3.83% total REO. Based on these estimated reserves and our expected annual production rate of REO upon completion of our Stage II optimization project, our expected mine life is approximately 24 years. We expect to be able to significantly grow our expected mine life through exploratory drilling programs and incorporation of the profitability uplift of our Stage II optimization project over time.

Mining activities in the United States are heavily regulated, particularly in California. Regulatory changes may make it more challenging for us to access our reserves. In addition, new mineral deposits may be discovered elsewhere, which could make our operations less competitive.

Maximizing Production Efficiency

In 2020, REO production was approximately 3.2x greater than the highest ever production in a twelve-month period by the former operator using the same capital equipment. We achieved these results through an optimized reagent scheme, lower process temperatures, better management of the tailings facility, and a commitment to operational excellence, driving approximately 95% uptime. We also believe that our Stage I optimization initiatives enabled us to achieve world-class production cost levels for rare earth concentrate. All of these achievements enabled us to become operating cash flow positive, despite significant Chinese trade tariffs on ore and concentrates in place over the optimization period. These trade tariffs have since been suspended, further enhancing the earnings power of our Stage I operations.

We believe that the success of our business will reflect our ability to manage our costs. Our Stage II optimization project (discussed below) is designed to enable us to manage our cost structure for separating REE through a revised facility process flow. The reintroduction of the oxidizing roasting step will allow us to capitalize on the inherent advantages of the bastnaesite ore at Mountain Pass, which is uniquely suitable to low-cost refining by selectively eliminating the need to carry lower-value cerium through the separations process. The recommissioning of our natural gas-powered combined heat and power (“CHP”) facility will reduce energy, heating and steam costs as well as minimize or eliminate our reliance on the regional electric power grid. Further, our location offers significant transportation advantages that create meaningful cost efficiencies in securing incoming supplies and shipping of our final products.

We currently operate a single site in a single location, and any stoppage in activity, including for reasons outside of our control, could adversely impact our production, results of operations and cash flows. In addition, several of our current and potential competitors are government supported and may have access to substantially greater capital, which may allow them to make similar or greater efficiency improvements or undercut market prices for our product.

Development of Our REE Refining Capabilities and Other Opportunities

Our Stage II optimization project is focused on advancing from concentrate production to the separation of individual REE. Engineering, procurement, construction and other recommissioning activities are underway and involve upgrades and enhancements to the existing facility process flow to reliably produce separated REE at a lower cost and with an expected smaller environmental footprint per volume of REO produced than the prior operator of Mountain Pass. As part of our Stage II optimization project, we plan to reintroduce a roasting circuit, reorient the plant process flow, increase product finishing capacity, improve wastewater management and make other improvements to materials handling and storage. We believe that our Stage II optimization project investments will enable us to increase the recovery of NdPr from our concentrate, increase NdPr production, and lower the cost of production, in each case, as compared to the prior owner’s operations.

Upon completion of our Stage II optimization project, we expect to be a low-cost producer of separated NdPr oxide, which represents a majority of the value contained in our ore. Further, we believe we will then be in a position to consider opportunities to integrate further downstream into the business of upgrading NdPr into metal alloys and magnets, ultimately

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expanding our presence as a global source for rare earth magnetics. We also believe integration into magnet production would provide some protection from commodity pricing volatility, while enhancing our business profile and profitability as the producer of a critical industrial output in addition to a producer of resources. Geopolitical developments have created an increased urgency to bring critical rare earth mining and refining production capability to the United States and to restore the full U.S. magnetics supply chain.

The completion of our Stage II optimization project and any development of Stage III is expected to be capital intensive. During the first quarter of 2021, we revised the scope of our Stage II optimization project to include process design innovations that reduce reagent consumption while increasing the planned recovery of separated REO and improving potential product mix. We expect to be able to reach targeted production rates and profitability in 2023 without the need to recommission our chlor-alkali facility, which we previously estimated would cost approximately $30 million. We believe this significantly reduces the operational risks in achieving our targeted profitability. We expect to invest a total of approximately $220 million on our Stage II optimization project, principally in 2021 and 2022. Our estimated costs or estimated time to completion may increase, potentially significantly, due to factors outside of our control. While we believe we have sufficient cash resources to fund our Stage II optimization project and operating working capital in the near term, we cannot assure this. Any delays in our ongoing optimization plans or substantial cost increases related to their execution could significantly impact our ability to maximize our revenue opportunities and adversely impact our business and cash flows.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations:


	For the three months ended September 30,				Change				For the nine months ended September 30,				Change
(in thousands, except percentages)	2021		2020		$		%		2021		2020		$		%
Revenue:
Product sales	$	98,581	$	40,864	$	57,717	141	%	$	230,842	$	91,699	$	139,143	152	%
Other sales	1,173		158		1,015		642	%	2,001		433		1,568		362	%
Total revenue	99,754		41,022		58,732		143	%	232,843		92,132		140,711		153	%

