PROSPECTUS SUPPLEMENT NO. 16 Filed Pursuant to Rule 424(b)(3)
(to prospectus dated March 19, 2021) Registration No. 333-251034

 

 

PURECYCLE TECHNOLOGIES, INC.

25,000,000 Shares

Common Stock

 

This prospectus supplement is being filed to update and supplement the information contained in the prospectus dated March 19, 2021 (as supplemented or amended from time to time, the “Prospectus”), with the information contained in our Quarterly Report on Form 10-Q, which was filed with the Securities and Exchange Commission (“SEC”) on November 10, 2021 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

 

The Prospectus and this prospectus supplement relate to the resale from time to time of up to 25,000,000 shares of our common stock, par value $0.001 per share (“Common Stock”), issued pursuant to the terms of those certain subscription agreements entered into (the “PIPE Investment”) in connection with the Business Combination (as defined in the Prospectus). As described in the Prospectus, the selling securityholders named therein or their permitted transferees (collectively, the “Selling Stockholders”), may sell from time to time up to 25,000,000 shares of our Common Stock that were issued to the Selling Stockholders in connection with the closing of the PIPE Investment and the Business Combination.

 

This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

 

Our Common Stock, warrants and units are listed on The Nasdaq Capital Market under the symbols “PCT,” “PCTTW” and “PCTTU,” respectively. On November 11, 2021, the closing price of our Common Stock was $9.79 per share.

 

Investing in our securities involves risks that are described in the “Risk Factors” section beginning on page 23 of the Prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus supplement is November 12, 2021.

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from            to

 

Commission File Number 001-40234

 

 

 

 

PureCycle Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

State   86-2293091
Delaware  

(I.R.S. Employer

Identification Number)

 

5950 Hazeltine National Drive, Suite 650

Orlando, Florida 32822

(877) 648-3565

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading
Symbols
  Name of each exchange on which registered
Common Stock, par value $0.001 per share   PCT   The Nasdaq Stock Market LLC
Warrants, each exercisable for one share of common stock, $0.001 par value per share, at an exercise price of $11.50 per share   PCTTW   The Nasdaq Stock Market LLC
Units, each consisting of one share of common stock, $0.001 par value per share, and three quarters of one warrant   PCTTU   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

 

As of November 10, 2021, there were approximately 125,025,204 shares of the registrant's common stock outstanding, par value $0.001 per share, outstanding.

 

 

 

 

 

PureCycle Technologies, Inc.

 

QUARTERLY REPORT on FORM 10-Q

TABLE OF CONTENTS

 

  Page
PART I - Financial Information  
   
Item 1. Financial Statements
   
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 5
   
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine months ended September 30, 2021 and 2020 6
   
Unaudited Condensed Consolidated Statements of Stockholder’s Equity for the Three and Nine months ended September 30, 2021 and 2020 7
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2021 and 2020 9
   
Notes to the Interim Condensed Consolidated Financial Statements 10
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
   
Item 4. Controls and Procedures 47
   
PART II - Other Information  
   
Item 1. Legal Proceedings 49
   
Item 1A. Risk Factors 49
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
   
Item 3. Defaults Upon Senior Securities 65
   
Item 4. Mine Safety Disclosures 65
   
Item 5. Other Information 65
   
Item 6. Exhibits 66
   
Signatures 67

 

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PureCycle Technologies, Inc.

 

PART I - FINANCIAL INFORMATION (CONTINUED)

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements about the outcome of any legal proceedings to which PCT is, or may become a party, and the financial condition, results of operations, earnings outlook and prospects of PCT. Forward-looking statements generally relate to future events or PCT’s future financial or operating performance and may refer to projections and forecasts. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions (or the negative versions of such words or expressions), but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements are based on the current expectations of the management of PCT and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date of this Quarterly Report on Form 10-Q. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors,” those discussed and identified in public filings made with the U.S. Securities and Exchange Commission (the “SEC”) by PCT and the following:

 

•      PCT's ability to meet, and to continue to meet, applicable regulatory requirements for the use of PCT’s UPRP (as defined below) in food grade applications (both in the United States and abroad);

 

•      PCT's ability to comply on an ongoing basis with the numerous regulatory requirements applicable to the UPRP and PCT’s facilities (both in the United States and abroad);

 

•      Expectations and changes regarding PCT’s strategies and future financial performance, including its future business plans, expansion plans or objectives, prospective performance and opportunities and competitors, revenues, products and services, pricing, operating expenses, market trends, liquidity, cash flows and uses of cash, capital expenditures, and PCT’s ability to invest in growth initiatives;

 

•      PCT’s ability to scale and build the Ironton plant in a timely and cost-effective manner;

 

•      PCT’s ability to build its first U.S. cluster facility, located in Augusta, Georgia (the “Augusta Facility”), in a timely and cost-effective manner.

 

•      PCT’s ability to sort and process polypropylene plastic waste at its plastic waste prep (“Feed PreP”) facilities;

 

•      PCT’s ability to maintain exclusivity under the Procter & Gamble Company (“P&G”) license (as described below);

 

•      the implementation, market acceptance and success of PCT’s business model and growth strategy;

 

•      the success or profitability of PCT’s offtake arrangements;

 

•      the ability to source feedstock with a high polypropylene content;

 

•      PCT’s future capital requirements and sources and uses of cash;

 

•      PCT’s ability to obtain funding for its operations and future growth;

 

3

 

 

PureCycle Technologies, Inc.

 

PART I - FINANCIAL INFORMATION (CONTINUED)

 

•      developments and projections relating to PCT’s competitors and industry;

 

•      the outcome of any legal or regulatory proceedings to which PCT is, or may become, a party including the recently filed securities class action case and the ongoing SEC investigation;

 

•      the ability to recognize the anticipated benefits of the Business Combination;

 

•      unexpected costs related to the Business Combination;

 

•      geopolitical risk and changes in applicable laws or regulations;

 

•      the possibility that PCT may be adversely affected by other economic, business, and/or competitive factors;

 

•      operational risk; and

 

•      the risk that the COVID-19 pandemic, including any variants and the efficacy and distribution of vaccines, and local, state, federal and international responses to addressing the pandemic may have an adverse effect on PCT’s business operations, as well as PCT’s financial condition and results of operations.

 

We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

 

Should one or more of these risks or uncertainties materialize or should any of the assumptions made prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

 

4

 

 

PureCycle Technologies, Inc.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS
   (Unaudited)   (Unaudited) 
(in thousands except per share data)  September 30, 2021   December 31, 2020 
CURRENT ASSETS          
Cash  $36,672   $64,492 
Debt securities available for sale   184,575     
Prepaid expenses and other current assets   2,793    446 
Total current assets   224,040    64,938 
Restricted cash   272,879    266,082 
Prepaid expenses and other non-current assets   5,807    2,890 
Property, plant and equipment, net   189,222    74,067 
TOTAL ASSETS  $691,948   $407,977 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
CURRENT LIABILITIES          
Accounts payable  $2,084   $1,058 
Accrued expenses   44,385    26,944 
Accrued interest   7,798    4,951 
Notes payable – current       122 
Total current liabilities   54,267    33,075 
NON-CURRENT LIABILITIES          
Deferred revenue   5,000     
Notes payable   59,670    26,477 
Bonds payable   232,270    235,676 
Warrant liability   9,530     
Other non-current liabilities   1,076    1,000 
TOTAL LIABILITIES  $361,813   $296,228 
           
COMMITMENT AND CONTINGENCIES        
           
STOCKHOLDERS' EQUITY          
Common shares - $0.001 par value, 250,000 shares authorized; 118,251 and 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020   118     
Class A Units - no par value; 0 and 3,981 units authorized; 0 and 3,612 units issued and outstanding as of September 30, 2021 and December 31, 2020       38 
Class B Preferred Units - no par value; 0 and 1,938 units authorized; 0 and 1,938 units issued and outstanding as of September 30, 2021 and December 31, 2020       21 
Class B-1 Preferred Units - no par value; 0 and 1,146 units authorized, 0 and 1,105 units issued and outstanding as of September 30, 2021 and December 31, 2020       16 
Class C Units – no par value; 0 and 1,069 units authorized, 0 and 865 units issued and 0 and 775 units outstanding as of September 30, 2021 and December 31, 2020       7 
Additional paid-in capital   468,421    192,381 
Accumulated other comprehensive loss   (17)    
Accumulated deficit   (138,387)   (80,714)
TOTAL STOCKHOLDERS' EQUITY   330,135    111,749 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $691,948   $407,977 

 

The accompanying notes are an integral part of these financial statements.

 

5

 

 

PureCycle Technologies, Inc. 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2021   2020   2021   2020 
(in thousands except per share data)                    
Costs and expenses                    
Operating costs  $2,687   $3,564   $7,228   $7,040 
Research and development   330    171    1,101    528 
Selling, general and administrative   24,489    2,232    39,372    4,518 
Total operating costs and expenses   27,506    5,967    47,701    12,086 
Interest expense   1,843    642    5,722    1,827 
Change in fair value of warrants   (8,369)       4,893    1,775 
Other income   (3)       (206)   (100)
Total other expense   (6,529)   642    10,409    3,502 
Net loss  $(20,977)  $(6,609)  $(58,110)  $(15,588)
Loss per share                    
Basic and diluted  $(0.18)  $(0.28)  $(0.61)  $(0.75)
Weighted average common shares                    
Basic and diluted   118,255    27,156    95,773    27,156 
                     
Other comprehensive loss:                    
Unrealized loss on debt securities available for sale  $89   $   $(17)  $ 
Total comprehensive loss  $(20,888)  $(6,609)  $(58,127)  $(15,588)

 

The accompanying notes are an integral part of these financial statements.

