Quarterly report pursuant to Section 13 or 15(d)

EQUITY-BASED COMPENSATION

v3.21.2
EQUITY-BASED COMPENSATION
9 Months Ended
Sep. 30, 2021
Share-based Payment Arrangement [Abstract]  
EQUITY-BASED COMPENSATION EQUITY-BASED COMPENSATION
2021 Equity Incentive Plan
In connection with the Business Combination, on March 17, 2021, our stockholders approved the PureCycle Technologies, Inc. 2021 Equity and Incentive Compensation Plan (the “Plan”).
The Plan provides for the grant of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance units, dividend equivalents, and certain other awards. As of September 30, 2021, approximately 8.28 million shares of common stock are reserved for issuance under the Plan.
Restricted Stock Agreements
In connection with the Closing, on March 17, 2021, PCT entered into restricted stock agreements with various PureCycle employees who held unvested Legacy PCT Class C Units at the Closing (the “Restricted Stock Agreements”). The outstanding unvested Legacy PCT Class C Units, issued pursuant to the PCT Technologies LLC Amended and Restated Equity Incentive Plan, were converted to PCT’s restricted shares, subject to the same vesting schedule and forfeiture restrictions as the unvested Legacy PCT Class C Units they replace.
The shares issued pursuant to the Restricted Stock Agreements are time-based and vest over the period defined in each individual grant agreement or upon a change of control event as defined in the agreement. The Company has the option to repurchase all vested shares upon a stockholder’s termination of employment or service with the Company.
The Company recognizes compensation expense for the shares equal to the fair value of the equity-based compensation awards and is recognized on a straight-line basis over the vesting period of such awards. The fair value of the stock is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions:
2021 2020
Expected annual dividend yield —  % —  %
Expected volatility 49.1  %
42.1 - 63.3%
Risk-free rate of return 0.1  %
1.6 - 1.7%
Expected option term (years) 0.2
0.8 - 4.4
The expected term of the shares granted is determined based on the period of time the shares are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on the Company’s capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, the Company considered industry, stage of life cycle, size and financial leverage. The dividend yield on the Company’s shares is assumed to be zero as the Company has not historically paid dividends. The fair value of the underlying Company shares for the nine months ending September 30, 2021 was determined using an initial public offering scenario. The fair value of the underlying Company shares for the nine months ended September 30, 2020 was determined using a hybrid method consisting of an option pricing method and an initial public offering scenario.
A summary of restricted stock activity for the nine months ended September 30, 2021 and 2020 is as follows (in thousands except per share data):
Number of RSU's Weighted average grant date fair value Weighted average remaining recognition period
Non-vested at December 31, 2019 73  $ 2.21 
Recapitalized 607  (1.97)
Non-vested at December 31, 2019 (after effect of recapitalization) 680  0.24 
Granted 1,937  1.73 
Vested (1,777) 1.37 
Forfeited (11) 1.95 
Non-vested at September 30, 2020 829  $ 1.27  2.18
Number of RSU's Weighted average grant date fair value Weighted average remaining recognition period
Non-vested at December 31, 2020 91  $ 11.58 
Recapitalization 671  (10.19)
Non-vested at December 31, 2020 (after effect of recapitalization) 762  1.39 
Granted 2,353  18.88 
Vested (699) 9.83 
Forfeited (26) 3.92 
Non-vested at September 30, 2021 2,390  $ 16.12  2.63
Equity-based compensation cost is recorded within the selling, general and administrative expenses and operating costs in the condensed consolidated statements of comprehensive loss, and totaled approximately $9.2 million and $2.0 million for the three months ended September 30, 2021 and 2020, respectively, and $9.7 million and $2.6 million for the nine months ended September 30, 2021 and 2020, respectively.
Stock Options
The stock options issued pursuant to the Plan are time-based and vest over the period defined in each individual grant agreement or upon a change of control event as defined in the Plan.
The Company recognizes compensation expense for the shares equal to the fair value of the equity-based compensation awards and is recognized on a straight-line basis over the vesting period of such awards. The fair value of the stock is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions:
2021 2020
Expected annual dividend yield —  % —  %
Expected volatility 47.5  % —  %
Risk-free rate of return 0.7  % —  %
Expected option term (years) 4.5 0
The expected term of the shares granted is determined based on the period of time the shares are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on the Company’s capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, the Company considered industry, stage of life cycle, size and financial leverage. The dividend yield on the Company’s shares is assumed to be zero as the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using the Company’s closing stock price on the grant date.
