USA Rare Earth, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF USAR Overview USA Rare Earth, Inc. (“USAR”), is a company with the mission to establish a vertically integrated, domestic rare earth magnet supply chain that supports the future state of energy, mobility, and national security in the United States (“U.S.”). We are developing the Stillwater Facility and, via our Round Top Project, intend to establish domestic rare earth and critical minerals supply, extraction, and processing capabilities to both supply our magnet manufacturing plant and market surplus materials to third parties. Rare earth magnets are critical to various business sectors and industries, including the defense, automotive, aviation, AI robotics, industrial, medical and consumer electronics industries, among others. Our vertically integrated approach — from sourcing REE’s, in addition to other critical minerals such as gallium, to producing finished NdFeB magnets — assists in strengthening the U.S.’s control over critical supply chains such as the supply of rare earth minerals and magnets and thus reduce domestic reliance on foreign, particularly Chinese, imports. We believe our focus on developing domestic rare earth production aligns with national priorities, offering the future potential of a sustainable and secure domestic supply of materials critical to key industries. We have been in the exploration and research stages since our formation and have not yet realized any revenues from its planned operations. Our Business Model We acquired the land and other assets comprised of a facility at Stillwater, Oklahoma (“Stillwater Facility”) to develop it into a magnet production facility and we are in the process of completing our magnet production capabilities at the Stillwater Facility necessary for the initial production of NdFeB magnets. We control certain mining rights to Round Top Mountain, which is an above-ground mineral deposit near Sierra Blanca, Texas that contains the Round Top Deposit, the mining and extraction of which comprises our Round Top Project. We have not yet begun to extract any minerals from the Round Top Deposit. The development of the Round Top Project involves a high degree of financial risk and uncertainty. We have not yet commenced production in connection with either our Round Top Project or our Stillwater Facility and, consequently, we do not currently have any operating income or cash flows. Accordingly, we do not currently generate, nor have we realized to date, any revenues. Facilities Our facilities are comprised of the Stillwater, Oklahoma facility, the Wheat Ridge, Colorado facility and the Round Top Mountain Project, in Sierra Blanca, Texas. Recent Developments Securities Purchase Agreement; Pre-Funded PIPE Warrant; PIPE Warrant As previously disclosed and further described in our Current Report on Form 8-K filed on May 5, 2025, we entered into an amended and restated securities purchase agreement, dated as of April 29, 2025 (the “Purchase Agreement”), with a purchaser (the “Purchaser”) for the private placement (the “Private Placement”) of (i) 8.55 million shares of the Company’s common stock, par value $0.0001 per share (the “PIPE Shares”), (ii) a pre-funded warrant (the “Pre-Funded PIPE Warrant”) to purchase an aggregate of 2.16 million shares of Common Stock (the “Pre-Funded PIPE Warrant Shares”) and (iii) a warrant (the “PIPE Warrant”) to purchase an aggregate of 10.71 million shares of Common Stock (the “PIPE Warrant Shares,” and together with the Shares, the Pre-Funded PIPE Warrant, the Pre-Funded PIPE Warrant Shares and the PIPE Warrant, the “Securities”), at an exercise price of $7.00 per share, for aggregate gross proceeds of $75.00 million. On May 2, 2025, the Company closed the Private Placement and issued the Securities. The Company intends to use the net proceeds from the Private Placement for working capital and general corporate purposes. Merger and Related Transactions We were formerly known as Inflection Point Acquisition Corp. II (“IPXX”), which was a special purpose acquisition company incorporated as a Cayman Islands exempted corporation on March 6, 2023. We were incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. Shares of USAR common stock (“Common Stock”) and USAR warrants (“Warrants”) began trading on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “USAR” and “USARW”, respectively, on March 14, 2025. On March 13, 2025, we consummated the previously announced Business Combination and other related transactions (the “Merger”) as further described in Note 1, “Organization” and Note 3, “Merger Transaction” to our condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. The Merger was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Merger and other related transactions had several significant impacts on our reported financial position and results, due to the reverse recapitalization treatment. 