 

6

 

 

PureCycle Technologies, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(Unaudited)

 

   For the Three and Nine Months Ended September 30, 2021 
   Common stock   Class A   Class B Preferred   Class B-1 Preferred   Class C                 
(in thousands)  Shares   Amount   Units   Amount   Units   Amount   Units   Amount   Units   Amount   Additional
paid-in
capital
   Accumulated
other
comprehensive
loss
   Accumulated
deficit
   Total
stockholders'
equity
 
Balance, December 31, 2020      $    3,612   $88,081    1,938   $20,071    1,105   $41,162    775   $11,967   $31,182   $   $(80,714)  $111,749 
Conversion of stock           34,386    (88,043)   18,690    (20,050)   15,217    (41,146)   5,936    (11,960)   161,199           $ 
Balance at December 31, 2020,
effect of reverse
recapitalization conversion
      $    37,998   $38    20,628   $21    16,322   $16    6,711   $7   $192,381   $   $(80,714)  $111,749 
Issuance of units upon vesting of
Legacy PCT profits interests
                                   116        239            239 
Redemption of vested profit units                                   (5)       (36)           (36)
Removal of beneficial conversion
feature upon adoption of ASU
2020-06
                                           (31,075)       437    (30,638)
Merger Recapitalization   81,754    82    (37,998)   (38)   (20,628)   (21)   (16,322)   (16)   (6,822)   (7)                
ROCH Shares Recapitalized, Net
of Redemptions, Warrant Liability
and Issuance Costs of $27.9
million
   34,823    35                                    293,931            293,966 
Issuance of restricted stock awards   775    1                                    (1)            
Forfeiture of restricted stock   (3)   (1)                                   1             
Reclassification of redeemable
warrant to liability
                                           (33)           (33)
Equity based compensation                                           68            68 
Net loss                                                   (26,074)   (26,074)
Balance, March 31, 2021   117,349   $117       $       $       $       $   $455,475   $   $(106,351)  $349,241 
Forfeiture of restricted stock   (10)                                                    
Equity based compensation                                           835            835 
Unrealized loss on available for
sale debt securities
                                               (106)       (106)
Net loss                                                   (11,059)   (11,059)
Balance, June 30, 2021   117,339   $117       $       $       $       $   $456,310   $(106)  $(117,410)  $338,911 
Exercise of warrants   17                                        196            196 
Issuance of restricted stock awards   1,000    1                                    (1)            
Equity based compensation   26                                        13,611            13,611 
Share repurchase   (131)                                       (1,695)           (1,695)
Unrealized gain on available for
sale debt securities
                                               89        89 
Net loss                                                   (20,977)   (20,977)
Balance, September 30, 2021   118,251   $118       $       $       $       $   $468,421   $(17)  $(138,387)  $330,135 

 

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PureCycle Technologies, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(Unaudited)

 

   For the Three and Nine Months Ended September 30, 2020 
   Common stock   Class A   Class B Preferred   Class B-1 Preferred   Class C                 
(in thousands)  Shares   Amount   Units   Amount   Units   Amount   Units   Amount   Units   Amount   Additional
paid-in
capital
   Accumulated
other
comprehensive
loss
   Accumulated
deficit
   Total
stockholders'
equity
 
Balance, December 31, 2019      $    2,581   $387    1,728   $1,898    630   $23,656    436   $4,054   $107   $   $(27,722)  $2,380 
Conversion of stock           24,575    (360)   16,660    (1,880)   8,670    (23,647)   3,625    (4,050)   29,937             
Balance at December 31, 2019,
effect of reverse recapitalization
conversion
           27,156   $27    18,388   $18    9,300   $9    4,061   $4   $30,044   $   $(27,722)  $2,380 
Issuance of units                           4,578    5            11,569            11,574 
Issuance of units upon vesting of
Legacy PCT profits interests
                                   362        417            417 
Net loss                                                   (4,564)   (4,564)
Balance, March 31, 2020      $    27,156   $27    18,388   $18    13,878   $14    4,423   $4   $42,030   $   $(32,286)  $9,807 
Issuance of units                           393                920            920 
Issuance of units upon vesting of
Legacy PCT profits interests
                                   147    1    172            173 
Net loss                                                   (4,415)   (4,415)
Balance, June 30, 2020      $    27,156   $27    18,388   $18    14,271   $14    4,570   $5   $43,122   $   $(36,701)  $6,485 
Issuance of units                           2,045    2            5,010            5,012 
Issuance of units upon vesting of
Legacy PCT profits interests
                                   1,256    1    1,962            1,963 
Redemption of vested profit units                                   (8)       (16)           (16)
Net loss                                                   (6,609)   (6,609)
Balance, September 30, 2020      $    27,156   $27    18,388   $18    16,316   $16    5,818   $6   $50,078   $   $(43,310)  $6,835 

 

The accompanying notes are an integral part of these financial statements.

 

8

 

 

PureCycle Technologies, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

   Nine months ended September 30, 
(in thousands)  2021   2020 
Cash flows from operating activities          
Net loss  $(58,110)  $(15,588)
Adjustments to reconcile net loss to net cash used in operating activities          
Equity-based compensation   14,753    2,886 
Fair value change of warrants   4,893    1,775 
Depreciation expense   1,507    1,409 
Accretion of debt instrument discounts   167     
Amortization of debt issuance costs   2,040     
Issuance costs attributable to warrants   109     
Amortization of premium on debt securities   395     
Gain on extinguishment of secured term loan   (314)    
Changes in operating assets and liabilities          
Prepaid expenses and other current assets   (2,347)   (128)
Prepaid expenses and other non-current assets   (2,917)   (100)
Accounts payable   (399)   (587)
Accrued expenses   (9,554)   288 
Accrued interest   2,819    (739)
Deferred revenue   5,000     
Net cash used in operating activities  $(41,958)  $(10,784)
Cash flows from investing activities          
Construction of plant   (88,153)   (2,423)
Purchase of debt securities, available for sale   (229,183)    
Sale and maturity of debt securities, available for sale   44,197     
Net cash used in investing activities  $(273,139)  $(2,423)
Cash flows from financing activities          
Proceeds from secured term loan       314 
Proceeds from promissory note   91     
Payments on promissory note from related parties       (600)
Payments on advances from related parties       (2,704)
Payments on promissory notes   (91)   (863)
Proceeds for exercise of warrants   196     
Proceeds from ROCH and PIPE financing, net of issuance costs   298,461     
Convertible notes issuance costs   (480)    
Bond issuance costs   (4,067)   (155)
Proceeds from issuance of units       17,173 
Payments on redemption of vested Legacy PCT profit interests   (36)    
Net cash provided by financing activities  $294,074   $13,165 
Net decrease in cash and restricted cash   (21,023)   (42)
Cash and restricted cash, beginning of period   330,574    150 
Cash and restricted cash, end of period  $309,551   $108 
Supplemental disclosure of cash flow information          
Non-cash operating activities          
Interest paid during the period, net of capitalized interest  $845   $1,581 
Non-cash investing activities          
Additions to property, plant, and equipment in accrued expenses  $25,300   $ 
Additions to property, plant, and equipment in accounts payable  $1,425   $1,319 
Additions to property, plant, and equipment in accrued interest  $1,708   $39 
Non-cash financing activities          
Share repurchase — additions to accrued expense  $1,695   $ 
PIK interest on convertible notes  $1,680   $ 
Initial fair value of acquired warrant liability  $4,604   $ 
Capitalization of bond issuance costs — additions to accrued expenses  $   $1,961 
Conversion of accounts payable to promissory notes  $   $1,247 

 

The accompanying notes are an integral part of these financial statements.

 

9

 

 

PureCycle Technologies LLC

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1 - ORGANIZATION

 

Formation and Organization

 

PureCycle Technologies, Inc. (“PureCycle,” “PCT” or the “Company”) is headquartered in Orlando, Florida, and its planned principal operation is to conduct business as a plastics recycler using PureCycle’s patented recycling process. Developed and licensed by The Procter & Gamble Company (“P&G”), the patented recycling process separates color, odor and other contaminants from plastic waste feedstock to transform it into virgin-like resin. The Company is currently constructing its first planned facility and conducting research and development activities to operationalize the licensed technology.

 

PureCycle Technologies LLC was formed as a Delaware limited liability company on September 15, 2015 as Advanced Resin Technologies, LLC. In November 2016, Advanced Resin Technologies, LLC changed its name to PureCycle Technologies LLC.

 

Business Combination

 

On March 17, 2021, PureCycle consummated the previously announced business combination (“Business Combination”) by and among Roth CH Acquisition I Co., a Delaware corporation (“ROCH”), Roth CH Acquisition I Co. Parent Corp., a Delaware corporation and wholly owned direct subsidiary of ROCH (“ParentCo”), Roth CH Merger Sub LLC, a Delaware limited liability company and wholly owned direct subsidiary of Parent Co, Roth CH Merger Sub Corp., a Delaware corporation and wholly owned direct subsidiary of ParentCo and PureCycle Technologies LLC (“PCT LLC” or “Legacy PCT”) pursuant to the Agreement and Plan of Merger dated as of November 16, 2020, as amended from time to time (the “Merger Agreement”).

 

Upon the completion of the Business Combination and the other transactions contemplated by the Merger Agreement (the “Transactions”, and such completion, the “Closing”), ROCH changed its name to PureCycle Technologies Holdings Corp. and became a wholly owned direct subsidiary of ParentCo, PCT LLC became a wholly owned direct subsidiary of PureCycle Technologies Holdings Corp. and a wholly owned indirect subsidiary of ParentCo, and ParentCo changed its name to PureCycle Technologies, Inc. The Company’s common stock, units and warrants are now listed on the Nasdaq Capital Market (“NASDAQ”) under the symbols “PCT,” “PCTTU” and “PCTTW,” respectively.

 

In connection with the Business Combination, ROCH entered into subscription agreements with certain investors (the “PIPE Investors”), whereby it issued 25.0 million shares of common stock at $10.00 per share (the “PIPE Shares”) for an aggregate purchase price of $250.0 million (the “PIPE Financing”), which closed simultaneously with the consummation of the Business Combination. Upon the Closing of the Business Combination, the PIPE Investors were issued shares of the Company’s common stock.

 

Legacy PCT unitholders will be issued up to 4.0 million additional shares of the Company’s common stock if certain conditions are met (“the Earnout”). The Legacy PCT unitholders will be entitled to 2.0 million shares if after six months after the Closing and prior to or as of the third anniversary of the Closing, the closing price of the common stock is greater than or equal to $18.00 over any 20 trading days within any 30-trading day period. The Legacy PCT unitholders will be entitled to 2.0 million shares upon the commercial-scale plant in Ironton, Ohio (the “Ohio Phase II Facility”) becoming operational, as certified by Leidos Engineering, LLC (“Leidos”), an independent engineering firm, in accordance with criteria established in agreements in connection with construction of the plant.