Operating costs and expenses:
Cost of sales(1)	21,907		15,425		6,482		42	%	57,798		44,957		12,841		29	%
General and administrative	14,881		5,635		9,246		164	%	40,986		14,477		26,509		183	%
Advanced projects, development and other	1,327		11		1,316		n.m.		2,436		96		2,340		2438	%
Depreciation, depletion and amortization	6,951		2,179		4,772		219	%	19,767		4,832		14,935		309	%
Accretion of asset retirement and environmental obligations	595		563		32		6	%	1,780		1,691		89		5	%
Royalty expense to SNR	—		1,055		(1,055)		(100)	%	—		1,908		(1,908)		(100)	%
Write-down of inventories	—		—		—		n.m.		1,809		—		1,809		n.m.
Settlement charge	—		—		—		n.m.		—		66,615		(66,615)		(100)	%
Total operating costs and expenses	45,661		24,868		20,793		84	%	124,576		134,576		(10,000)		(7)	%
Operating income (loss)	54,093		16,154		37,939		235	%	108,267		(42,444)		150,711		n.m.
Other income, net	97		61		36		59	%	3,656		298		3,358		1127	%

Interest expense, net	(2,624)		(1,713)		(911)		53	%	(6,417)		(3,582)		(2,835)		79	%
Income (loss) before income taxes	51,566		14,502		37,064		256	%	105,506		(45,728)		151,234		n.m.
Income tax benefit (expense)	(8,803)		125		(8,928)		n.m.		(19,458)		(211)		(19,247)		9122	%
Net income (loss)	$	42,763	$	14,627	$	28,136	192	%	$	86,048	$	(45,939)	$	131,987	n.m.

Adjusted EBITDA	$	68,287	$	11,609	$	56,678	488	%	$	147,734	$	24,645	$	123,089	499	%
Adjusted Net Income	$	51,982	$	7,245	$	44,737	617	%	$	108,885	$	14,693	$	94,192	641	%

n.m. - Not meaningful.

(1)Excludes depreciation, depletion and amortization.

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Revenue consists primarily of product sales, which pertain to our sales of REO concentrate principally to Shenghe under the Original Offtake Agreement for sales between January 1, 2020, and June 5, 2020, or the A&R Offtake Agreement for sales after June 5, 2020.

Product sales increased year over year by $57.7 million, or 141%, to $98.6 million for the three months ended September 30, 2021. The increase was driven by higher REO sales volume, which increased by 3,385 MTs, or 36%, to 12,814 MTs for the three months ended September 30, 2021, as compared to the prior year period, and a higher realized price per REO MT, which increased by 127% year over year for the three months ended September 30, 2021, reflecting higher demand for rare earth products. The increase in REO sales volume for the three months ended September 30, 2021, as compared to the prior year period, reflects an increase in REO production volume and is impacted by the timing of shipments. The increase in REO production volume for the three months ended September 30, 2021, as compared to the prior year period, reflects continued improvement in the efficiency of our processing operations.

Product sales increased year over year by $139.1 million, or 152%, to $230.8 million for the nine months ended September 30, 2021. The increase was driven by higher REO sales volume, which increased by 4,437 MTs, or 16%, to 32,484 MTs for the nine months ended September 30, 2021, as compared to the prior year period, and a higher realized price per REO MT, which increased by 132% year over year for the nine months ended September 30, 2021, reflecting higher demand for rare earth products. The increase in REO sales volume for the nine months ended September 30, 2021, as compared to the prior year period, primarily reflects an increase in REO production volume. The increase in REO production volume for the nine months ended September 30, 2021, as compared to the prior year period, reflects an improvement in the efficiency of our processing operations. Product sales for the nine months ended September 30, 2020, were negatively impacted by the Shenghe Implied Discount, in which $3.7 million of the value of products sold to Shenghe during the nine months ended September 30, 2020, was not recognized as revenue. As mentioned above, starting June 5, 2020, the accounting treatment specific to the Shenghe Implied Discount was no longer required.

REO sales volume varies period-to-period based on the timing of shipments, but sales volumes generally track our production volumes over time given our take-or-pay arrangement with Shenghe. See the “Quarterly Performance Trend” section below for further discussion on realized price per REO MT.

Cost of sales (excluding depreciation, depletion and amortization) consists of production- and processing-related labor costs (including wages and salaries, benefits, and bonuses), mining and processing supplies (such as reagents), parts and labor for the maintenance of our mining fleet and processing facilities, other facilities-related costs (such as property taxes and utilities), packaging materials, and shipping and freight costs.

Cost of sales increased year over year by $6.5 million, or 42%, to $21.9 million for the three months ended September 30, 2021, driven primarily by higher sales volume. The increase in production cost per REO MT from $1,389 for the three months ended September 30, 2020, to $1,449 for the three months ended September 30, 2021, is primarily due to higher payroll costs and employee headcount, including an increase in hiring ahead of the completion of our Stage II optimization project. Cost discipline and production efficiencies achieved during the three months ended September 30, 2021, more than offset higher material and supplies costs as well as COVID-19-impacted freight-in costs.