34 Forward Purchase Agreements On March 11, 2025, IPXX entered into FPA with three separate investors (“Sellers”) pursuant to which the investors agreed to hold up to a total of approximately 1.89 million publicly held Class A ordinary shares of IPXX (“Public Shares”) in connection with the Closing of the Merger. Each FPA amended, restated and superseded in its entirety a separate FPA with each of the Sellers, dated March 10, 2025, which had identical terms to those described herein, except that the Reset Price (as defined in the FPAs) was not subject to the floor price described below. For purposes of the FPAs, the Public Shares held by each Seller are referred to as such Seller’s “Maximum Shares.” The aggregate number of Public Shares subject to each FPA (the “FPA Shares”) was the aggregate number of Public Shares as notified to the Company by the applicable Seller, but in no event more than such Seller’s Maximum Shares set forth above. Each Seller notified the Company that it would subject the Maximum Shares to their respective FPAs. The FPA Shares are subject to reduction following the full or partial optional early termination of the FPAs as described below. Each FPA provided that in connection with Closing, the Company would pay to the Seller under such FPA, out of the funds held in IPXX’s trust account, an amount (the “Prepayment Amount”) equal to the product of (i) the FPA Shares and (ii) an amount (the “Initial Price”) equal to the redemption price per share payable to investors who elected to redeem in connection with the Merger Transactions, which Initial Price was approximately $11.00. The Company prepaid approximately $20.8 million to the trust account at the closing of the Merger to secure its purchase obligation to repurchase for any outstanding FPA Shares at the Initial Price per share of $11.00 on the date that is 90 days after the closing of the merger (the “Maturity Date”). On any day the Nasdaq is open for trading following the Closing of the Merger through the Maturity Date, the Sellers may sell any, or all, of their FPA Shares (the “Terminated Shares”). For any Terminated Shares, the Seller must remit the Initial Price to the Company but retains any profit over that price. At the Maturity Date, the Company is obligated to purchase any outstanding FPA Shares at a price per share equal to the Initial Price. Class A Convertible Preferred Investment On August 21, 2024, in connection with the signing of the Business Combination Agreement, we completed the pre-funded private investment in public equity (“PIPE”) financing pursuant to which USARE LLC and certain accredited investors entered into the Class A Convertible Preferred SPAs, for 2.50 million USARE LLC Class A Convertible Preferred Units and USARE LLC Class A Preferred Investor Warrants exercisable for an aggregate of approximately 2.97 million USARE LLC Class A Units, for an aggregate purchase price of approximately $25.5 million. In addition, USARE LLC issued approximately 0.12 million USARE LLC Class A-2 Convertible Preferred Units and a USARE LLC Class A Preferred Investor Warrant to purchase up to approximately 0.03 million USARE LLC Class A Units in exchange for Mr. Micheal Blitzer’s promise to forgive, at Closing, 50% of the then-outstanding balance of a convertible promissory note. IPXX and certain accredited investors including Mr. Blitzer, and Collective Capital Management entered into Securities Purchase Agreements on January 31, 2025 to purchase (i) USARE LLC Class A-2 Convertible Preferred Units and (ii) USARE LLC Class A Investor Warrants for an aggregate purchase price of approximately $15.3 million which closed on February 3, 2025. On March 11, 2025, IPXX entered into a securities purchase agreement for Series A Preferred Stock and Series A Preferred Investor Warrants for total gross proceeds of $8.0 million. Public Company Costs Following the consummation of the Merger, USA Rare Earth, Inc. is an SEC-reporting and NASDAQ-listed company, which require us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices both before and after the consummation of the Merger. We expect to incur significant additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees. Results of Operations We have no operating revenues. We are dependent on equity or other external financings to fund our pursuit and development of our consolidated business plans (including magnet production at our Stillwater Facility), to fund our mineral exploration and evaluation operations, our evaluation and intended development of the Round Top Project (collectively, our “R&D” costs), selling, general and administrative (“SG&A”) costs, interest expense and other costs. As a result, we expect to incur operating losses until such time as either: (i) the Stillwater Facility is fully completed and operational to the extent that it generates net profits, or (ii) an economic mineral resource is identified, developed and put into profitable commercial production at the Round Top Project. The following tables set forth components of our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. 