 

In connection with the Business Combination, the Company incurred direct and incremental costs of approximately $27.9 million related to the equity issuance, consisting primarily of investment banking and other professional fees, which were recorded to additional paid-in capital as a reduction of proceeds.

 

The Company incurred approximately $5.2 million of expenses primarily related to advisory, legal, and accounting fees in conjunction with the Business Combination. Of this, $3.2 million was recorded in general and administrative expenses on the consolidated statement of comprehensive loss for the nine months ended September 30, 2021.

 

10

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Unless the context otherwise requires, “Registrant,” “PureCycle,” “Company,” “PCT,” “we,” “us,” and “our” refer to PureCycle Technologies, Inc., and its subsidiaries at and after the Closing and give effect to the Closing. “Legacy PCT”, “ROCH” and “ParentCo” refer to PureCycle Technologies LLC, ROCH and ParentCo, respectively, prior to the Closing.

 

The aggregate consideration for the Business Combination was $1,156.9 million, payable in the form of shares of the ParentCo Common Stock and assumed indebtedness.

 

The following summarizes the merger consideration (in thousands except per share information):

 

Total shares transferred   83,500 
Value per share  $10.00 
Total Share Consideration  $835,000 
Assumed indebtedness     
Revenue Bonds   249,600 
The Convertible Notes   60,000 
Term Loan   314 
Related Party Promissory Note   12,000 
Total merger consideration  $1,156,914 

 

The following table reconciles the elements of the Business Combination to the condensed consolidated statement of cash flows for the nine months ended September 30, 2021 (in thousands):

 

Cash - ROCH Trust and cash (net of redemptions)  $76,510 
Cash - PIPE   250,000 
Less transaction costs   (28,049)
Net Business Combination and PIPE financing  $298,461 

 

In addition to cash received by the Company at the Close of the Business Combination, the Company assumed a warrant liability from ROCH measured at $4.6 million at March 18, 2021.

 

Refer to Note 6 – Warrants for further information.

 

Basis of Presentation

 

The accompanying condensed consolidated interim financial statements include the accounts of the Company. The condensed consolidated interim financial statements are presented in U.S. Dollars. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions were eliminated upon consolidation. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes of Legacy PCT for the fiscal year ended December 31, 2020 as filed on July 1, 2021 in our prospectus filed pursuant to Rule 424(b)(3) of the Securities Act. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2021. The accompanying condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented.

 

11

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Reclassifications

 

Certain amounts in prior periods have been reclassified to conform with the report classifications of the nine months ended September 30, 2021, noting the Company has reflected the reverse recapitalization pursuant to the Business Combination, as well as immaterial corrections related to prior periods for all periods presented within the unaudited condensed consolidated balance sheets, statements of comprehensive loss, statements of stockholders’ equity, and statements of cash flows.

 

Reverse Recapitalization

 

The Business Combination was accounted for as a reverse recapitalization and ROCH was treated as the “acquired” company for accounting purposes. The Business Combination was accounted for as the equivalent of Legacy PCT issuing stock for the net assets of ROCH, accompanied by a recapitalization. Accordingly, all historical financial information presented in these condensed consolidated interim financial statements represents the accounts of Legacy PCT “as if” Legacy PCT is the predecessor to the Company. The units and net loss per unit, prior to the Business Combination, have been adjusted to share amounts reflecting the exchange ratio established in the Business Combination.

 

Potential Impact of COVID-19 on the Company’s Business

 

With the global spread of the COVID-19 pandemic and the local, state and federal responses to the pandemic applicable to the Company’s corporate headquarters, its Ironton, Ohio plant operations, and employees and potentially the Augusta Facility, the Company has implemented policies and procedures to continue its operations under minimum business operations guidelines. The extent to which the COVID-19 pandemic and the restrictions resulting from the pandemic impact the Company’s business, financial condition or results of operations will depend on future developments, which are highly uncertain and cannot be accurately predicted.

 

Liquidity

 

The Company has sustained recurring losses and negative cash flows from operations since its inception. As reflected in the accompanying condensed consolidated interim financial statements, the Company has not yet begun commercial operations and does not have any sources of revenue. In prior periods, substantial doubt was raised about the ability of Legacy PCT to continue as a going concern. The Company believes that the total capital raised through the Business Combination is sufficient to adequately fund its future obligations for at least one year from the date the condensed consolidated interim financial statements are available to be issued. As of September 30, 2021, and December 31, 2020, the Company had an unrestricted cash balance of $36.7 million and $64.5 million, respectively, working capital of $169.8 million and $31.9 million, respectively, and an accumulated deficit of $138.4 million and $80.7 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred a net loss of $58.1 million and $15.6 million, respectively.

 

Emerging Growth Company

 

At September 30, 2021, we qualified as an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we have taken and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have opted to take advantage of such extended transition period available to emerging growth companies which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard.

 

12

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Immaterial Corrections Related to Prior Periods

 

We have identified immaterial corrections to prior periods related to capitalization of interest associated with the tax-exempt revenue bonds and the costs associated with issuance of equity that originated during the period presented herein. We evaluated the effects of these corrections on the condensed consolidated financial statements for the year ended December 31, 2020 and the unaudited condensed consolidated financial statements for the three months ended March 31, 2021, as well as the three and six months ended June 30, 2021, individually and in the aggregate, in accordance with the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. We have concluded that no period is materially misstated. Accordingly, we have reflected the prior period impacts and associated revisions for these periods presented herein.

 

The revision increased property, plant and equipment, net and decreased interest expense by $3.8 million for the twelve months ended December 31, 2020, $4.1 million for the three months ended March 31, 2021, and $4.2 million and $8.3 million for the three and six months ended June 30, 2021, respectively, as well as reclassified $0, $0 and $11.1 million from net cash used in operating activities to cash paid for construction of plant for the twelve months ended December 31, 2020, three months ended March 31, 2021, and six months ended June 30, 2021, respectively.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at date of inception to be cash and cash equivalents. As of September 30, 2021, the Company’s cash and cash equivalents balance represents cash and money market funds deposited with financial institutions. As of December 31, 2020, the Company’s cash and cash equivalents balance represents cash deposited with financial institutions. These balances may exceed federally insured limits; however, the Company believes the risk of loss is low.

 

Investments

 

The Company accounts for its investment in Debt Securities in accordance with ASC 320, Investments – Debt Securities. The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. All investment holdings as of September 30, 2021 have been classified as Available for Sale. The Company did not hold any investments in Debt Securities as of December 31, 2020. The Company classifies its Debt Securities investments as current assets as they are highly liquid and the related funds are available for use in current operations.

 

Income Taxes

 

To calculate the interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. The effect of changes in the enacted tax laws or rates is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.

 

Furthermore, in December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The new guidance affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The Company adopted the ASU during the first quarter of 2021 using a prospective approach. The adoption of the ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

13

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Warrants

 

The Company evaluates all of its financial instruments, including issued warrants, to determine if such instruments are liability classified, pursuant to ASC 480 - Distinguishing Liabilities from Equity (“ASC 480”) or derivatives or contain features that qualify as embedded derivatives pursuant to ASC 815 – Derivatives and Hedging (“ASC 815”). The classification of instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Issuance costs incurred with the Business Combination that are attributable to liability classified warrants are expensed as incurred.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, ASU 2018-10, Codification Improvements to Topic 842, Leases, was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Furthermore, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Furthermore, on June 3, 2020, the FASB deferred by one year the effective date of the new leases standard for private companies, private not-for-profits (“NFPs”) and public NFPs that have not yet issued (or made available for issuance) financial statements reflecting the new standard. These new leasing standards are effective for the Company beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the effect of the adoption of this guidance on the consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”), which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is currently in the process of evaluating the effects of this pronouncement on the Company's financial statements and does not expect it to have a material impact on the consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20 that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. Two methods of transition were permitted upon adoption: full retrospective and modified retrospective. The Company elected to apply the modified retrospective adoption approach to all contracts. Under this approach, prior periods were not restated. Rather, convertible notes and other disclosures for prior periods were provided in the notes to the financial statements as previously reported under ASC 470-20, and the cumulative effect of initially applying the guidance was recognized as an adjustment to Notes payable, APIC, and Accumulated deficit.

 

14

 

 

As a result of applying the modified retrospective method to adopt ASU 2020-06, adjustments were made to the consolidated balance sheets as of December 31, 2020 and the below illustrates how the notes payable, APIC, and accumulated deficit balances would be effected as of January 1, 2021 (in thousands, as adjusted to show the effect of the reverse recapitalization as described in Note 1):

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

   December 31, 2020       January 1, 2021 
   As reported   Adjustments   As adjusted 
Notes payable  $26,599   $30,638   $57,237 
APIC   192,381    (31,075)   161,306 
Accumulated deficit  $(80,714)  $437   $(80,277)

 

NOTE 3 – NOTES PAYABLE AND DEBT INSTRUMENTS

 

Secured Term Loan

 

Enhanced Capital Ohio Rural Fund, LLC

 

On February 28, 2019, Legacy PCT entered into a subordinated debt agreement with Enhanced Capital Ohio Rural Fund, LLC. The agreement provides for principal of $1.0 million with an interest rate of the U.S. Federal prime rate per annum.

 

As of September 30, 2021, and December 31, 2020, the outstanding balance of the loan is $0. On October 7, 2020, upon the closing of the revenue bond offering, the full outstanding balance was paid off. Legacy PCT incurred $9 thousand and $29 thousand of interest cost during the three and nine months ended September 30, 2020, respectively.

 

Promissory Notes

 

Koch Modular Process Systems Secured Promissory Note

 

On December 20, 2019, Legacy PCT entered into an agreement with Koch Modular Process Systems LLC (“KMPS”) to convert the current balance of Account Payable due to KMPS into a promissory note. Legacy PCT issued a Secured Promissory Note for a principal amount of $1.7 million with a maximum advance of funds up to $3.0 million. During the nine months ended September 30, 2020, Legacy PCT converted $1.2 million of Accounts Payable into the note. The rate of interest on the loan balance is 21% per annum through the month of November 2019 and 24% per annum for December 2019 and thereafter.

 

As of September 30, 2021, and December 31, 2020, the outstanding balance on the promissory note is $0. On October 7, 2020, upon the closing of the revenue bond offering, the full outstanding balance was paid off. Legacy PCT incurred $107 thousand and $342 thousand of interest cost during the three and nine months ended September 30, 2020, respectively.