A summary of stock option activity for the nine months ended September 30, 2021 and 2020 is as follows (in thousands except per share data):
Number of Options Weighted Average Exercise Price Weighted
Average
Remaining
Contractual
Term
(Years)
Balance, December 31, 2019 —  $ — 
Granted —  —  — 
Exercised —  —  — 
Forfeited —  —  — 
Balance, September 30, 2020   $   — 
Number of Options Weighted Average Exercise Price Weighted
Average
Remaining
Contractual
Term
(Years)
Balance, December 31, 2020 —  $ — 
Granted 613  28.90  7
Exercised —  —  — 
Forfeited —  —  — 
Balance, September 30, 2021 613  $ 28.90  6.46
Exercisable —  —  — 
Equity-based compensation cost is recorded within the selling, general and administrative expenses within the condensed consolidated statements of comprehensive loss and totaled approximately $583 thousand and $0 for the three months ended September 30, 2021 and 2020, respectively, and $1.3 million and $0 for the nine months ended September 30, 2021 and 2020, respectively. The weighted average grant-date fair values of options granted during the nine months ended September 30, 2021 and 2020 were $11.41 and $0, respectively. There were no stock options exercised during 2021 or 2020.
Performance-Based Restricted Stock Agreements
The shares issued pursuant to the Performance-Based Restricted Stock Agreements vest depending on if the performance obligations are met. In general, the performance-based stock units (“Performance PSUs”) will be earned based on achievement of pre-established performance objectives related to production at the Company’s operational manufacturing facilities by December 31, 2023 and will vest on the date the attainment of such performance objectives is determined by the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”), subject to the participant’s continued employment with the Company through December 31, 2023. The Company has also issued PSUs that vest if the market price of the Company’s common stock exceeds a defined target during the performance period (“Market PSUs”, together with the Performance PSUs, the “PSUs”).
As of September 30, 2021, and 2020, the outstanding PSUs issued by the Company were 424 thousand and 0, respectively. No PSUs were granted in fiscal year 2020. As of September 30, 2021, the performance-based provision has not been achieved for any of the outstanding performance-based award.
The Company recognizes compensation expense for the Performance PSUs equal to the fair value of the equity-based compensation awards and is recognized on a straight-line basis over the vesting period of such awards as the Company has concluded the performance condition is probable to be met.
The Company recognizes compensation expense for the Market PSUs equal to the fair value of the equity-based compensation awards and is recognized on a straight-line basis over the derived service period. The fair value and derived service period of the Market PSUs is estimated on the date of grant using a Monte Carlo simulation with the following assumptions:
2021 2020
Expected annual dividend yield —  % —  %
Expected volatility 55.0  % —  %
Risk-free rate of return —  % —  %
Expected option term (years) 2.7 0.0
The expected term of the shares granted is determined based on the period of time the shares are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on the Company’s capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, the Company considered industry, stage of life cycle, size and financial leverage. The dividend yield on the Company’s shares is assumed to be zero as the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using the Company’s closing stock price on the grant date.
A summary of the PSU activity for the nine months ended September 30, 2021 and 2020 is as follows (in thousands except per share data):
Number of PSUs Weighted Average Exercise Price Weighted
Average
Remaining
Contractual
Term
(Years)
Balance, December 31, 2019 —  $ — 
Granted —  —  — 
Vested —  —  — 
Forfeited —  —  — 
Balance, September 30, 2020   $   — 
Number of PSUs Weighted Average Exercise Price Weighted
Average
Remaining
Contractual
Term
(Years)
Balance, December 31, 2020 —  $ — 
Granted 424  18.65  — 
Vested —  —  — 
Forfeited —  —  — 
Balance, September 30, 2021 424  $ 18.65  2
Exercisable —  —  — 
Equity-based compensation cost is recorded within the selling, general and administrative expenses within the consolidated statements of comprehensive loss and totaled approximately $3.5 million and $0 for the three months
ended September 30, 2021 and 2020, respectively, and $3.5 million and $0 for the nine months ended September 30, 2021 and 2020, respectively