PureCycle Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial amounts are in U.S. dollars; “million” is abbreviated as “m.” PureCycle is commercializing a licensed process to recycle polypropylene into ultra-pure recycled resin. It had not generated operating revenue through the reporting period.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Operating costs and expenses | $35.2m | $21.1m | $84.9m | $59.9m |
| Net income (loss) | $4.9m | $(34.9)m | $(77.5)m | $(75.4)m |
| Net cash used in operating activities | — | $(61.3)m | $(50.2)m | |
| Net cash used in investing activities | — | $(55.3)m | $(203.8)m | |
| Net cash provided by financing activities | — | $273.3m | $247.6m |
- Q3 net income was not evidence of operating profitability: it was primarily driven by a $48.8m non-cash gain from changes in the fair value of liability-classified warrants. The nine-month net loss included an equivalent $17.7m warrant valuation benefit.
- Operating costs rose 67% in Q3 and 42% for the first nine months, mainly with Ironton staffing, commissioning and operating costs, and depreciation after assets entered service. Q3 interest expense was $10.8m versus $0.2m a year earlier; nine-month interest expense was $14.9m versus $1.2m.
- At September 30, cash and cash equivalents were $199.3m, available-for-sale debt securities $12.0m, and restricted cash $184.8m. Management reported $211.4m of available unrestricted liquidity; the $150m revolving facility was undrawn. Working capital was $205.4m.
- Total assets were $1.072bn, total liabilities $630.3m, and stockholders’ equity $441.6m. Property, plant and equipment, net, was $625.9m.
- Debt included $249.6m principal of revenue bonds, $250m principal amount at maturity of green convertible notes (carrying amount $219.1m), $21.9m equipment financing, and a related-party note with $41.7m principal before discount and issuance costs. The $40m related-party term loan bore 12.9% interest at quarter-end, with interest eligible to be paid in kind. The $150m revolving facility had no borrowings at quarter-end.
Material changes and operating developments
- Ironton reached mechanical completion in April 2023 and began producing initial post-industrial recycled pellets; the construction monitor certified commencement of production in June. The facility’s expected nameplate capacity is 107m pounds annually. However, it had not met its targeted production milestone by September 30 and had not generated revenue.
- Management expected Ironton to become commercially operational and begin revenue generation later in 2023, with full capacity targeted in 2024. Up to $12.5m remained anticipated for a performance-guarantee payment; management estimated total Ironton investment at about $360m, excluding that payment.
- In August, PureCycle issued $250m principal amount at maturity of 7.25% green convertible notes for about $218.5m net proceeds. The notes mature in 2030, have an initial conversion price of about $14.82 per share, and include a holder repurchase right in August 2027.
- Cash and restricted cash increased by $156.6m during the first nine months, while operating cash use increased by $11.2m year over year. Financing included $225m proceeds from convertible notes, $38m from the related-party note, and $22.1m from equipment financing.
Outlook, risks and contingencies
- Management stated that recurring losses, negative operating cash flows, and lack of revenue raised substantial doubt about the company’s ability to continue as a going concern. It concluded its plans, including expected Ironton commercialization and available liquidity, alleviated that doubt for the next 12 months; this depends on execution and liquidity assumptions.
- After quarter-end, on November 8, 2023, lenders waived the missed September production milestone and reset requirements. PureCycle paid an additional $50m into a trustee account, bringing required aggregate trustee deposits to at least $100m while revenue bonds remain outstanding. Revised targets include 4.45m pounds of pellets over 30 consecutive days by December 31, 2023; completion of performance testing by February 28, 2024; project completion by March 31, 2024; and production/ramp targets, including nameplate capacity, by April 30, 2024. Failure to meet revised milestones may restrict access to trust-held funds and result in default-related consequences.
- Management cited uncertain financing and timing for the Augusta, Georgia, facility. Phase One carries a minimum $440m investment commitment and a December 31, 2023 construction-start condition tied to certain incentives. The company also reported $24.6m of Augusta commitments and $21.3m for future Feed PreP and purification facilities.
- Material execution risks include Ironton commissioning and performance, financing future facilities, sourcing suitable feedstock, regulatory clearances, and achieving commercial sales. The company disclosed securities and derivative litigation, a contractor arbitration and related lien claim seeking about $17m, and other legal demands; it could not estimate potential losses for the unresolved matters.
- Disclosure controls were not effective at September 30 because of material weaknesses in IT access controls and financial reporting review processes. Remediation had begun but was not complete.
Important facts for investors to verify
- Whether Ironton met each revised production, performance-testing, completion and ramp-up milestone, and whether commercial revenue began as expected.
- How the post-quarter $50m trustee deposit affected unrestricted liquidity and whether restricted funds or covenant conditions limit access to cash.
- Actual operating cash burn, interest and debt-service costs, and whether additional financing is required or available on acceptable terms.
- Progress, financing and incentive deadlines for Augusta, including the required construction start and investment commitments.
- Developments in the disclosed litigation, arbitration and contractor lien claim, and remediation of the material weaknesses in controls.