 

Denham-Blythe Company, Inc. Secured Promissory Note

 

On December 20, 2019, Legacy PCT and Denham-Blythe Company, Inc. (“DB”) entered into an agreement to convert the current balance of Account Payable due to DB into a promissory note. Legacy PCT issued a Secured Promissory Note for a principal amount of $2.0 million. The rate of interest on the loan balance is 24% per annum for December 2019 and thereafter with interest on the loan payable monthly.

 

As of September 30, 2021 and December 31, 2020, the outstanding balance on the promissory note is $0. On October 7, 2020, upon the closing of the revenue bond offering, the full outstanding balance was paid off. Legacy PCT incurred $122 thousand and $365 thousand of interest cost during the three and nine months ended September 30, 2020, respectively. As the promissory note was used to construct the Company’s property, plant and equipment, a portion of the interest cost incurred was capitalized within Property, Plant and Equipment.

 

15

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Promissory Note to Related Party

 

Innventus Fund I, LP

 

On July 19, 2019, Legacy PCT entered into a Note and Warrant Financing agreement with Innventus Fund I, LP (now known as Innventus ESG Fund I L.P.) to obtain a $600 thousand loan and warrant financing. The Negotiable Promissory Note had a maturity date of October 21, 2019, and an interest rate of 1-month LIBOR plus 8.0%. The aggregate unpaid principal amount of the loan and all accrued and unpaid interest is due on the maturity date. Legacy PCT repaid the principal and all accrued and unpaid interest on February 5, 2020. Legacy PCT incurred $0 and $5 thousand of interest cost during three and nine months ended September 30, 2020, respectively.

 

Auto Now Acceptance Company, LLC

 

On May 5, 2017, Legacy PCT entered into a revolving line of credit facility (the “Credit Agreement”) with Auto Now Acceptance Company, LLC (“Auto Now”), a related party.

 

On May 3, 2018, the Credit Agreement was amended and restated in its entirety and secured by a Security Agreement dated May 3, 2018. The credit facility was increased to $14.0 million, bearing interest at a rate of LIBOR plus 6.12% per annum, payable monthly. The maturity date was extended to August 15, 2018.

 

On July 31, 2018, the Credit Agreement was amended to extend the maturity date to February 15, 2019. Under the agreement, Auto Now’s advances of funds to Legacy PCT ceased on July 31, 2018.

 

On May 29, 2020, Legacy PCT executed a Second Amended and Restated the Security Agreement and entered into a Third Amended and Restated Promissory Note agreement to extend the financing on the loan from Auto Now. The agreement extended the maturity date of the loan to June 30, 2021 and adjusted the interest rate on the third amended loan agreement. The security interests include inventory, equipment, accounts receivables and all the Company’s assets. The interest rate within the amendment increased as follows:

 

The annual rate of the 1-month LIBOR in U.S. dollars plus 6.12% adjusted daily, from May 3, 2018 through May 18, 2020

 

12% per annum from May 19, 2020 through August 31, 2020

 

16% per annum from September 1, 2020 through December 31, 2020

 

24% per annum from January 1, 2021 through June 30, 2021

 

As of September 30, 2021 and December 31, 2020, the outstanding balance on the credit facility is $0. On December 21, 2020, Legacy PCT repaid the outstanding balance on the note. Legacy PCT incurred $413 thousand and $1.1 million of interest cost during the three and nine months ended September 30, 2020, respectively. As the promissory note was used to construct the Company’s property, plant and equipment, a portion of the interest cost incurred was capitalized within Property, Plant and Equipment.

 

Advances from Related Parties

 

During 2019 and 2020, Legacy PCT received $746 thousand of funding and support services from Innventure1 LLC (formerly Innventure LLC) and Wasson Enterprises. On March 26, 2020, $375 thousand of the balance was repaid. The remaining balance of $371 thousand was assigned from Wasson Enterprise to Innventure LLC (Formerly WE-Innventure LLC).

 

16

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Convertible Notes

 

On October 6, 2020, Legacy PCT entered into a Senior Notes Purchase Agreement (the “Agreement”) with certain investors. The Agreement provides for the issuance of Senior Convertible Notes (the “Notes” or “Convertible Notes”), which have an interest rate of 5.875% and mature on October 15, 2022 (the “Maturity Date”) and are subject to a six-month maturity extension at the Company’s option with respect to 50% of the then outstanding Notes on a pro rata basis, unless repurchased or converted prior to such date (“Maturity Date Extension”). The initial closing took place on the date of the Indenture on October 7, 2020 (the “First Closing”), upon which $48.0 million in aggregate principal of Notes were issued to the Investors (“the Magnetar Investors”). The Agreement also includes an obligation for the Company to issue and sell, and for each of the Magnetar Investors to purchase, Notes in the principal amount of $12.0 million within 45 days after the Company enters into the Merger Agreement as defined in Note 1 (“Second Closing Obligation”). On December 29, 2020, the remaining Notes were purchased in accordance with the Agreement. On April 15, 2021, the first interest payment of $1.7 million was paid entirely in kind, which increased the principal amount of the Notes by $1.7 million (“PIK Interest”). The Notes are convertible through the Maturity Date at the option of the holder. Following the consummation of the Business Combination, however, each holder was required to agree not to convert its Notes (except in connection with a Change of Control or Fundamental Change (each as defined in the Indenture) for a period not to exceed one hundred eighty (180) days following the consummation of the Business Combination, or September 13, 2021). As of September 30, 2021 and December 31, 2020, none of the Notes were converted into shares of common stock. The Notes are recorded within notes payable in the condensed consolidated balance sheet. As the Notes were used to construct the Company’s property, plant and equipment, a portion of the interest costs incurred were capitalized within property, plant and equipment.

 

The following provides a summary of the interest expense of PCT’s convertible debt instruments (in thousands):

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2021   2020   2021   2020 
Contractual interest expense  $906   $   $2,689   $ 
Amortization of deferred financing costs   466        1,546     
Effective interest rate   9.0%   %   9.0%   %

 

The following provides a summary of the convertible notes (in thousands):

 

   As of 
   September 30, 2021   December 31, 2020 
Unamortized deferred issuance costs  $2,010   $3,288 
Net carrying amount   59,670   56,712 
Fair value  $123,332   $123,532 
Fair value level  Level 3   Level 3 

 

As of September 30, 2021, as a result of the Business Combination, the conversion price of the notes changed to the quotient of (A) $1,000 and (B) the SPAC transaction PIPE valuation; provided that if the Equity Value of the Company in connection with the SPAC Transaction is greater than $775.0 million, the conversion rate shall equal the product of (1) the amount that would otherwise be calculated pursuant to this clause set forth above and (2) a fraction equal to the Equity Value of the Company divided by $775.0 million (as such terms are defined in the indenture governing the Notes). The conversion price is $6.93 for potential conversion of the Notes outstanding as of September 30, 2021 into approximately 8.9 million shares of common stock.

 

As of December 31, 2020 the conversion price of the Notes was the quotient of $1,000 and the quotient of (A) 80% of the Adjusted Equity Value of the Company as determined based upon the sale of approximately 684 thousand Legacy PCT Class A Units at $87.69 per unit (the “November Investment”) and (B) the number of outstanding shares of Capital Stock of the Company on a Fully-Diluted Basis immediately prior to the November Investment (as such terms are defined in the indenture governing the Notes).

 

17

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Revenue Bonds

 

On October 7, 2020, the Southern Ohio Port Authority (“SOPA”) issued certain revenue bonds (“Bonds” or “Revenue Bonds”) and loaned the proceeds from their sale to PureCycle: Ohio LLC, an Ohio limited liability company (“PCO”), pursuant to a loan agreement dated as of October 1, 2020 between SOPA and PCO (“Loan Agreement”), to be used to (i) acquire, construct and equip the Ohio Phase II Facility; (ii) fund a debt service reserve fund for the Exempt Facility Revenue Bonds (PureCycle Project), Tax-Exempt Series 2020A Bonds (“Series 2020A Bonds”); (iii) finance capitalized interest; and (iv) pay the costs of issuing the Bonds. The Bonds were offered in three series, including (i) Tax-Exempt Series 2020A Bonds; (ii) Subordinate Exempt Facility Revenue Bonds (PureCycle Project), Tax-Exempt Series 2020B (“Series 2020B Bonds”); and (iii) Subordinated Exempt Facility Revenue Bonds (PureCycle Project), Taxable Series 2020C (“Series 2020C Bonds”), each series in the aggregate principal amount, bearing interest and maturing as shown in the table below. The Series 2020A Bonds were issued at a total discount of $5.5 million. The discount is amortized over the term of the Bonds using the effective interest method. The purchase price of the Bonds was paid and immediately available to SOPA on October 7, 2020, the date of delivery of the Bonds to their original purchaser. PureCycle is not a direct obligor on the Bonds and is not a party to the Loan Agreement or the indenture of trust dated as of October 1, 2020 (“Indenture”), between SOPA and UMB Bank, N.A as trustee (“Trustee”), pursuant to which the Bonds have been issued. Legacy PCT has executed a guaranty of completion dated as of October 7, 2020 (“Completion Guaranty”), with respect to the full and complete performance by PCO of PCO’s obligations with respect to construction and completion of the Project, including construction by the Completion Date, free and clear of any liens (other than permitted liens), and the payment of all Project costs incurred prior to completion of the Project, and all claims, liabilities, losses and damages owed by PCO to each counterparty under the Project Documents (as such terms are defined in the Indenture). In addition, pursuant to the Guaranty, PureCycle is obligated to fund and maintain a liquidity reserve for the Project during the term of the Guaranty in the amount of $50.0 million to be held in an escrow account with U.S. Bank National Association, as escrow agent (“Liquidity Reserve”). Pursuant to the terms of the Loan Agreement PCO executed promissory notes, one in the aggregate principal amount of each series of Bonds, in favor of SOPA, which were assigned to the Trustee on October 7, 2020.

