Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
USA Rare Earth, Inc. (“USAR”), is a company with a 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 our Stillwater Facility, located in Stillwater, Oklahoma, 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 at Stillwater and market surplus materials to third parties. Rare earth magnets are critical to various business sectors and industries, including the defense, automotive, aviation, artificial intelligence (also referred to as “AI”) robotics, industrial, medical and consumer electronics industries, among others. Our vertically integrated approach – from sourcing rare earth elements (“REE”), in addition to other critical minerals such as gallium, to producing finished sintered Neodymium Iron Boron (“NdFeB“ or “neo”) 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 our planned operations.
Our Business Model
We acquired the land at Stillwater, Oklahoma, and other assets that together comprises our Stillwater Facility. Our Stillwater Facility will be used to research, develop and produce neo magnets of which we are currently in the process of completing our magnet production capabilities which is necessary for the initial production of neo magnets.
We control certain mining rights to Round Top Mountain, which is located near Sierra Blanca, Texas, that contains the Round Top Mountain deposit, the mining, and the extraction of rare earth minerals which comprises our Round Top Project. We have not yet begun to extract any minerals from the Round Top Mountain 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.
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Recent Developments
Private Investment in Public Entity Financing
On April 29, 2025, we entered into an amended and restated securities purchase agreement with a purchaser for the private placement of (i) 8.55 million shares of our common stock, (ii) a pre-funded warrant to purchase an aggregate of 2.2 million shares of our common stock at an exercise price of $0.0001 per share, and (iii) a warrant to purchase an aggregate of 10.7 million shares of our common stock at an exercise price of $7.00 per share, for aggregate gross proceeds of $75.0 million (“$75M PIPE”). The Company intends to use the net proceeds for working capital and general corporate purposes. The $75M PIPE offering closed on May 2, 2025. See Note 4, “Fair Value Measurements – Private Investment in Public Entity Financing” for valuation of each component under the $75M PIPE and Note 11, “Mezzanine and Stockholders' Equity – Private Investment in Public Entity Financing” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements (unaudited),” of this Quarterly Report on Form 10-Q for further discussion on the specifics of the $75M PIPE.
Forward Purchase Agreements
On March 11, 2025, we entered into a Forward Purchase Agreement (“FPA”) with three (3) separate investors pursuant to which the investors agreed to hold up to a total of approximately 1.89 million publicly held shares of our common stock.
On various dates during the quarter ended June 30, 2025, the FPA investors exercised their rights under the FPAs and sold the entire 1.89 million FPA shares held. Upon the early termination, the FPA investors remitted cash in the amount of $20.8 million. See Note 3, “Merger Transaction” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements (unaudited),” of this Quarterly Report on Form 10-Q for further discussion on the FPA.
Investor Warrants and Series A Warrants
On various dates during the quarter ended June 30, 2025, investors exercised 0.13 million Investor warrants and 2.92 million Series A warrants for Common Stock, in which we received a cash payment of $1.5 million and $20.4 million, respectively.
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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 table set forth our results of operations, the amount of change, and percent of change between the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2025 2024 $ % 2025 2024 $ %
(In thousands, except for percentages)
Operating expenses:
Selling, general and administrative $ 6,227 $ 1,286 $ 4,941 380.0% $ 13,256 $ 3,933 $ 9,323 240.0 %
Research and development 2,577 1,725 852 50.0 % 4,266 3,776 490 10.0 %
Total operating expenses $ 8,804 $ 3,011 $ 5,793 190.0 % $ 17,522 $ 7,709 $ 9,813 130.0 %
Other income (expense):
Interest and dividend $ 765 $ 45 $ 720 NM $ 952 $ 154 $ 798 NM
(Loss) gain on fair market value of financial instruments (134,662) 229 (134,891) NM (74,362) 230 (74,592) NM
Interest expense and other income (loss), net (12) (82) 70 (90.0) % (99) (166) 67 (40.0) %
Total other income (loss), net $ (133,909) $ 192 $ (134,101) NM $ (73,509) $ 218 $ (73,727) NM
NM Percent change is not meaningful
Comparison of the three months ended June 30, 2025 and 2024
Selling, general and administrative . The increase in SG&A expenses of $4.9 million was primarily due to an increase in litigation settlement of $1.8 million, consulting costs of $1.2 million, legal services of $0.6 million related to the post-merger activities, and an increase in other costs of $1.3 million.