35 Comparison of three months ended March 31, 2025 and 2024 The following tables set forth our results for the periods indicated, and the changes between periods (in thousands, except for percentages): Three Months Ended March 31, Change 2025 2024 $ % Operating costs and expenses Selling, general and administrative $ 7,029 $ 2,647 $ 4,382 166 % Research and development 1,689 2,051 (362 ) (18 )% Total operating costs and expenses 8,718 4,698 4,020 86 % Operating loss (8,718 ) (4,698 ) (4,020 ) 86 % Other income (expense) Interest and dividend income 187 109 78 72 % Gain on fair market value of financial instruments 60,300 1 60,299 * Interest and other expense (87 ) (84 ) (3 ) 4 % Total other income 60,400 26 60,374 * Net income (loss) 51,682 (4,672 ) 56,354 * Net income (loss) attributable to non-controlling interest (150 ) (200 ) 50 (25 )% Net income (loss) attributable to common $ 51,832 $ (4,472 ) $ 56,304 * * Not meaningful Operating Costs and Expenses Selling, general and administrative (“SG&A”). The increase in SG&A expenses was primarily due to a $3.7 million increase in financial consulting, legal and other professional fees and an increase of $0.9 million equity-based compensation expense associated with the Merger, partially offset by lower payroll expenses. Research and development (“R&D”). The decrease in R&D was primarily due to lower consulting fees related to feasibility studies. Other Income and Expense Interest and dividend income. The increase in interest and dividend income was primarily due to higher balances in our money market funds. Gain on fair market value of financial instruments. The gain on fair market value of financial instruments in the first quarter of 2025 relates to the remeasurement of our earnout liability of $53.4 million, warrant liability of $6.2 million and derivative liability of $0.7 million. Interest and other expense. Our interest expense was consistent in the three months ended March 31, 2025 compared to the same period in the prior year. Liquidity and Capital Resources; Going Concern Sources and Uses of Liquidity Our condensed consolidated financial statements have been prepared contemplating the continuation of the Company as a going concern and the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon our ability to continue as a going concern. While our management believes in the viability of its strategy to generate future revenues, control costs and the ability to raise additional funds, our strategy may not be successful. Our condensed consolidated financial statements do not include any adjustments that might be necessary were we unable to continue as a going concern. If the going concern basis was not appropriate for the condensed consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the reported revenues and expenses, and the statement of financial position classifications used. 36 We have generated no revenues since inception, continue to incur losses from operations, and have an accumulated deficit. Our ability to continue as a going concern is dependent upon our ability to raise capital, to implement our business plan, generate sufficient revenues, and to control operating expenses. For the quarter ended March 31, 2025, we had net income of $51.7 million, which included a non-cash fair value gain on financial instruments of $60.3 million. For the quarter ended March 31, 2025, we used $10.3 million cash in operating activities. Subsequent to March 31, 2025, we received additional cash proceeds of $11.5 million in connection with early terminations of the Forward Purchase Agreements (“FPA”) from the Sellers. In addition, on May 5, 2025, we announced the closing of PIPE financing for $75 million with a single institutional investor. Although, as of March 31, 2025 we had cash on our balance sheet of $23.4 million and have subsequently raised additional proceeds from the exercises of the FPA and financing from the PIPE, we will need to raise additional capital to implement our strategic plan. Based on our need to raise additional capital, as well as milestones required for our current strategic plan to generate sustainable commercial revenues, there is substantial doubt regarding our ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. We consider cash equivalents to be highly liquid investments purchased with original maturities of three months or less. As of March 31, 2025, we had $23.4 million in cash and cash equivalents. For the three months ended March 31, 2025, we recognized Interest and dividend income of approximately $0.2 million. Cash Flows Three Months Ended March 31, 2025 2024 Change (in thousands) Net cash used in operating activities $ (10,329 ) $ (4,233 ) $ (6,096 ) Cash used in investing activities (3,050 ) (1,019 ) (2,031 ) Net cash provided by (used in) financing activities 19,969 (405 ) 20,374 The following presents management’s discussion of cash flows for the three months ended March 31, 2025 to the three months ended March 31, 2024. Operating Activities The $6.1 million increase in net cash used in operating activities was primarily