 

(in thousands)              
Bond Series  Term  Principal
Amount
   Interest
Rate
   Maturity Date
2020A  A1  $12,370    6.25%  December 1, 2025
2020A  A2  $38,700    6.50%  December 1, 2030
2020A  A3  $168,480    7.00%  December 1, 2042
2020B  B1  $10,000    10.00%  December 1, 2025
2020B  B2  $10,000    10.00%  December 1, 2027
2020C  C1  $10,000    13.00%  December 1, 2027

 

The proceeds of the Bonds and certain equity contributions have been placed in various trust funds and non-interest-bearing accounts established and administered by the Trustee under the Indenture. Before each disbursement of amounts in the Project Fund held by the Trustee under the Indenture, PCO is required to submit to the Trustee a requisition for funds to be disbursed outlining the specified purpose of the disbursement and substantiating the expenditure. In addition, 100% of revenue attributable to the production of the Ohio Phase II Facility must be deposited into an operating revenue escrow fund held by U.S. Bank National Association, as escrow agent. Funds in the trust accounts and operating revenue escrow account will be disbursed by the Trustee when certain conditions are met, and will be used to pay costs and expenditures related to the development of the Ohio Phase II Facility, make required interest and principal payments (including sinking fund redemption amounts) and any premium, in certain circumstances required under the Indenture, to redeem the Bonds.

 

As conditions for closing the Bonds, Legacy PCT contributed $60.0 million in equity at closing and PureCycle and certain affiliates contributed an additional $40.0 million in equity upon the Closing of the Business Combination. PureCycle provided the Liquidity Reserve for the Ohio Phase II Facility construction of $50.0 million and deposited the amount upon the Closing of the Business Combination. In addition, PureCycle must maintain at least $75.0 million of cash on its balance sheet as of July 31, 2021 and $100.0 million of cash on its balance sheet as of January 31, 2022, in each case, including the Liquidity Reserve. The Company has met this requirement as of July 31, 2021.

 

18

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

The Bonds are recorded within Bonds payable in the condensed consolidated balance sheet. The Company incurred $4.8 million and $0 of interest cost during the three months ended September 30, 2021 and 2020, respectively, and $14.4 million and $0 of interest cost during the nine months ended September 30, 2021 and 2020, respectively. As the Bond proceeds will be used to construct the Company’s property, plant and equipment, the interest costs related to the tax-exempt portion of the Revenue Bonds have been capitalized within Property, Plant and Equipment. The Company capitalized $4.3 million and $0 of interest cost during the three months ended September 30, 2021 and 2020, respectively, and $12.8 million and $0 of interest cost during the nine months ended September 30, 2021 and 2020, respectively. Management believes the fair value of the Revenue Bonds is not materially different than the carrying amount.

 

In connection with its obligations under that certain Security Agreement dated as of October 7, 2020, between PCO, as debtor, and the Trustee, as secured party, entered into when the Bonds were issued (the “Security Agreement”), PCO must deliver consent and agreements (“Consents”) to the Trustee with respect to each agreement entered into in connection with the Project, each of which agreements is required under the Loan Agreement to be assigned to the Trustee. The forms of the Consents relating to a certain feedstock supply agreement from one supplier of feedstock to the Project (the “Supplier”) and from two purchasers of offtake from the Project (“Offtaker 2” and “Offtaker 3” and together with the Supplier, the “Counterparties”) delivered to the Trustee contained terms inconsistent with the form of the Consent required under the Security Agreement. On May 11, 2021, the Guaranty was amended and restated in an amended and restated guaranty of completion (the “ARG”) executed by PureCycle and delivered to the Trustee, which broadens the purposes for which draws by the Trustee on the Liquidity Reserve may be utilized, extends the period during which the Liquidity Reserve must be maintained, includes conditions that would permit a reduction in the amount of the Liquidity Reserve required to be maintained by PureCycle, and includes conditions precedent to the elimination of the requirement that PureCycle replenish the Liquidity Reserve and to the termination of the ARG and the escrow agreement under which the Liquidity Reserve is held by the escrow agent (the “Escrow Agreement”), upon which termination, the balance of the Liquidity Reserve will be returned to PureCycle. So long as there are any Series 2020A Bonds outstanding under the Indenture, the ARG and the Escrow Agreement will remain in place upon the conditions stated in the ARG. The terms of the ARG are summarized as follows: The Liquidity Reserve shall be maintained in the amount of $50.0 million, subject to replenishment by PureCycle until certain conditions stated in the ARG relating to the following have been met: (i) the completion of construction and acquisition of the Project, (ii) the payment of all Project costs, and (iii) the replacement of the assigned agreements of the Counterparties underlying the Consents which have expired or terminated, with one or more agreements between counterparties and PCO upon terms at least as favorable to PCO as the expired or terminated agreements of the Counterparties, (a) for which a Consent that conforms to the form of Consent required by the Security Agreement is executed by the counterparties and provided to the Trustee, (b) which, in the case of supply of feedstock to the Project, provide in the aggregate for the supply of at least the minimum and maximum volumes of feedstock meeting substantially similar feedstock specifications as the Supplier had committed to supply, and (c) which, in the case of purchase of offtake from the Project, provide in the aggregate for the purchase of the minimum and maximum volumes of offtake from the Project meeting substantially similar specifications as Offtaker 2 and Offtaker 3 had committed to purchase from PCO. When the conditions stated in (i), (ii) and (iii) above have been satisfied but so long as there are Series 2020A Bonds outstanding under the Indenture, the Escrow Agreement shall remain in place but the Liquidity Reserve amount shall be reduced to $25 million and PureCycle shall no longer be required to replenish the amount of the reduced Liquidity Reserve if and when disbursements are made therefrom. If the conditions of (i) and (ii) have been met but only a portion of the feedstock and offtake contracted for by the Counterparties, respectively, has been replaced under replacement agreements as aforesaid in (iii) above, then the Liquidity Reserve amount may be reduced only by the applicable proportion of the amounts stated in the ARG which evidence the intent of the parties of the amount of value representing the supply or offtake of the agreements of the Counterparties. When the conditions precedent of (i), (ii), and (iii) have been satisfied and there are no longer any Series 2020A Bonds then outstanding, then PureCycle shall have no obligation to maintain the reduced Liquidity Reserve, the ARG and the Escrow Agreement shall terminate and the balance on deposit in the Liquidity Reserve escrow fund held by the escrow agent shall be returned to PureCycle.

 

So long as any Series 2020A Bonds remain outstanding under the Indenture, upon the occurrence of an Event of Default under the Loan Agreement or Indenture, if the Trustee takes control of the Liquidity Reserve held by the escrow agent, such funds may be used for any purpose, including the payment of debt service on the Series 2020A Bonds, as may be determined by the Trustee or directed by a majority of the holders of the Series 2020A Bonds then outstanding.

 

19

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Paycheck Protection Program

 

On May 4, 2020, Legacy PCT entered into a Paycheck Protection Program (the “Program”, or “PPP loan”) Term Note with PNC Bank to obtain principal of approximately $314 thousand (the “Term Note”). This Term Note was issued pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program. During the period from May 4, 2020 until the forgiveness amount was known, (“Deferral Period”), interest on the outstanding principal balance accrued at the fixed rate of 1% per annum, but neither principal nor interest was due during the Deferral Period. Legacy PCT applied for loan forgiveness as of December 31, 2020, and forgiveness was granted for the full outstanding principal balance of $314 thousand on April 9, 2021.

 

The outstanding balance on the loan is approximately $0 and $314 thousand as of September 30, 2021 and December 31, 2020, respectively, with $0 and $122 thousand recorded as Notes payable – current and $0 and $192 thousand recorded as Notes payable in the condensed consolidated balance sheets.

 

NOTE 4 - STOCKHOLDERS’ EQUITY

 

The condensed consolidated statements of stockholders’ equity reflect the reverse recapitalization as discussed in Note 1 as of March 17, 2021. As Legacy PCT was deemed the accounting acquirer in the reverse recapitalization with ROCH, all periods prior to the consummation date reflect the balances and activity of Legacy PCT. The consolidated balances and the audited consolidated financial statements of Legacy PCT, as of December 31, 2020, and the share activity and per share amounts in these condensed consolidated statements of equity were retroactively adjusted, where applicable, using the recapitalization exchange ratio of 10.52 for Legacy PCT Class A Units. Legacy PCT Class B Preferred Units were converted into shares of PCT common stock at a share conversion factor of 10.642 whereas Legacy PCT Class B-1 Preferred Units were converted into shares of PCT common stock at a share conversion factor of 14.768 as a result of the reverse recapitalization. Legacy PCT Class C Units were converted into shares of PCT common stock at a share conversion factor of 9.32, 7.40, or 2.747, based on the distribution threshold of the Class C Unit.

 

Common Stock

 

Holders of PCT common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The holders do not have cumulative voting rights in the election of directors. Upon the Company’s liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of the Company’s common stock will be entitled to receive pro rata the Company’s remaining assets available for distribution. Holders of the Company’s common stock do not have preemptive, subscription, redemption or conversion rights. All shares of the Company’s common stock are fully paid and non-assessable. The Company is authorized to issue 250.0 million shares of common stock with a par value of $0.001. As of September 30, 2021 and December 31, 2020, 118.24 million and 0 shares are issued and outstanding, respectively.

 

Preferred Stock

 

As of September 30, 2021, the Company is authorized to issue 25.0 million shares of preferred stock with a par value of $0.001, of which no shares are issued and outstanding.

 

NOTE 5 - 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.

 

20

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

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 

 

21

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

   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.

 

22

 

  

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

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.

 

23

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

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.

 

24

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

NOTE 6 - WARRANTS

 

Warrants issued to purchase Legacy PCT Class B Preferred Units

 

On October 16, 2015, Legacy PCT issued a unit purchase warrant to P&G in connection with the patent licensing agreement described in Note 10, for 211 thousand warrants at an aggregate exercise price of $1.00, allowing P&G to purchase a variable number of Legacy PCT Class B Preferred Units during the exercise period of April 15, 2019 through April 15, 2024. The warrants were determined to vest at the start of the exercise period. The number of warrants available to P&G to purchase is equal to an amount that initially represented 5% of all outstanding equity of Legacy PCT on a fully diluted basis. Additionally, the warrant agreement contains an anti-dilution provision, which states that the number of warrants exercisable upon full exercise of the warrant will be subject to adjustment, such that the ownership percentage is not reduced below 2.5% sharing percentage in the Company, on a fully diluted basis.

