PureCycle Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. PureCycle is commercializing licensed technology to purify recycled polypropylene into ultra-pure recycled resin. The company had not begun commercial operations and reported no revenue.
Financial results and position
| Metric | Q3 2022 / Sept. 30, 2022 | Comparable period / prior balance |
|---|---|---|
| Revenue | None | None |
| Net loss | Q3: $34.9 million; nine months: $75.4 million | Q3 2021: $21.0 million; nine months 2021: $58.1 million |
| Loss per share | Q3: $0.21; nine months: $0.49 | Q3 2021: $0.18; nine months 2021: $0.61 |
| Operating costs and expenses | Q3: $21.1 million; nine months: $59.9 million | Q3 2021: $27.5 million; nine months 2021: $47.7 million |
| Cash used in operations | Nine months: $50.2 million | Nine months 2021: $42.0 million |
| Cash used in investing | Nine months: $203.8 million | Nine months 2021: $273.1 million |
| Cash from financing | Nine months: $247.6 million | Nine months 2021: $294.1 million |
| Cash, cash equivalents and available-for-sale debt securities | $215.0 million; available unrestricted liquidity after Ironton set-aside: $160.4 million | At Dec. 31, 2021: $200.8 million and $150.1 million, respectively |
| Restricted cash | $201.1 million | At Dec. 31, 2021: $230.4 million |
| Total assets / liabilities | $887.1 million / $368.6 million | At Dec. 31, 2021: $664.7 million / $283.1 million |
| Revenue bonds payable | $233.3 million carrying value; $249.6 million gross including unamortized discount and issuance costs | Gross amount was also $249.6 million at Dec. 31, 2021 |
There is no meaningful operating margin to assess because the company has no revenue. The nine-month loss widened by 30%; the quarterly loss widened by 67%. The largest unusual driver was the fair-value remeasurement of liability-classified warrants, which generated $14.9 million of Q3 expense and $16.2 million for the nine months. The company also recorded $1.0 million of other comprehensive loss on available-for-sale securities for the nine months.
Changes versus prior periods
- Nine-month operating expenses increased 26%, principally due to higher operating costs as Ironton and Feed PreP activities expanded. Q3 operating expenses fell 23%, mainly because 2021 included higher equity compensation and bonus expense.
- Operating cash outflow increased $8.2 million year over year. Investing cash outflow decreased, despite higher construction spending, as purchases and maturities of debt securities changed.
- March 2022 PIPE financing raised approximately $250 million gross through common shares and Series A warrants. Common shares outstanding rose to 163.5 million from 127.6 million at year-end 2021.
- Warrant liabilities increased to $66.3 million from $6.1 million at year-end, primarily reflecting the newly issued Series A warrants and their subsequent fair-value accounting.
Outlook, projects and risks
- Ironton: The first commercial plant is designed for approximately 107 million pounds of annual capacity. Management expected production to begin in early 2023 and full operation later in 2023, and continued to expect the facility to generate cash in the first half of 2023. The company estimated an additional $75 million of completion costs, including a $12 million performance guarantee payable after independent engineering certification.
- Liquidity and funding: Management said available liquidity was adequate for the next 12 months, while noting uncertainty around start-up results and future financing. The company was restricting spending and hiring and expected to seek additional debt or equity funding. Augusta project-financing timing and likelihood were uncertain, prompting expense controls and timeline adjustments.
- Ravago dispute: Ravago, an Ironton feedstock supplier and offtake customer, alleged breach and sought to terminate its agreements. PureCycle disputed the allegations and was pursuing replacement agreements. The bond trustee began an investigation, leaving construction reimbursements pending; PureCycle paid $12.4 million to vendors from unrestricted cash on November 3, 2022. About $13.2 million remained to be reimbursed from the Ironton Bond Fund as of October 31. Failure to secure acceptable substitute agreements could adversely affect the business.
- Other development: The FDA issued an opinion letter covering food-grade post-industrial feedstocks for Conditions of Use A–H and a Letter of No Objection for stadium post-consumer feedstock for Conditions E–G. Additional submissions and testing were planned. A planned Central Florida Feed PreP site faced water and sewer permit challenges. A Denver, Pennsylvania site lease carries $52.3 million of minimum payments over 15 years and is expected to commence by the end of 2023. A South Korea joint venture was announced after quarter-end, with construction completion expected in 2025.
- Risks and contingencies: Construction inflation, supply constraints, feedstock availability and quality, commodity-price competition, facility start-up and scale-up, permitting, and access to capital could affect results. Securities class-action and derivative litigation remained unresolved; the company said potential losses could not be reasonably estimated.
- Controls: Management concluded disclosure controls were ineffective at quarter-end because of material weaknesses involving qualified accounting staffing, segregation of duties, formal review and reporting controls, IT access controls, and expense/payables cutoff and completeness. Remediation was underway but not complete.
Important facts for investors to verify
- Whether Ironton commissioning, production ramp-up, completion costs and cash-generation timing meet management’s expectations.
- Whether the trustee approves replacement Ravago agreements and resumes construction-cost reimbursements, and how the dispute affects liquidity and bond compliance.
- Whether Augusta financing is secured on acceptable terms and whether its revised schedule remains viable.
- Whether $160.4 million of available unrestricted liquidity remains sufficient after construction, operating commitments and any delays in reimbursement or financing.
- Whether FDA clearances expand to additional feedstock sources and use conditions, and whether Feed PreP facilities obtain permits and operate economically.
- Progress in remediating the disclosed material weaknesses, and developments in the pending securities and derivative litigation.