Cost of sales increased year over year by $12.8 million, or 29%, to $57.8 million for the nine months ended September 30, 2021, driven primarily by higher sales volume. The increase in production cost per REO MT from $1,371 for the nine months ended September 30, 2020, to $1,484 for the nine months ended September 30, 2021, is primarily due to higher payroll costs and employee headcount, including an increase in hiring ahead of the completion of our Stage II optimization project. In addition, production efficiencies achieved during the nine months ended September 30, 2021, were partially offset by higher material and supplies costs as well as COVID-19-impacted freight-in costs.

We believe our production cost per REO MT has stabilized in the short-term, with operating efficiencies largely offsetting raw material and logistics pressures. We anticipate additional efficiency opportunities as we increase REO production volumes in our milling and flotation circuit over time. In addition, production cost per REO MT may vary period-to-period based on the timing of scheduled outages of our production facilities for maintenance. See the “Quarterly Performance Trend” section below for further discussion on production cost per REO MT.

General and administrative expenses consist primarily of accounting, finance, executive, and administrative personnel costs, including stock-based compensation expense related to these personnel; professional services (including legal, regulatory, audit and others); certain engineering expenses; insurance, license and permit costs; facilities rent and other costs; office supplies; general facilities expenses; certain environmental, health, and safety expenses; and gain or loss on sale or disposal of long-lived assets.

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General and administrative expenses increased year over year by $9.2 million, or 164%, to $14.9 million for the three months ended September 30, 2021, reflecting $3.9 million in stock-based compensation expense primarily from grants of restricted stock and restricted stock units (“Stock Awards”) made during the fourth quarter of 2020 related to the Business Combination. Prior to the fourth quarter of 2020, we had not granted any Stock Awards nor recorded any stock-based compensation expense. Excluding this item, the increase was $5.3 million, or 94%, mainly due to increases in personnel, insurance, and legal costs, the majority of which were incurred to support our operations as a public company, as well as a legal settlement of $1.0 million, including legal fees.

General and administrative expenses increased year over year by $26.5 million, or 183%, to $41.0 million for the nine months ended September 30, 2021, reflecting $12.1 million in stock-based compensation expense primarily from grants of Stock Awards made during the fourth quarter of 2020 related to the Business Combination. Excluding this item, the increase was $14.4 million, or 99%, mainly due to increases in personnel, professional service, insurance, and legal costs, the majority of which were incurred to support our operations as a public company, as well as a legal settlement of $1.0 million, including legal fees.

Advanced projects, development and other consists principally of costs incurred in connection with certain government contracts, the research or development of new processes or to significantly enhance our existing processes, as well as costs incurred to support growth and development initiatives or other opportunities. Advanced projects, development and other increased year over year by $1.3 million to $1.3 million for the three months ended September 30, 2021 and by $2.3 million to $2.4 million for the nine months ended September 30, 2021, primarily due to increased costs incurred under our government contracts as well as other costs incurred to support growth and development initiatives, particularly with regards to metal, alloy, and magnet manufacturing.

Depreciation, depletion and amortization consist of depreciation of property, plant and equipment related to our mining equipment and processing facilities, depletion of our mineral resources, and amortization of capitalized computer software (prior to the adoption of Accounting Standards Update No. 2018-15). Depreciation, depletion and amortization increased year over year by $4.8 million, or 219%, to $7.0 million for the three months ended September 30, 2021, and by $14.9 million, or 309%, to $19.8 million for the nine months ended September 30, 2021, reflecting primarily the depletion of the mineral rights resulting from the SNR Mineral Rights Acquisition in November 2020, as well as the impact of additional equipment purchases and assets placed into service.

Accretion of asset retirement and environmental obligations is based on the requirement to reclaim and remediate the land surrounding our mine and processing facilities upon the retirement of the Mountain Pass facility and on the estimated future cash flow requirement to monitor groundwater contamination, respectively. Accretion of asset retirement and environmental obligation remained relatively flat year over year.

Royalty expense to SNR for the three and nine months ended September 30, 2020, related to our prior obligation to pay SNR for the right to extract rare earth ores contained in our mine and was based on 2.5% of product sales, subject to certain minimums. Following the Business Combination, we do not incur royalty expenses on a consolidated basis. See Note 17, “Related-Party Transactions,” to our unaudited Condensed Consolidated Financial Statements.

Write-down of inventories for the nine months ended September 30, 2021, pertains to a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021 after determining that the inventory contained a significant amount of alluvial material that did not meet our requirement for mill feed and, as a result, was deemed unusable.

Settlement charge of $66.6 million for the nine months ended September 30, 2020, which was non-cash, was recorded in connection with the termination of the DMA. See also “Recent Developments and Comparability of Results” section above.

Other income, net consists primarily of gains or losses on extinguishment of debt and interest income. Other income, net increased year over year for the three months ended September 30, 2021, due to higher interest income, and increased year over year for the nine months ended September 30, 2021, as a result of a non-cash gain recognized during the second quarter of 2021 as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan, which had a principal amount of $3.4 million. For more information, see the “Liquidity and Capital Resources” section below.