Research and development . The increase in R&D expenses of $0.9 million was primarily due to an increase in 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.
• Change in fair market value of financial instruments . The change in fair market value of financial instruments was primarily due to the day one loss of the Common Stock component under the $75M PIPE, and the increase in fair value of our Earnout and Series A warrant liabilities, and the fair value of the Common Stock and Prefunded warrant liabilities, resulting in a net loss on the fair market value of financial instruments.
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Comparison of the six months ended June 30, 2025 and 2024
Selling, general and administrative . The increase in SG&A expenses of $9.3 million was primarily due to an increase in merger-related transaction bonuses and other consulting costs of $2.9 million, legal services of $2.5 million related to the pre-merger and post-merger activities, litigation settlement of $1.8 million, equity based compensation costs of $0.9 million, marketing costs of $0.8 million, and an increase in employee, recruiting costs and travel expenses of $0.4 million.
Research and development . The increase in R&D expenses of $0.5 million was primarily due to an increase in consulting fees related to feasibility studies and employee costs, partially offset by lower insurance and other costs.
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.
• Change in fair market value of financial instruments . The change in fair market value of financial instruments was primarily due to the day one loss of the Common Stock component under the $75M PIPE, and the increase in fair value of our Series A warrant liability.
Liquidity and Capital Resources
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.
We have generated no revenues since inception, continue to incur losses from operations, and have an accumulated deficit. Although there is sufficient cash to cover our operating needs for the next 12 months, in order to achieve our current plan to manufacture and sell commercial products, we are dependent upon our ability to raise additional capital and to control operating expenses.
For the six months ended June 30, 2025, we had a net loss of $91.0 million, which included a non-cash fair value loss on financial instruments of $74.4 million. For the six months ended June 30, 2025, net cash used in operating activities was $18.2 million.
We consider cash equivalents to be highly liquid investments purchased with original maturities of three months or less. As of June 30, 2025, we had $121.8 million in cash and cash equivalents. In addition, during the three and six months ended June 30, 2025, investors exercised 0.13 million Common Stock Warrants and 2.92 million Series A Investor Warrants, of which the Company received cash of $1.5 million and $20.4 million, respectively, and for the six months ended June 30, 2025, we recognized interest and dividend income of approximately $1.0 million. Although we had sufficient cash on our balance sheet and sufficient flow of cash from the $75M PIPE financing, exercise of warrants, and interest income on our cash balances to handle our operations over the next 12 months, we will still need to raise additional capital to implement our current strategic plan and to purchase raw material inventory to achieve our revenue projections and positive cash flows.
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.
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Cash Flows
Six Months Ended June 30,
2025 2024 Change
(In thousands)
Net cash used in operating activities $ (18,238) $ (8,277) $ (9,961)
Net cash used in investing activities (6,297) (1,055) (5,242)
Net cash provided by (used in) financing activities 129,565 (572) 130,137
Operating Activities . The $10.0 million increase in net cash used in operating activities, as compared to the comparable period of the prior year, was primarily due to an increase of $5.7 million net loss adjusted for non-cash items, such as the non-cash loss of $74.6 million related to the day one loss under the valuation of the $75M PIPE, the change in fair value of outstanding financial instruments, and a non-cash litigation settlement of approximately $1.7 million, and an increase in cash used for accounts payable and prepaid insurance.
Investing Activities. The $5.2 million increase in cash used in investing activities, as compared to the comparable period of the prior year, was primarily due to additional investments made for property, plant and equipment as we execute our strategic business plan and continue to build the manufacturing process at our Stillwater Facility.
Financing Activities. The $130.1 million increase in cash provided by financing activities, as compared to the comparable period of the prior year, is primarily due to the $75M PIPE financing activities, contributions from the Merger, and exercises of warrants. 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.
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 U.S., 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. Our plan 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 Mountain 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 Mountain 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.
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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 1, “Organization” and 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 discussion of our going concern assessment and a description of our critical and other significant accounting policies, respectively.
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 $1.235 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 DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies”.
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