 

Legacy PCT determined the warrants issued are liability classified under ASC 480. Accordingly, the warrants were held at their initial fair value and remeasured at fair value at each subsequent reporting date with changes in the fair value presented in the statements of comprehensive loss.

 

On October 15, 2020, P&G exercised all 211 thousand of the warrants for total proceeds of $1. The fair value of the Legacy Class B Preferred Units on the date of exercise was $18.17 million and was recorded in APIC. In connection with the exercise, the Company recorded a loss of $211 thousand.

 

A summary of the Legacy PCT Class B warrant activity for nine months ended September 30, 2020 is as follows (in thousands except per share data):

 

   Number of
warrants
   Weighted
average
exercise price
   Weighted
average grant
date fair value
   Weighted
average
remaining
contractual
term (years)
 
Outstanding at December 31, 2019   211   $1.00   $30.63    4.29 
Granted                
Exercised                
Outstanding at September 30, 2020   211   $1.00   $30.63    3.54 
Exercisable   211                

 

The Company recognized expense of $0 and $1.78 million for the nine months ended September 30, 2021 and 2020, respectively, in connection with these warrants, which was recorded within the Change in fair value of warrants line item in the condensed consolidated statements of comprehensive loss. The warrants were exercised in the fourth quarter of 2020, therefore there was no activity during the nine months ended September 30, 2021.

 

Warrants issued to purchase Legacy PCT Class B-1 Preferred Units

 

On June 5, 2019, in connection with a Legacy PCT Class B-1 Preferred Unit purchase agreement with a related party, Legacy PCT issued a unit purchase warrant for 8 thousand warrants at an exercise price of $37.61, allowing the related party to purchase a variable number of Legacy PCT Class B-1 Preferred Units during the exercise period of June 5, 2019 through June 4, 2024.

 

Legacy PCT determined the warrants are not a freestanding instrument under ASC 480. Also, the warrants are determined to be clearly and closely related to the Legacy PCT Class B-1 Preferred Units under ASC 815, Derivatives and Hedging. Accordingly, they are not recorded in the financial statements until exercised. On March 12, 2021, the warrants were cancelled prior to the closing of the Business Combination.

 

25

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

On July 22, 2019, in connection with a bridge note and warrant financing agreement with Innventus Fund I, L.P. (now known as Innventus ESG Fund I L.P.), Legacy PCT issued a unit purchase warrant for 5 thousand warrants at an exercise price of $37.61, allowing Innventus to purchase a variable number of Legacy PCT Class B-1 Preferred Units during the exercise period of July 22, 2019 through July 22, 2024.

 

Legacy PCT determined the warrants issued are equity classified under ASC 480. Accordingly, the warrants were held at their initial fair value with no subsequent remeasurement. On March 12, 2021, the warrants were cancelled prior to the closing of the Business Combination.

 

A summary of the Class B-1 warrant activity for the nine months ended September 30, 2021 and 2020 is as follows (in thousands except per share data):

 

   Number of
warrants
   Weighted
average
exercise price
   Weighted
average grant
date fair value
   Weighted
average
remaining
contractual
term (years)
 
Outstanding at December 31, 2019   5   $37.61   $15.52    4.56 
Granted               0 
Exercised               0 
Outstanding at September 30, 2020   5   $37.61   $15.52    3.81 
                     
Outstanding at December 31,  2020   5   $37.61   $15.52    3.56 
Granted               0 
Exercised               0 
Cancelled  $(5)  $37.61   $15.52    3.56 
Outstanding at September 30, 2021      $   $     
Exercisable                   

 

The Company recognized no expense for the nine months ended September 30, 2021 and 2020, respectively.

 

Warrants issued to purchase Legacy PCT Class C Units

 

On June 29, 2018, the Legacy PCT Board approved the issuance of warrants to RTI Global (“RTI”) under the terms of a professional services agreement to purchase an aggregate of 144 thousand of Legacy PCT Class C Units at an aggregated exercise price of $37.605 per unit. The warrants vested immediately upon issuance and expire on June 29, 2023 or upon a change in control event, as defined in the warrant agreement. The Company determined the warrants issued are equity classified under ASC 480. Accordingly, the warrants were held at their initial fair value with no subsequent remeasurement.

 

In connection with the Business Combination discussed in Note 1, the Company modified the warrant agreement to purchase 971 thousand shares of PCT common stock instead of Legacy PCT Class C Units on November 20, 2020. RTI can exercise these warrants upon the first anniversary of Closing of the Business Combination. The warrants expire on December 31, 2024. In connection with the modification of the agreement, the Company determined the warrants issued are liability classified under ASC 480. Accordingly, the warrants were held at their initial fair value and will be remeasured at fair value at each subsequent reporting date with changes in the fair value presented in the statements of comprehensive loss.

 

26

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

A summary of the RTI warrant activity for the nine months ended September 30, 2021 and 2020 is as follows (in thousands, except per share data, as adjusted to show the effect of the reverse recapitalization as described in Note 1):

 

   Number of
warrants
   Weighted
average
exercise price
   Weighted
average grant
date fair value
   Weighted
average
remaining
contractual
term (years)
 
Outstanding at December 31, 2019   971   $5.56   $0.03    5 
Granted                
Exercised                
Outstanding at September 30, 2020   971   $5.56   $0.03    4.25 
Exercisable   971                

 

   Number of
warrants
   Weighted
average
exercise price
   Weighted
average grant
date fair value
   Weighted
average
remaining
contractual
term (years)
 
Outstanding at December 31, 2020   971   $5.56   $0.03    4 
Granted                
Exercised                
Outstanding at September 30, 2021   971   $5.56   $0.03    3.25 
Exercisable   971                

 

The Company recognized $6.8 million and $0 of benefit for the three months ended September 30, 2021 and 2020, and $8.2 million and $0 of expense for the nine months ended September 30, 2021 and 2020, respectively. Refer to Note 12 – Fair Value of Financial Instruments for further information.

 

Public Warrants and Private Warrants

 

Upon the closing of the Business Combination, there were approximately 5.9 million outstanding public and private warrants to purchase shares of the Company’s common stock that were issued by ROCH prior to the Business Combination. Each whole warrant entitles the registered holder to purchase one whole share of the Company’s Common Stock at a price of $11.50 per share, subject to adjustment as discussed below, at the later of the closing of the Business Combination or one year after ROCH’s initial public offering, provided that the Company has an effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of Common Stock. The warrants will expire five years after the completion of the Business Combination, or earlier upon redemption or liquidation. The private warrants are identical to the public warrants, except that the private warrants and the common stock issuable upon exercise of the private warrants were not transferable, assignable or salable until after the completion of an Initial Business Combination, subject to certain limited exceptions. Additionally, the private warrants are non-redeemable so long as they are held by the initial holder or any of its permitted transferees. If the private warrants are held by someone other than the initial holder or its permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.

 

The Company may redeem the outstanding warrants in whole, but not in part, at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if and only if the last sale price of the Company’s common stock equals or exceeds $18.00 per share for any 20-trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders. If the Company calls the warrants for redemption, management will have the option to require all holders that wish to exercise the warrants to do so on a cashless basis. In no event will the Company be required to net cash settle the warrant exercise. The public warrants are accounted for as equity classified warrants as they were determined to be indexed to the Company’s stock and meet the requirements for equity classification.

 

27

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

The Company has classified the private warrants as a warrant liability as there is a provision within the warrant agreement that allows for private warrants to be exercised via a cashless exercise while held by the Sponsor and affiliates of the Sponsor, but would not be exercisable at any time on a cashless basis if transferred and held by another investor. Therefore, the Company will classify the private warrants as a liability pursuant to ASC 815 until the private warrants are transferred from the initial purchasers or any of their permitted transferees.

 

At September 30, 2021, there were approximately 5.7 million Public Warrants and 0.2 million Private Placement Warrants outstanding. Refer to Note 12 – Fair Value of Financial Instruments for further information.

 

NOTE 7 - RELATED PARTY TRANSACTIONS

 

Innventure LLC (“Innventure”) had a significant ownership stake in Legacy PCT. Innventure, in turn, was majority owned by Innventure1. WE-INN LLC (“WE-INN”) held a minority interest in Innventure, and WE-INN is majority owned by Wasson Enterprises.

 

Innventure held significant interests in the following legal entities: Innventure Management Services LLC, Innventure GP LLC, and Aeroflexx LLC. Innventure had a significant financial interest over each of the legal entities within the group and had decision-making ability over the group whereby significant managerial and operational support was provided by Innventure personnel. This includes certain executive management and officers of Legacy PCT and other legal entities that were employees or officers of Innventure. The legal entities, including Legacy PCT, were deemed to be under common control by Innventure. There were no transactions between PCT and its affiliates, Innventure GP LLC and Aeroflexx LLC, during the nine months ended September 30, 2021 and 2020.

 

Innventure Management Services LLC provided significant managerial support to the other legal entities below Innventure, including Legacy PCT.

 

Management services

 

During the nine months ended September 30, 2021 and 2020, PureCycle reimbursed Innventure Management Services LLC for certain expenses incurred on its behalf. The Company paid $46 thousand and $128 thousand to Innventure Management Services LLC related to this arrangement for the three months ended September 30, 2021 and 2020, respectively, and $167 thousand and $315 thousand for the nine months ended September 30, 2021 and 2020, respectively. These amounts were included in selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss. As of September 30, 2021, and December 31, 2020, the Company owed Innventure Management Services LLC $6 thousand and $30 thousand, respectively, related to this arrangement, which is classified as accounts payable in the accompanying condensed consolidated balance sheets.

 

Related party receivables

 

In 2020, the Company prepaid certain tax payments on behalf of unitholders. As of September 30, 2021 and December 31, 2020 the receivable balance was $78 thousand recorded in prepaid expenses and other current assets in the condensed consolidated balance sheets.

 

Leases

 

The Company provides office space to, and is reimbursed for, the rent by Innventure LLC.

 

NOTE 8 – NET LOSS PER SHARE

 

The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The two-class method also requires losses for the period to be allocated between common and participating securities based on their respective rights if the participating security contractually participates in losses. As holders of participating securities do not have a contractual obligation to fund losses, undistributed net losses are not allocated to nonvested restricted stock for purposes of the loss per share calculation.

 

28

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

As result of the reverse recapitalization, the Company has retroactively adjusted the weighted average shares outstanding prior to the Business Combination to give effect to the Exchange Ratio used to determine the number of shares of common stock into which they were converted.