Interest expense, net consists of the amortization of the debt issuance costs on our Convertible Notes (as defined in the “Liquidity and Capital Resources” section below); the amortization of the discount on our debt obligation to Shenghe; interest expense associated with promissory notes with certain investment funds managed by and/or affiliated with JHL Capital Group and QVT Financial, which were repaid in full upon the consummation of the Business Combination; and the expense associated with the 0.25% per annum interest rate on our Convertible Notes, offset by interest capitalized.

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Interest expense, net increased year over year by $0.9 million, or 53%, to $2.6 million for the three months ended September 30, 2021, reflecting interest expense from our Convertible Notes and the amortization of the discount on our debt obligations to Shenghe, which was higher than the interest expense incurred on the promissory notes in the prior year. During the three months ended September 30, 2021, we capitalized interest of less than $0.1 million. No interest was capitalized for the three months ended September 30, 2020.

Interest expense, net increased year over year by $2.8 million, or 79%, to $6.4 million for the nine months ended September 30, 2021, reflecting interest expense from our Convertible Notes and the amortization of the discount on our debt obligations to Shenghe, which was higher than the interest expense incurred on the promissory notes in the prior year. During the nine months ended September 30, 2021, we capitalized interest of $0.2 million. No interest was capitalized for the nine months ended September 30, 2020.

Income tax benefit (expense) consists of an estimate of U.S. federal and state income taxes and income taxes in the jurisdictions in which we conduct business, adjusted for federal, state and local allowable income tax benefits, the effect of permanent differences and any valuation allowance against deferred tax assets. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 17.1% and 18.4% for the three and nine months ended September 30, 2021, respectively, as compared to (0.9)% and (0.5)% for the three and nine months ended September 30, 2020, respectively, principally due to a full valuation allowance as of September 30, 2020. The effective tax rate for the three and nine months ended September 30, 2021, differed from the statutory tax rate of 21% primarily due to state income tax expense and income tax benefit from percentage depletion.

Quarterly Performance Trend

While our business is not seasonal in nature, we sometimes experience a timing lag between production and sales, which may result in volatility in our results of operations between periods. In addition, our realized price per REO MT for the quarterly periods prior to the second quarter of 2020 were adversely impacted by the imposition of Chinese import duties in 2018 (and subsequent increase in May 2019). The import duties were lifted in May 2020.

The following table presents our key performance indicators for the quarterly periods indicated:


	FY2021						FY2020								FY2019
(in whole units or dollars)	Q3		Q2		Q1		Q4		Q3		Q2		Q1		Q4		Q3
REO production volume (MTs)	11,998		10,305		9,849		9,337		10,197		9,287		9,682		8,673		9,417
REO sales volume (MTs)	12,814		9,877		9,793		10,320		9,429		10,297		8,321		8,561		9,852
Realized price per REO MT	$	7,693	$	7,343	$	5,891	$	4,070	$	3,393	$	3,093	$	2,544	$	2,389	$	2,967
Production cost per REO MT	$	1,449	$	1,538	$	1,475	$	1,589	$	1,389	$	1,412	$	1,300	$	1,602	$	1,695

Non-GAAP Financial Measures

We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow, which are non-GAAP financial measures that we use to supplement our results presented in accordance with GAAP. These measures are similar to measures reported by other companies in our industry and are regularly used by securities analysts and investors to measure companies’ financial performance. Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance or liquidity of other companies within our industry or in other industries.

Total Value Realized

Total Value Realized, which we use to calculate our key performance indicator, realized price per REO MT, is a non-GAAP financial measure. As mentioned above, realized price per REO MT is an important measure of the market price of our product. The following table presents a reconciliation of our Total Value Realized, to our product sales, which is determined in accordance with GAAP, as well as the calculation of realized price per REO MT:

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	For the three months ended September 30,				For the nine months ended September 30,
(in thousands, unless otherwise stated)	2021		2020		2021		2020
Product sales	$	98,581	$	40,864	$	230,842	$	91,699
Adjusted for:
Shenghe Implied Discount(1)	—		34		—		3,664
Tariff rebates(2)	—		(8,901)		(2,050)		(10,347)
Total Value Realized	$	98,581	$	31,997	$	228,792	$	85,016

Total Value Realized	$	98,581	$	31,997	$	228,792	$	85,016
Divided by:
REO sales volume (in MTs)	12,814		9,429		32,484		28,047
Realized price per REO MT (in dollars)(3)	$	7,693	$	3,393	$	7,043	$	3,031

(1)Represents the difference between the contractual amount realized by Shenghe and the amount of deferred revenue we recognized.

(2)The amounts pertain to tariff rebates due to the retroactive effect of lifting the Chinese tariffs in May 2020.

(3)May not recompute as presented due to rounding.

