PureCycle Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PureCycle is commercializing a licensed process to recycle polypropylene into ultra-pure recycled resin. The company had not generated operating revenue through the reporting date.
Financial performance and position
- Revenue and margins: No operating revenue was reported; profit margins are not meaningful at this pre-revenue stage.
- Q2 results: Operating costs and expenses were $27.8 million, versus $19.7 million in Q2 2022. Net loss was $56.6 million, compared with $15.0 million; diluted loss per share was $0.35 versus $0.09.
- First-half results: Operating costs and expenses were $49.6 million, up from $38.8 million. Net loss was $82.4 million, versus $40.4 million; diluted loss per share was $0.50 versus $0.27.
- Loss drivers: Q2 included $26.3 million of warrant fair-value expense, compared with a $4.5 million benefit in Q2 2022. For the first half, warrant fair-value expense was $31.1 million, versus $1.3 million in 2022. The filing says changes were driven mainly by PCT’s share price, volatility, and time to warrant expiration.
- Cash flow: First-half operating cash outflow was $40.4 million, compared with $35.1 million in 2022. Investing cash outflow was $24.9 million, versus $191.9 million, largely reflecting lower purchases of debt securities. Financing provided $54.1 million, versus $248.1 million, which included the prior-year PIPE proceeds.
- Liquidity: June 30 cash and cash equivalents were $28.9 million; restricted cash was $187.4 million. Available unrestricted liquidity was $28.9 million, down from $107.9 million at year-end 2022. Working capital was $21.5 million, versus $197.9 million.
- Debt: Balance-sheet debt included $247.4 million of long-term debt, $6.4 million current debt, and a $36.4 million related-party note payable. The company also had an undrawn $150 million revolving facility, extended after quarter-end to mature March 31, 2025. The $40 million related-party term loan carried a 12.7% rate at June 30; interest may be paid in kind.
- Assets: Property, plant and equipment, net, was $628.8 million, up from $505.7 million at year-end 2022, reflecting facility construction and equipment.
Material changes and operating progress
- Operating costs more than doubled year over year in both the quarter and first half, primarily due to higher staffing, facility rent, depreciation after Ironton assets entered service, commissioning support, and site costs.
- Mechanical completion of the Ironton Facility was achieved April 25, 2023. Initial post-industrial recycled pellet production was certified by an independent construction monitor on June 28; the company reported commencing production by July 1. The facility is still being commissioned and has nameplate capacity of approximately 107 million pounds annually.
- The company reported no borrowings under its revolving credit facility at June 30. It received $40 million under a related-party term loan and $19.7 million through equipment financing during the first half.
Outlook, risks, and unusual items
- Management outlook: PureCycle expected to begin producing and selling resin in 2023 and reach full Ironton production capacity in early 2024. These are expectations, not reported results. Certain production targets remain subject to the bond waiver milestones, including targets by January 31, 2024.
- Funding and going concern: The filing states that available unrestricted liquidity is insufficient to fund operations, commitments, and growth plans and that conditions raised substantial doubt about the company’s ability to continue as a going concern. Management said its plans—including Ironton becoming commercially viable and revenue-generating later in 2023—alleviated that doubt. The company expects to seek additional debt or equity financing and warns funding may not be available on acceptable terms.
- Commitments and expansion: Remaining Ironton investment was estimated at $10.0–$22.5 million, subject to contract contingencies. Other stated commitments included $13.3 million for Augusta pre-construction and long-lead equipment and $15.8 million for future Feed PreP and purification facilities. Augusta Phase One requires at least $440 million of investment; financing and timing remain uncertain, and construction must start by December 31, 2023 to preserve certain incentives.
- Debt and project conditions: The Ironton bond default waiver imposes production and completion milestones; failure to comply could trigger an event of default. The revolving facility is secured by substantially all company assets, carries rising interest margins, and has customary default provisions. The related-party nature of the lenders and the term loan is also relevant.
- Legal matters: A securities class action was not dismissed as to most defendants, and the company cannot estimate a possible loss. A contractor filed an arbitration demand and mechanic’s lien seeking approximately $17 million; PureCycle disputes the claim and asserts counterclaims. The company likewise cannot estimate a potential loss from the arbitration.
- Controls: Management concluded disclosure controls were not effective at June 30 due to material weaknesses involving IT access controls and financial reporting review. Remediation is underway but has not been completed.
- Other unusual item: The company recorded a $25 million surety bond for vendor-contract performance; it was not recorded as debt or a balance-sheet liability because no liability was then identified.
Important facts for investors to verify
- Whether Ironton completes performance testing, receives required certifications, meets waiver production milestones, and achieves commercial sales and planned capacity.
- Whether management can secure enough unrestricted funding to cover operating needs, Ironton costs, debt service, and expansion commitments.
- The final cost and resolution of Ironton construction contingencies, including the estimated $10.0–$22.5 million remaining investment and contractor arbitration.
- Whether Augusta financing and construction proceed on schedule, including the December 31, 2023 start deadline and $440 million Phase One investment commitment.
- Progress in remediating material weaknesses and developments in the securities litigation and other legal matters.