 

Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted earnings per share (“EPS”) calculations for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share data):

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2021   2020   2021   2020 
Numerator:                    
Net income (loss) attributable to PureCycle Technologies  $(20,977)  $(6,609)  $(58,110)  $(15,588)
Less cumulative earnings to preferred stockholder       882        4,833 
Net income (loss) attributable to common stockholders  $(20,977)  $(7,491)  $(58,110)  $(20,421)
Denominator:                    
Weighted average common shares outstanding, basic and diluted   118,255    27,156    95,773    27,156 
Net loss per share attributable to common stockholder, basic and diluted  $(0.18)  $(0.28)  $(0.61)  $(0.75)

 

The weighted-average outstanding common share equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive. These shares include vested but not exercised warrants and non-vested restricted stock units and convertible notes.

 

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT

 

Presented in the table below are the major classes of property, plant and equipment by category as of the below dates:

 

   As of September 30, 2021 
(in thousands)  Cost   Accumulated
Depreciation
   Net Book
Value
 
Building  $12,029   $618   $11,411 
Machinery and equipment   18,569    3,645    14,924 
Fixtures and Furnishings   104    34    70 
Land improvements   150    10    140 
Land   1,150        1,150 
Construction in process   161,527        161,527 
Total property, plant and equipment  $193,529   $4,307   $189,222 

 

29

 

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

   As of December 31, 2020 
(in thousands)  Cost  

Accumulated
Depreciation

   Net Book
Value
 
Building  $12,029   $387   $11,642 
Machinery and equipment   15,982    2,388    13,594 
Fixtures and Furnishings   104    22    82 
Land improvements   150    3    147 
Land   1,150        1,150 
Construction in process   47,452        47,452 
Total property, plant and equipment  $76,867   $2,800   $74,067 

 

Depreciation expense is recorded within operating costs in the condensed consolidated statements of comprehensive loss and amounted to $1.5 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively, and $522 thousand and $475 thousand for the three months ended September 30, 2021 and 2020, respectively.

 

NOTE 10 – DEVELOPMENT PARTNER ARRANGEMENTS

 

License Agreements

 

On October 16, 2015, Legacy PCT entered into a patent license agreement with P&G (the “Original Patent License Agreement”). Legacy PCT and P&G entered into an Amended and Restated Patent License Agreement on July 28, 2020 (the “Amended and Restated Patent License Agreement”). PCT and P&G entered into a side letter agreement on February 12, 2021 amending certain provisions of the Amended and Restated License Agreement (the “Side Letter Agreement” and, together with the Original Patent License Agreement and the Amended and Restated Patent License Agreement, the “License Agreement”). The License Agreement outlines three phases with specific deliverables for each phase. During Phase 1 of the License Agreement, P&G provided Legacy PCT with up to one full-time employee to assist in the execution of Legacy PCT’s research and development activities. During Phase 2, P&G provided up to two full-time employees to assist in the execution of Legacy PCT’s research and development activities. In April 2019, Legacy PCT elected to enter into Phase 3 of the License Agreement and prepaid a royalty payment in the amount of $2.0 million, which will be reduced against future royalties payable as sales occur. Phase 3 of the License Agreement relates to the commercial manufacture period for the manufacture of the licensed product. This phase includes the construction of the first commercial plant for the manufacture of the licensed product, details on the commercial sales capacity and the pricing of the licensed product to P&G and to third parties. Where the Company has made royalty payments to its product development partners, the Company expenses such payments as incurred unless it has determined that is it probable that such prepaid royalties have future economic benefit to the Company. In such cases prepaid royalties will be reduced as royalties would otherwise be due to the partners. Effective January 1, 2021, the Company entered into an agreement with P&G to provide certain research assistance through June 30, 2021. Under the terms of the January agreement, the Company is obligated to pay P&G $0.5 million for such services. Effective July 1, 2021, the Company entered into a consulting agreement with P&G. The agreement will expire effective June 30, 2022. Under the terms of the agreement, we are obligated to pay P&G $0.1 million for certain research assistance.

 

As of September 30, 2021 and December 31, 2020, the Company is in Phase 3 of the License Agreement and has recorded $2.0 million within prepaid expenses and other non-current assets in the condensed consolidated balance sheets.

 

On November 13, 2019, Legacy PCT entered into a patent sublicense agreement with Impact Recycling Limited (“Impact”) through the term of the patents. The agreement outlines an initial license fee of $2.5 million and royalties on production using the license. In 2020, Legacy PCT paid $890 thousand of the initial license fee, and during the nine months ended September 30, 2021, the Company paid the remaining $1.6 million of the initial fee. The initial license fee of $2.5 million is recorded in prepaid expenses and other non-current assets in the condensed consolidated balance sheets and will be ratably amortized over the term of the underlying patent using the straight-line method. In May 2021, the Company began using the technology covered by the Impact agreement and commenced amortization as of this date.

 

30

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Block and Release Agreement

 

On June 23, 2020, Legacy PCT entered into a block and release agreement with Total Petrochemicals & Refining S.A./N.V. (“Total”). Upon execution of the agreement, Total made a prepayment consisting of a payment of $5.0 million for future receipt of resin consisting of recycled polypropylene (“recycled PP”). The prepayment was placed in an escrow account until the “release condition” of the Company closing the bond offering and overall capital funding of at least $370.0 million has occurred. After the Company successfully raised the required capital, the $5.0 million was released during the nine months ended September 30, 2021 to the Company and recorded as deferred revenue in the condensed consolidated balance sheets.

 

Strategic Alliance Agreement

 

On December 13, 2018, Legacy PCT entered into a strategic alliance agreement with Nestle Ltd. (“Nestle”), which expires on December 31, 2023. Upon execution of the agreement, Nestle committed to provide $1.0 million to Legacy PCT to fund further research and development efforts. The funding provided by Nestle may be convertible, in whole or in part, into a prepaid product purchase arrangement at Nestle’s option, upon the time of product delivery beginning in 2020. Additionally, because the research and development efforts were not successful as of December 31, 2020, up to 50% of the funding may be convertible into a 5-year term loan obligation, payable to Nestle at an interest rate equivalent to the U.S. prime rate. As of the issuance of these statements, Nestlé has not elected to convert any funding into a term loan.

 

Legacy PCT received the funding from Nestle on January 8, 2019. The Company has recorded $1.0 million as a deferred research and development obligation within other non-current liabilities in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. Recognition related to the funding received will be deferred until it is probable that Nestle will not exercise their option. If the prepaid product purchase option is exercised, the obligation will be recognized as an adjustment to the transaction price of future product sales (e.g., net revenue presentation). If the option is not exercised, or in the case of development efforts not being successful, any amounts not converted to a loan obligation will be recognized as a reduction to research and development costs.

 

NOTE 11 - INCOME TAXES

 

Historically, Legacy PCT was a limited liability company which had elected to be treated as a partnership for income tax purposes. As such, the Company was not directly liable for income taxes for federal purposes. As of the date of the Business Combination, the operations of the Company ceased to be taxed as a partnership resulting in a change in tax status for federal and state income tax purposes. This change in tax status requires immediate recognition of any deferred tax assets or liabilities as of the transaction date as the Company will now be directly liable for income taxes. The recognition of these initial deferred balances, if any, would be recorded as additional tax expense in the period of the transaction. In addition, the Company will accrue current and deferred tax expense based on ongoing activity from that date.

 

The Company has determined that any net deferred tax assets are not more likely than not to be realized in the future as of the date of the change in tax status, and a full valuation allowance is required. In addition, the Company has determined that any current forecasted operations would result in federal and state income tax losses which are also not more likely than not to be realized. As a result, for the periods ended September 30, 2021 and 2020, the Company has reported tax expense of $0 and $0, respectively.

 

As a part of the initial and current period recognition, Management has also evaluated the Company’s tax positions, including their status as a pass-through entity for federal and state tax purposes historically, and has determined that the Company has taken no uncertain tax positions that require adjustment to the condensed consolidated interim financial statements for the respective periods.

 

31

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, and fair value is determined through the use of models or other valuation methodologies

 

Level 3 - Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation.

 

Assets and liabilities measured and recorded at Fair Value on a recurring basis

 

As of September 30, 2021 and December 31, 2020, the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis were classified within the fair value hierarchy as follows (in thousands):

 

   September 30, 2021   December 31, 2020 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Assets                                        
Investments:                                        
Commercial paper, available for sale  $   $83,723   $   $83,723   $   $   $   $ 
Corporate Bonds, available for sale       94,974        94,974                 
Municipal bonds, available for sale       5,878        5,878                 
Total investments  $   $184,575   $   $184,575   $   $   $   $ 
                                         
Liabilities                                        
Warrant liability:                                        
RTI warrants  $   $   $8,214   $8,214   $   $   $   $ 
Private warrants           1,316    1,316                 
Total warrant liability  $   $   $9,530   $9,530   $   $   $   $ 

 

Measurement of the Private Warrants

 

The private warrants are measured at fair value on a recurring basis using a Black-Scholes model. The private warrants are classified as Level 3 for both initial measurement upon close of the Business Combination and subsequent measurement using the following assumptions:

 

   September 30, 2021   March 18, 2021 (Initial
Recognition)
 
Expected annual dividend yield   %   %
Expected volatility   56.2%   47.3%
Risk-free rate of return   0.86%   0.86%
Expected option term (years)   4.47    5.0 

 

32

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

The expected term of the warrants granted are determined based on the duration of time the warrants 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 warrants 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 Black-Scholes calculation.

 

The aggregate values of the private warrants were $1.3 million and $4.6 million on September 30, 2021 and March 18, 2021, respectively.

 

A summary of the private warrants activity from the Business Combination date at March 18, 2021 to September 30, 2021 is as follows:

 

    Fair value
(Level 3)
 
Balance at March 18, 2021   $ 4,604  
Change in fair value     (3,288 )
Balance at September 30, 2021   $ 1,316  

 

Refer to Note 6 – Warrants for further information.

 

Measurement of the RTI warrants

 

Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.