Production Costs

Production Costs, which we use to calculate our key performance indicator, production cost per REO MT, is a non-GAAP financial measure. As mentioned above, production cost per REO MT is a key indicator of our production efficiency. The following table presents a reconciliation of our Production Costs to our cost of sales (excluding depreciation, depletion and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands, unless otherwise stated)	2021		2020		2021		2020
Cost of sales (excluding depreciation, depletion and amortization)	$	21,907	$	15,425	$	57,798	$	44,957
Adjusted for:
Stock-based compensation expense(1)	(542)		—		(2,438)		—
Shipping and freight	(2,795)		(2,184)		(7,076)		(6,096)
Other(2)	—		(144)		(79)		(406)
Production Costs	$	18,570	$	13,097	$	48,205	$	38,455

Production Costs	$	18,570	$	13,097	$	48,205	$	38,455
Divided by:
REO sales volume (in MTs)	12,814		9,429		32,484		28,047
Production cost per REO MT (in dollars)(3)	$	1,449	$	1,389	$	1,484	$	1,371

(1)Pertains only to the amount of stock-based compensation expense included in cost of sales.

(2)Pertains primarily to costs attributable to sales of stockpiles.

(3)May not recompute as presented due to rounding.

Adjusted EBITDA

We calculate Adjusted EBITDA as our GAAP net income or loss before interest expense, net; income tax expense or benefit; and depreciation, depletion and amortization; further adjusted to eliminate the impact of stock-based compensation expense; transaction-related and other non-recurring costs; non-cash accretion of asset retirement and environmental obligations; gain or loss on sale or disposal of long-lived assets; write-downs of inventories; royalty expense to SNR; tariff rebates; and other income, net. We present Adjusted EBITDA because it is used by management to evaluate our underlying operating and financial performance and trends.

Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash or are not related to our underlying business performance. This non-GAAP financial measure is intended to

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supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.

Our Adjusted EBITDA does not reflect our results of operations on a comparable basis between periods due to the accounting treatment of the modifications of our agreements with Shenghe (see the “Recent Developments and Comparability of Results” section above). Accordingly, our Adjusted EBITDA trend for the periods presented may not be indicative of future trends. If the Shenghe Implied Discount applicable to sales made under the Original Offtake Agreement had been included in our deferred revenue, our Adjusted EBITDA for the nine months ended September 30, 2020, would have been higher by $3.7 million.

The following table presents a reconciliation of our Adjusted EBITDA, which is a non-GAAP financial measure, to our net income (loss), which is determined in accordance with GAAP:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Net income (loss)	$	42,763	$	14,627	$	86,048	$	(45,939)
Adjusted for:
Depreciation, depletion and amortization	6,951		2,179		19,767		4,832
Interest expense, net	2,624		1,713		6,417		3,582
Income tax expense (benefit)	8,803		(125)		19,458		211
Stock-based compensation expense(1)	4,552		—		14,723		—
Transaction-related and other non-recurring costs(2)	1,914		559		3,219		2,390
Accretion of asset retirement and environmental obligations	595		563		1,780		1,691
Loss on sale or disposal of long-lived assets, net(3)	182		—		219		—
Write-down of inventories(4)	—		—		1,809		—
Royalty expense to SNR	—		1,055		—		1,908
Settlement charge(5)	—		—		—		66,615
Tariff rebate(6)	—		(8,901)		(2,050)		(10,347)
Other income, net(7)	(97)		(61)		(3,656)		(298)
Adjusted EBITDA	$	68,287	$	11,609	$	147,734	$	24,645

(1)Principally included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations. Approximately $3.9 million and $11.7 million of the amounts for the three and nine months ended September 30, 2021, respectively, pertained to a one-time grant of stock awards to employees and executives upon the consummation of the Business Combination.

(2)Amounts for the three and nine months ended September 30, 2021, relate to advisory, consulting, accounting, and legal expenses and settlements incurred in connection with non-recurring transactions, including secondary equity offerings to existing shareholders (no proceeds were received by the Company), the redemption of the Company’s Public Warrants, and other matters. Amounts for the three and nine months ended September 30, 2020, relate to advisory, consulting, accounting and legal expenses in connection with the Business Combination and non-recurring costs for SAP implementation.

(3)Included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations.

(4)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.

(5)As discussed in the “Recent Developments and Comparability of Results” section above, in connection with terminating the DMA, we recognized a one-time, non-cash settlement charge.

(6)Represents non-cash revenue recognized in connection with tariff rebates received relating to product sales from prior periods.

(7)The amount for the nine months ended September 30, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan.

Adjusted Net Income

We calculate Adjusted Net Income as our GAAP net income or loss excluding the impact of depletion; stock-based compensation expense; transaction-related and other non-recurring costs; gain or loss on sale or disposal of long-lived assets; write-downs of inventories; royalty expense to SNR; tariff rebates; and other income or loss, net; adjusted to give effect to the income tax impact of such adjustments. To calculate the income tax impact of such adjustments on a year-to-date basis, we utilize an effective tax rate equal to our income tax expense excluding material discrete costs and benefits, with any impacts of changes in effective tax rate being recognized in the current period. We present Adjusted Net Income because it is used by management to evaluate our underlying operating and financial performance and trends.

