PureCycle Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The filing is unaudited. PureCycle is a pre-commercial plastics recycler developing technology licensed from Procter & Gamble (P&G); it had not begun commercial operations or generated operating revenue. The March 17, 2021 business combination was accounted for as a reverse recapitalization, so prior-period results reflect Legacy PCT.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | No operating revenue | No operating revenue | No operating revenue | No operating revenue |
| Operating costs and expenses | $9.9 million | $2.9 million | $20.2 million | $6.1 million |
| Net loss | $15.3 million | $4.4 million | $45.4 million | $9.0 million |
| Loss per share, basic and diluted | $0.13 | $0.19 | $0.54 | $0.48 |
| Interest expense | $6.1 million | $0.6 million | $12.1 million | $1.2 million |
- Cash and liquidity at June 30: Unrestricted cash was $37.7 million; restricted cash was $300.9 million; available-for-sale debt securities were $200.4 million. Working capital was $198.3 million. The filing reports $338.6 million of cash and restricted cash combined.
- Debt: Notes payable were $59.2 million and bonds payable were $232.0 million, for approximately $291.2 million in carrying value before considering accrued interest and other presentation differences. Management also cited $313.6 million of debt and accrued interest, less $20.0 million of discounts and issuance costs. Convertible notes carry 5.875% stated interest, mature October 2022, and may be extended for half the outstanding amount to April 2023.
- Cash flows, six months: Operating activities used $43.0 million; investing activities used $242.9 million, including $200.7 million for debt securities and $42.2 million for plant construction; financing activities provided $293.9 million, primarily from the business combination and PIPE financing.
- Margins: Not meaningful to calculate because the company had no revenue. Profitability and operating margins were not established.
Material changes versus comparable periods
- Six-month net loss increased by $36.4 million year over year. Operating costs and expenses rose $14.1 million; interest expense rose $11.0 million; and the six-month warrant fair-value charge was $13.3 million, compared with $1.8 million in the prior-year period.
- SG&A increased substantially, reflecting additional headcount, public-company costs, insurance and professional services, and $3.2 million of transaction-related expense in the six-month period.
- The March business combination and PIPE brought approximately $298.5 million of net financing proceeds after transaction costs. The company invested in liquid debt securities and accelerated construction spending.
- Property, plant and equipment, net, increased to $138.4 million from $70.2 million at year-end 2020; construction in progress was $112.7 million.
- Accumulated deficit grew to $129.5 million from $84.6 million at year-end 2020. Total stockholders’ equity was $326.8 million.
Outlook, commentary and key risks
- Ironton, Ohio: The first commercial-scale plant is planned for approximately 107 million pounds of annual capacity. Management expected production to begin in late 2022 and the facility to be fully operational in 2023. The filing estimates remaining completion costs at approximately $183.9 million in one MD&A passage; another passage describes $160.2 million as remaining cost to complete. Management said it did not then anticipate additional capital beyond planned funding to complete Plant 1.
- Augusta, Georgia: An agreement to build a first U.S. cluster facility was reached July 29, 2021. The approximately 200-acre site is expected ultimately to produce up to 650 million pounds annually. The filing does not provide a detailed construction budget or operating timetable for Augusta.
- Longer-term plans: Management described a goal of approximately 30 commercial lines by 2030 and 50 by 2035, and approximately 1.0 billion pounds of installed capacity by the end of 2024. These are forward-looking objectives, not guaranteed outcomes.
- Commercial arrangements: Management reported contracted feedstock sufficient for Ironton’s 107-million-pound nameplate capacity for at least three years and offtake commitments with a combined guaranteed minimum of 63 million pounds annually, with up to 138 million pounds at the company’s option. The filing cautions that arrangements are subject to conditions, customer acceptance and product specifications.
- Funding constraints: Much of the cash is restricted for project purposes. The company must maintain a $50 million liquidity reserve under the amended completion guaranty, subject to specified conditions for reduction or release. It also faced minimum cash requirements of $75 million as of July 31, 2021 and $100 million as of January 31, 2022, including the reserve; it reported meeting the July requirement.
- Execution and regulatory risks: Commercial-scale performance, construction timing and costs, feedstock availability and quality, customer acceptance, food-grade regulatory clearances, permitting, and continued P&G license exclusivity remain significant uncertainties. The company’s technology had been tested at a smaller-scale evaluation unit; commercial-scale results were not assured.
- Contingencies: Two putative securities class actions alleged misleading statements about the technology, business and prospects. The cases were consolidated; the company said it intended to defend them and could not reasonably estimate any loss or range of loss.
- Controls: Management concluded disclosure controls were not effective as of June 30, 2021 because of material weaknesses involving technical accounting expertise, segregation of duties, review processes, IT access controls, and expense/payables completeness and cutoff. Remediation was underway, but the weaknesses had not yet been fully remediated.
- Unusual accounting item: Liability-classified warrants are remeasured through earnings, creating potentially significant non-cash swings in reported results. Six-month warrant fair-value expense was $13.3 million.
Important facts for investors to verify
- Reconcile the filing’s differing Ironton remaining-capital estimates of $183.9 million and $160.2 million, and confirm the latest expected cost and funding plan.
- Track actual construction progress, commissioning and production milestones against the late-2022 start and 2023 full-operation expectations.
- Confirm restrictions on cash, reserve requirements, bond covenants and the company’s ability to meet future liquidity needs while funding construction and expansion.
- Verify customer offtake and feedstock commitments, specifications, pricing terms and counterparties’ performance as commercial production approaches.
- Monitor FDA and other regulatory clearances, commercial-scale product quality, P&G license requirements, securities litigation and remediation of material weaknesses.