PureCycle Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. PureCycle is a pre-commercial plastics recycler developing technology licensed from Procter & Gamble (P&G). It had not begun commercial operations and reported no revenue. The March 17, 2021 business combination with Roth CH Acquisition I was accounted for as a reverse recapitalization; prior-period results reflect Legacy PCT.
Financial performance and position
- Revenue and margins: No operating revenue; profit margins are not meaningful at this stage.
- Net loss: $30.1 million, versus $4.6 million in Q1 2020. Loss per share was $0.59, versus $0.19.
- Expenses: Operating costs and expenses were $10.3 million, up from $3.3 million. SG&A rose to $7.6 million from $1.2 million, including $3.2 million of transaction-related expense. Interest expense was $6.1 million, versus $0.6 million.
- Warrant fair-value expense: $13.6 million, versus $0.7 million in Q1 2020. This non-cash remeasurement was a significant contributor to the larger reported loss.
- Cash flow: Operating cash use was $20.6 million, compared with $4.9 million; plant construction investment was $33.9 million, compared with $0.8 million. Financing provided $294.0 million, primarily from the business combination and related financing.
- Cash and liquidity: Cash and cash equivalents totaled $570.1 million, including $317.5 million of restricted cash; unrestricted cash was $252.5 million. Working capital was $228.7 million. Restricted funds are subject to project and bond-related use restrictions.
- Debt and balance sheet: Total liabilities were $343.9 million and total assets were $685.3 million. The filing reports approximately $310 million of debt before $20.7 million of discounts and issuance costs; bonds payable were $231.8 million and notes payable were $57.2 million, excluding current notes. Convertible notes bear 5.875% interest and mature October 2022, with a possible extension for half of the outstanding notes. Revenue bonds have rates of 6.25%–13% and maturities from 2025 to 2042.
Material changes and business developments
- The business combination and PIPE financing materially increased cash and equity; the company issued 117.3 million common shares by March 31.
- Construction in progress increased to $82.2 million from $43.6 million at December 31, 2020. Net property, plant and equipment rose to $108.4 million from $70.2 million.
- The company is building its first commercial-scale Ironton, Ohio facility, with expected nameplate capacity of approximately 107 million pounds annually. Management expected production to begin in late 2022 and the facility to be fully operational in 2023; estimated remaining construction cost was $265.9 million.
- Management reported contracted feedstock sufficient for the facility’s planned capacity for at least the first three years. Offtake agreements cover a stated minimum of 63 million pounds annually, with additional volumes available at the company’s option.
Outlook, risks and unusual items
- Management believed capital raised in the business combination was sufficient to fund obligations for at least one year from issuance of the interim financial statements. It also warned that additional financing may be needed if construction costs, expansion plans or forecasts require more capital.
- Bond-related obligations include a $50 million liquidity reserve and minimum cash balances, including the reserve, of $75 million by July 31, 2021 and $100 million by January 31, 2022. A May 2021 amended guaranty describes potential reserve reductions subject to construction, cost-payment and replacement feedstock/offtake agreement conditions.
- Key risks include completing and scaling the first-of-its-kind facility on time and budget; achieving commercial product quality and performance; securing regulatory approvals, including food-grade clearances; maintaining P&G license exclusivity; feedstock supply and customer acceptance; and meeting debt and liquidity obligations.
- Two securities class-action complaints were filed after quarter-end, alleging misleading statements about the technology, business and prospects. The company said it intended to defend the cases and could not estimate potential loss.
- Disclosure controls were deemed ineffective at March 31 because of material weaknesses in financial reporting controls, including staffing and technical accounting, segregation of duties, IT access, and expense and payable cutoff. Remediation was ongoing.
- Management cited plans for global expansion, including approximately 30 operating lines by 2030 and 50 by 2035; these are plans, not assured outcomes.
Most important facts for investors to verify
- Construction progress, remaining costs, commissioning timing and whether the Ironton plant achieves planned capacity and product specifications.
- Availability and restrictions on cash, compliance with bond-related minimum cash requirements, and the conditions for releasing or reducing the $50 million reserve.
- Actual financing needs and debt service capacity, including convertible-note maturity and bond covenants.
- Binding status, volumes, pricing and performance conditions of feedstock and offtake agreements, and required regulatory approvals.
- Progress in remediating material weaknesses and developments or potential financial exposure from the securities lawsuits.