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Adjusted Net Income excludes certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash, or not related to our underlying business performance. As a result of the SNR Mineral Rights Acquisition, the mineral rights for the rare earth ores contained in our mine were recorded at fair value as of the date of the Business Combination, resulting in a significant step-up of the carrying amount of the asset which will cause depletion to be meaningfully higher in future periods. This non-GAAP financial measure is intended to supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.

Our Adjusted Net Income does not reflect our results of operations on a comparable basis between periods primarily due to the accounting treatment of the modifications of our agreements with Shenghe (see the “Recent Developments and Comparability of Results” section above). Accordingly, our Adjusted Net Income trend for the periods presented may not be indicative of future trends.

The following table presents a reconciliation of our Adjusted Net Income, which is a non-GAAP financial measure, to our net income (loss), which is determined in accordance with GAAP:


	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Net income (loss)	$	42,763	$	14,627	$	86,048	$	(45,939)
Adjusted for:
Depletion(1)	4,754		29		13,971		86
Stock-based compensation expense(2)	4,552		—		14,723		—
Transaction-related and other non-recurring costs(3)	1,914		559		3,219		2,390
Loss on sale or disposal of long-lived assets, net(4)	182		—		219		—
Write-down of inventories(5)	—		—		1,809		—
Royalty expense to SNR	—		1,055		—		1,908
Settlement charge(6)	—		—		—		66,615
Tariff rebate(7)	—		(8,901)		(2,050)		(10,347)
Other income, net(8)	(97)		(61)		(3,656)		(298)
Tax impact of adjustments above(9)	(2,086)		(63)		(5,398)		278
Adjusted Net Income	$	51,982	$	7,245	$	108,885	$	14,693

(1)Principally includes the depletion associated with the mineral rights for the rare earth ores contained in the Company’s mine, which were recorded in connection with the SNR Mineral Rights Acquisition at fair value as of the date of the Business Combination, resulting in a significant step-up of the carrying amount of the asset.

(2)Principally included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations. Approximately $3.9 million and $11.7 million of the amounts for the three and nine months ended September 30, 2021, respectively, pertained to a one-time grant of stock awards to employees and executives upon the consummation of the Business Combination..

(3)Amounts for the three and nine months ended September 30, 2021, relate to advisory, consulting, accounting, and legal expenses and settlements incurred in connection with non-recurring transactions, including secondary equity offerings to existing shareholders (no proceeds were received by the Company), the redemption of the Company’s Public Warrants, and other matters. Amounts for the three and nine months ended September 30, 2020, relate to advisory, consulting, accounting and legal expenses in connection with the Business Combination and non-recurring costs for SAP implementation.

(4)Included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations.

(5)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.

(6)As discussed in the “Recent Developments and Comparability of Results” section above, in connection with terminating the DMA, we recognized a one-time, non-cash settlement charge.

(7)Represents non-cash revenue recognized in connection with tariff rebates received relating to product sales from prior periods.

(8)The amount for the nine months ended September 30, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan.

(9)Tax impact of adjustments is calculated using an adjusted effective tax rate, excluding the impact of discrete tax costs and benefits, to each adjustment. The adjusted effective tax rates were 18.5%, 19.1%, (0.9)%, and (0.5)% for the three and nine months ended September 30, 2021 and 2020, respectively. The rate for the three and nine months ended September 30, 2020, reflects a full valuation allowance.

Free Cash Flow

We calculate Free Cash Flow as net cash provided by or used in operating activities less additions of property, plant and equipment, net of proceeds received from government awards used for construction. We believe Free Cash Flow is useful for

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comparing our ability to generate cash with that of our peers. The presentation of Free Cash Flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.

The following table presents a reconciliation of our Free Cash Flow, which is a non-GAAP financial measure, to our net cash provided by (used in) operating activities, which is determined in accordance with GAAP:


	For the nine months ended September 30,
(in thousands)	2021		2020
Net cash provided by (used in) operating activities(1)	$	70,464	$	(318)
Additions of property, plant and equipment, net(2)	(83,805)		(9,695)
Free Cash Flow	$	(13,341)	$	(10,013)

(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting treatment thereof, $38.9 million and $14.7 million of our product sales for the nine months ended September 30, 2021 and 2020, respectively, were excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation.

(2)Amount for the nine months ended September 30, 2021, is net of $2.6 million in proceeds received from a government award used for construction, specifically our Stage II optimization project.

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash flows to meet the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations, debt service and other commitments. Historically, our principal sources of liquidity have been the Offtake Advances from Shenghe, issuances of notes or other debt, and net cash from operating activities. More recently, through the consummation of the Business Combination, including the PIPE Financing, and the issuance of the Convertible Notes (as discussed further below), we raised $504.4 million and $672.3 million in net proceeds, respectively.

As of September 30, 2021, we had $1,179.4 million of cash and cash equivalents, $690.0 million principal amount of long-term debt (to third parties) and $32.6 million principal amount of related-party debt pertaining to our Offtake Advances with Shenghe.