due to an increase of $3.1 million net loss adjusted for non-cash related expenses and an increase in cash used for prepaid insurance as well as accounts payable and accrued liabilities, net related to payments for professional services partially offset by lower cash expenditures on payroll-related expenses. Investing Activities The increase was primarily due to additional investments made for property plant and equipment as we execute our strategic business plans. Financing Activities The increase in cash provided by financing activities is primarily due to net financing activities and contributions from the Merger. See Note 3, “Merger Transaction” of the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q, for further discussion of amounts received from financing activities and Merger transactions. 37 Hatch Senior Convertible Promissory Note On July 28, 2023, USA Rare Earth, LLC and Hatch LTD entered into an unsecured $1.0 million Senior Convertible Promissory Note agreement (the “Hatch Note”) with a 10% interest rate with a maturity date of July 28, 2025. The interest was to be payable at maturity. See Note 10, “Note Payable” to our condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional information related to the Hatch Note. The Hatch Note was converted at Closing into Common Stock. Off-Balance Sheet Arrangements Other than as otherwise described in this Form 10-Q, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. Risks and Uncertainties Associated with Future Results of Operations We operate in two industries that are both subject to intense competition, development risk, and changes in U.S. governmental policies related to green energy, defense spending and dependence on foreign suppliers. Our operations are subject to significant risks and uncertainties including financial and operational risks, as well as the potential risk of business failure. The magnet technology industry is still in its infancy in the United States, and thus the technology, processes, and capabilities are still being developed. The magnet facility requires substantial capital commitment to complete and there may be unanticipated costs or delays associated with the construction. The Company’s plans for producing magnets are based on certain estimates and assumptions we have made about our business over the next few years, including the ability to obtain the equipment and materials needed to produce magnets on a timely basis from third party vendors. Due to rapidly rising demand, there is also a risk that substitute products will become available and reduce the need for our type of high-performance magnet. We have not yet established that the Round Top Deposit contains any commercially exploitable quantities of proven and probable mineral reserves, and we may not be able to do so. Even if the Company does eventually establish commercially exploitable quantities of mineral reserves, the Round Top Deposit may not be developed into a producing mine and the Company may not be able to extract those minerals economically. Both mineral exploration and development involve a high degree of risk, and few properties that are explored are ultimately developed into producing mines. The commercial viability of an established mineral deposit will depend on several factors including the size, grade, and other attributes of the mineral deposit, as well as proximity of the deposit to infrastructure, government regulation, and market prices, among other things. Most of these factors will be beyond the Company’s control, and any of them could increase costs and make extraction of any identified mineral deposit unprofitable. Critical Accounting Policies and Estimates We consider Fair Value, Long-Lived Assets and Equity-based Compensation the most critical accounting policies to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. We also consider our Going Concern assessment to be subject to critical accounting estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. See Note 2, “Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of our critical and other significant accounting policies. See Note 1, “Organization” of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a discussion of our going concern assessment. 38 Recently Adopted Accounting Standards See Note 2, “Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Emerging Growth Company Status Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. We expect to retain our emerging growth company status until the earliest of: ● The end of the fiscal year in which our annual revenues exceed $1.2 billion; ● The end of the fiscal year in which the fifth anniversary of our public company registration has occurred; ● The date on which we have issued more than $1.0 billion in non-convertible debt during the previous three-year period; or ● The date on which we qualify as a large accelerated filer. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCOSURES ABOUT MARKET RISK Not required under Regulation S-K for “smaller reporting companies”.