Our results of operations and cash flows depend in large part upon the market prices of REO and particularly the price of rare earth concentrate. Rare earth concentrate is not quoted on any major commodities market or exchange and demand is currently limited to a relatively limited number of refiners, a significant majority of which are based in China. Although we believe that our cash flows from operations and cash on hand is adequate to meet our liquidity requirements for the foreseeable future, uncertainty exists as to the market price of REO, especially in light of the ongoing COVID-19 pandemic, including the emergence of new variants (such as the Delta variant).

Our current working capital needs relate mainly to our mining and beneficiation operations. Our principal capital expenditure requirements relate mainly to the periodic replacement of mining or processing equipment, as well as our Stage II optimization project to recommission and optimize our idled refining facilities. Our future capital requirements will depend on several factors, including future acquisitions and potential additional investments in further downstream production (for example, pursuit of Stage III downstream opportunities for the production of rare-earth-based magnets and/or other finished components). If our available resources prove inadequate to fund our plans or commitments, we may be forced to revise our strategy and business plans or could be required, or elect, to seek additional funding through public or private equity or debt financings; however, such funding may not be available on terms acceptable to us, if at all.

Debt and Other Long-Term Obligations

Convertible Notes: On March 26, 2021, we 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 Company received net proceeds of $672.3 million from the issuance of the Convertible Notes.

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We intend to allocate an amount equal to the net proceeds from the Convertible Notes offering to existing or future investments in, or the financing or refinancing of, eligible “green projects.” Eligible green projects are intended to reduce the Company’s environmental impact and/or enable the production of low-carbon technologies. We aim to achieve a level of allocation for eligible green projects which matches the amount of such net proceeds. Pending such allocation of the net proceeds to eligible green projects, we intend to use the net proceeds from the Convertible Notes offering for general corporate purposes.

Offtake Advances: As of September 30, 2021, we had debt recorded to Shenghe with a carrying amount of $30.9 million, of which $32.6 million was principal and $1.7 million was debt discount. The debt to Shenghe is to be satisfied primarily through product sales, as described above, where partial non-cash consideration is received by the Company in the form of debt reduction (generally equal to approximately 15% of the ultimate market value of the REO, excluding tariffs, duties and certain other charges). Additional cash payments will be required as a result of sales of offtake products to other parties, and under certain other conditions. See also “Recent Developments and Comparability of Results” section above.

We follow an imputed interest rate model to calculate the amortization of the embedded discount, which is recognized as non-cash interest expense, by estimating the timing of anticipated payments and reductions of the debt principal balance. The effective rate applicable from the June 5, 2020, inception to September 30, 2021, was between 4.41% and 11.50%. As of September 30, 2021, we estimated the timing of repayment to be within the next year which resulted in an updated imputed interest rate of 16.28%. The increase in the imputed rate is primarily due to changes in expected market prices resulting in an earlier anticipated repayment of the outstanding balance through the various mechanisms, which results in a higher implicit interest rate in order to fully amortize the debt discount concurrent with the expected final repayment of the debt balance.

Paycheck Protection Loan: In April 2020, we obtained a loan of $3.4 million pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted in March 2020 (the “Loan”). The 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. In June 2021, we received notification from the Small Business Administration that the Loan and related accrued interest was forgiven.

Equipment Notes: We have entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery. As of September 30, 2021, we had $10.3 million in principal (and accrued interest) outstanding under the equipment notes.

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Public Warrants

Cash Flows

The following table summarizes our cash flows:


	For the nine months ended September 30,				Change
(in thousands, except percentages)	2021		2020		$		%
Net cash provided by (used in) operating activities	$	70,464	$	(318)	$	70,782	n.m.
Net cash used in investing activities	$	(83,680)	$	(9,695)	$	(73,985)	763	%
Net cash provided by financing activities	$	669,610	$	36,186	$	633,424	1750	%

n.m. - Not meaningful.

Net Cash Provided by (Used in) Operating Activities: The net cash provided by operating activities of $70.5 million for the nine months ended September 30, 2021, as compared to the net cash used in operating activities of $0.3 million in the prior year period, reflects the increase in product sales, partially offset by the increase in our cost of sales and general and administrative expenses (all as discussed above). In addition, of our product sales for the nine months ended September 30, 2021 and 2020, $38.9 million and $14.7 million, respectively, were excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation.

Net Cash Used in Investing Activities: Our current, recurring capital expenditure needs consist mainly of purchases of property, plant and equipment, including mining equipment. The increase in net cash used in investing activities of $74.0 million for the nine months ended September 30, 2021, compared to the prior year period, is attributable to an increase in capital expenditures relating primarily to our Stage II optimization project, as well as commissioning of our CHP facility and water treatment plant, partially offset by $2.6 million of proceeds from a government award used for construction, specifically our Stage II optimization project.

Net Cash Provided by Financing Activities: The increase in net cash provided by financing activities of $633.4 million for the nine months ended September 30, 2021, compared to the prior year period, primarily relates to the net proceeds received from the issuance of the Convertible Notes in March 2021 of $672.3 million, versus the $35.5 million in proceeds received from the Second Additional Advance during the nine months ended September 30, 2020.

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Off-Balance Sheet Commitments and Arrangements

We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

Critical Accounting Policies

A complete discussion of our critical accounting policies is included in our Form 10-K for the year ended December 31, 2020. There have been no significant changes in our critical accounting policies during the three months ended September 30, 2021.

Recently Adopted and Issued Accounting Pronouncements

Recently adopted and issued accounting pronouncements are described in Note 2, “Significant Accounting Policies,” in the notes to our unaudited Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk exposures for the three months ended September 30, 2021, as compared to those discussed in our Form 10-K for the year ended December 31, 2020.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021, to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

There were no changes that occurred during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be subject to legal and governmental proceedings and claims in the ordinary course of business. We are not currently a party to any material legal or governmental proceedings and, to our knowledge, none is threatened.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2020, and our Form 10-Q for the quarterly period ended March 31, 2021, which could materially affect our business, financial condition, and future results. The risks described in our Form 10-K for the year ended December 31, 2020, and our subsequent Form 10-Q filings are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our financial condition, operating results and cash flows. The following are new or modified risk factors that should be read in conjunction with the risk factors disclosed under Part I, Item 1A. “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2020, and Part II, Item 1A. “Risk Factors” in the Company’s subsequent Form 10-Q filings.

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Risks Relating to our Business and Industry

The COVID-19 pandemic could have an adverse effect on our business.

The current COVID-19 pandemic is significantly impacting the national and global economy and commodity and financial markets. The full extent and impact of the COVID-19 pandemic is unknown and to date has included, among other things, extreme volatility in financial markets, a slowdown in economic activity, extreme volatility in commodity prices and a global recession. The response to COVID-19 has led to significant restrictions on travel, temporary business closures, quarantines, global stock market volatility and a general reduction in consumer activity and sentiment, globally. The outbreak has affected our business and operations and may continue to do so by, among others, increasing the cost of operations and reducing employee productivity, limiting travel of our personnel, adversely affecting the health and welfare of our personnel, or preventing or delaying important third party service providers from performing normal and contracted activities crucial to the operation of our business. In addition, in the fourth quarter of 2020, we began to see shipping delays and container shortages from congestion at port facilities, which has been exacerbated by COVID-19. Congestion at U.S. and international ports could affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels.

The outbreak has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on manufacturing and the movement of employees in many regions of China, the U.S. and other countries. These disruptions could continue to impact the rare earth market, particularly the supply chain in China and the U.S., which in turn could impact our business or business prospects as under our A&R Offtake Agreement with Shenghe, we rely on Shenghe to purchase all of our rare earth concentrate products and sell those products to customers in China. See “Our Relationship and Agreements with Shenghe” within Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Decisions beyond our control, such as canceled events, restricted travel, barriers to entry, temporary closures or limited availability of county, state or federal government agencies, or other factors may affect our ability to perform mining operations, corporate activities, and other actions that would normally be accomplished without such limitations. The extent to which the COVID-19 outbreak will impact our operations, our business and the economy is highly uncertain. We cannot predict the impact of the COVID-19 pandemic, but it may materially and adversely affect our business, financial condition and results of operations.

On September 9, 2021, President Biden issued Executive Order 14042, “Ensuring Adequate COVID Safety Protocols for Federal Contractors.” The Safer Federal Workforce Task Force issued guidance on mandatory vaccines for the employees of federal contractors. In addition, pursuant to the directive in Executive Order 14042, Occupational Safety and Health Administration published an Emergency Temporary Standard (“ETS”) on November 5, 2021, for employers with 100 or more employees. The ETS requires employers to develop a mandatory COVID-19 vaccination policy, or a weekly testing policy, by December 5, 2021. The ETS requires employers who implement a mandatory vaccination policy to ensure employees complete all doses of either the Johnson & Johnson, Pfizer, or Moderna vaccine by January 4, 2022, or otherwise be subject to weekly testing. To the extent we implement mandatory vaccinations or weekly testing as a result of Executive Order 14042, this may have an adverse impact on our results of operations, including loss of personnel and/or production interruptions at Mountain Pass.

ITEM 4. MINE SAFETY DISCLOSURES

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-Q for the quarterly period ended September 30, 2021.

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ITEM 6. EXHIBITS


Exhibit No.						Description



























10.1*†						Form of MP Materials Corp. 2020 Stock Incentive Plan Restricted Stock Award Agreement.

31.1*						CEO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

31.2*						CFO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

32.1**						CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

32.2**						CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

95.1*						Mine Safety Disclosure pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104						Cover Page Inline XBRL File (included in Exhibit 101).

*						Filed herewith.

**						Furnished herewith.

†						Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

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


		MP MATERIALS CORP.

Dated:	November 10, 2021	By:	/s/ Ryan Corbett
			Ryan Corbett
			Chief Financial Officer