 

The Company has determined its warrant to be a Level 3 fair value measurement and has remeasured using the Black-Scholes option pricing model to calculate its fair value for both initial measurement upon close of the Business Combination and subsequent measurement using the following assumptions:

 

   September 30, 2021   March 18, 2021 (Initial
Recognition)
 
Expected annual dividend yield   %   %
Expected volatility   55.49%   48.51%
Risk-free rate of return   0.59%   0.54%
Expected option term (years)   3.25    3.79 

 

The expected term of the warrants granted are determined based on the duration of time the warrants 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 warrants 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 Black-Scholes calculation.

 

The Company has an option to repurchase the Warrants at any time. The maximum fair value of the Warrants is limited by the fair value of the repurchase option, which cannot exceed $15.0 million.

 

Changes in Level 3 liabilities measured at fair value for nine months ended September 30, 2021 are as follows (in thousands):

 

  

Fair value

(Level 3)

 
Balance at December 31, 2020  $ 
Change in fair value   8,214 
Balance at September 30, 2021  $8,214 

 

33

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Assets and liabilities recorded at carrying value

 

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurements.

 

The Company records cash and cash equivalents and accounts payable at cost, which approximates fair value due to their short-term nature or stated rates. The Company records debt at cost.

 

NOTE 13 - AVAILABLE-FOR-SALE INVESTMENTS

 

The Company classifies its investments in debt securities as available-for-sale. Debt securities are comprised of highly liquid investments with minimum “A” rated securities and, as of September 30, 2021, consist of corporate entity commercial paper and securities and municipal bonds. The debt securities are reported at fair value with unrealized gains or losses recorded in accumulated other comprehensive income in the condensed consolidated balance sheets. Refer to Note 12, "Fair Value of Financial Instruments," for information related to the fair value measurements and valuation methods utilized.

 

The following table represents the Company’s available-for-sale investments by major security type as of September 30, 2021 and December 31, 2020 (in thousands):

 

   September 30, 2021 
   Amortized Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Total Fair
Value
 
Commercial Paper  $83,732   $3   $(12)  $83,723 
Corporate Bonds   94,978    17    (21)   94,974 
Municipal Bonds   5,883        (5)   5,878 
Total  $184,593   $20   $(38)  $184,575 

 

    December 31, 2020 
    Amortized Cost    Gross Unrealized
Gains
    Gross Unrealized
Losses
    Total Fair
Value
 
Commercial Paper  $   $   $   $ 
Corporate Bonds                
Municipal Bonds                
Total  $   $   $   $ 

 

The following table summarizes the fair value and amortized cost bases of the Company’s available-for-sale investments by contractual maturity of September 30, 2021 and December 31, 2020 (in thousands):

 

   September 30, 2021   December 31, 2020 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
Due within one year  $125,538   $125,524   $   $ 
Due after one year through five years   59,055    59,051         
Total  $184,593   $184,575   $   $ 

 

Debt securities as of September 30, 2021 had an average remaining maturity of 0.9 years.

 

34

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

The Company reviews available-for-sale investments for other-than-temporary impairment loss periodically. The Company considers factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that the Company will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three and nine months ended September 30, 2021 and 2020, the Company did not recognize any other-than-temporary impairment losses. All marketable securities with unrealized losses have been in a loss position for less than twelve months, and the Company does not anticipate any material losses upon maturity of these investments. The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other securities holdings, primarily under commercial paper, equals the carrying value and is classified as Level 2.

 

NOTE 14 - CONTINGENCIES

 

Legal Proceedings

 

PCT is subject to legal and regulatory actions that arise from time to time in the ordinary course of business. The assessment as to whether a loss is probable or reasonably possible, and as to whether such loss or a range of such loss is estimable, often involves significant judgment about future events, and the outcome of litigation is inherently uncertain. Other than as described below, there is no material pending or threatened litigation against PCT that remains outstanding as of September 30, 2021.

 

Regulatory Investigations

 

On or around September 30, 2021, the SEC issued an investigative subpoena to PCT’s Chief Executive Officer requesting testimony in connection with a non-public, fact-finding investigation of the Company. The investigation pertains to, among other things, statements made in connection with PCT’s technology, financial projections, key supply agreements, and management. PCT and its Chief Executive Officer intend to cooperate with the SEC’s subpoena and investigation.

 

Shareholder Securities Litigation

 

Beginning on or about May 11, 2021, two putative class action complaints were filed against PCT, certain senior members of management and others, asserting violations of federal securities laws under Section 10(b) and Section 20(a) of the Exchange Act. The complaints generally allege that the applicable defendants made false and/or misleading statements in press releases and public filings regarding the Technology, PCT’s business and PCT’s prospects. The first putative class action complaint was filed in the U.S. District Court for the Middle District of Florida by William C. Theodore against PCT and certain senior members of management (the “Theodore Lawsuit”). The second putative class action complaint was filed in the U.S. District Court for the Middle District of Florida by David Tennenbaum against PCT, certain senior members of management and others (the “Tennenbaum Lawsuit” and, together with the Theodore Lawsuit, the “Lawsuits”). On July 14, 2021, the court granted a motion to consolidate the Lawsuits and on July 26, 2021, Tennenbaum filed a motion to voluntarily dismiss his complaint without prejudice. On August 5, 2021, the Court entered an order appointing the Ciecko Brothers as Co-Lead Plaintiffs (“Lead Plaintiffs”) and Pomerantz LLP as Lead Counsel.

 

On September 27, 2021, the Lead Plaintiffs filed a consolidated amended complaint. The consolidated amended complaint seeks to represent a class of investors who purchased or otherwise acquired PCT’s securities between November 16, 2020 and May 5, 2021, certification of the alleged class, as well as compensatory and punitive damages. The consolidated amended complaint relies on information included in a research report published by Hindenburg Research LLC. Defendants will be required to answer or otherwise plead on or before November 11, 2021.

 

PCT and the individual defendants constituting senior members of management intend to vigorously defend the Lawsuits. Given the stage of the litigation, PCT cannot reasonably estimate at this time whether there will be any loss, or if there is a loss, the possible range of loss, that may arise from the unresolved Lawsuits.

 

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PureCycle Technologies, Inc.

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

 

(Unaudited)

 

Derivative Litigation

 

On November 3, 2021, Byung-Gook Han, a purported PCT shareholder, derivatively and purportedly on behalf of PCT, filed a shareholder derivative action in the United States District Court for the District of Delaware (Byung-Gook Han v. Otworth et. al., Case No. 1:21-cv-01569-UNA) against certain senior members of PCT’s management, PCT’s directors and others (collectively, the “Individual Defendants”), alleging violations of Section 20(a) of the Exchange Act and breaches of fiduciary duties and bringing claims for unjust enrichment and waste of corporate assets. The shareholder derivative action generally alleges that the Individual Defendants made materially false and misleading statements in press releases, webinars and other public filings regarding the Technology, PCT’s business, PCT’s prospects, and the background and experience of the Individual Defendants. The shareholder derivative action seeks unspecified monetary damages, reform of the Company's corporate governance and internal procedures, unspecified restitution from the Individual Defendants, and costs and fees associated with bringing the action. The Individual Defendants intend to vigorously defend against the shareholder derivative action. Given the stage of the litigation, PCT cannot reasonably estimate at this time whether there will be any loss, or if there is a loss, the possible range of loss, that may arise from the unresolved shareholder derivative action.

 

In the future, PCT may become party to additional legal matters and claims arising in the ordinary course of business. While PCT is unable to predict the outcome of the above or future matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial position, results of operations, or cash flows.

 

NOTE 15 - SUBSEQUENT EVENTS

 

In connection with the preparation of the condensed consolidated interim financial statements for the period ended September 30, 2021, management has evaluated events through November 10, 2021 to determine whether any events required recognition or disclosure in the condensed consolidated interim financial statements. The following subsequent events were identified through the date of these condensed consolidated interim financial statements:

 

On October 15, 2021, the Company issued 235,796 shares of common stock to Aptar Group, Inc. (“Aptar”) for proceeds of $1 million, related to the closing of the FDA Letter Milestone.

 

On October 15, 2021, the approximately $1.8 million interest payment due for the Notes was paid entirely in kind, which increased the principal amount of the Notes by approximately $1.8 million.

 

On October 21, 2021, the Company received notice that certain holders of the Notes intended to convert approximately $45.3 million of the principal amount of the Notes. On October 22, the Company issued 6,533,532 shares of common stock to the converting Note holders.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis provides information which PCT’s management believes is relevant to an assessment and understanding of PCT’s consolidated results of operations and financial condition. The discussion should be read together with the unaudited condensed consolidated interim financial statements, together with related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “us”, “our”, and “the Company” are intended to mean the business and operations of PCT and its consolidated subsidiaries.

 

Overview

 

PureCycle Technologies, Inc. (“PCT” or “Company”) is a Florida-based corporation focused on commercializing a patented purification recycling technology (the “Technology”), originally developed by The Procter & Gamble Company (“P&G”), for restoring waste polypropylene into resin with near-virgin characteristics. PCT refers to this resin as ultra-pure recycled polypropylene (“UPRP”), which has nearly identical properties and applicability for reuse as virgin polypropylene. PCT has a global license for the Technology from P&G. PCT’s goal is to create an important new segment of the global polypropylene market that will assist multinational entities in meeting their sustainability goals, providing consumers with polypropylene-based products that are sustainable, and reducing overall polypropylene waste in the world’s landfills and oceans.

 

PCT’s process includes two steps: Feed Pre-Processing (“Feed PreP”) and the use of PCT’s recycling technology for purification. The Feed PreP step will collect, sort, and prepare polypropylene waste (“feedstock”) for purification. The purification step is a purification recycling process that uses a combination of solvent, temperature, and pressure to return the feedstock to near-virgin condition through a novel configuration of commercially available equipment and unit operations. The purification process puts the plastic through a physical extraction process using super critical fluids that both extract and filter out contaminants and purify the color, opacity, and odor of the plastic without changing the bonds of the polymer. By not altering the chemical makeup of the polymer, the Company is able to use significantly less energy and reduce production costs as compared to virgin resin.

 

Plant 1 or the Ohio Phase II Facility

 

PCT is currently building its first commercial-scale plant in Ironton, Ohio (referred to herein as “Plant 1” or the “Ohio Phase II Facility”), which is expected to have nameplate UPRP capacity of approximately 107 million pounds/year when fully operational. The Ohio Phase II Facility leverages the existing infrastructure of PCT’s pilot facility known as the Feedstock Evaluation Unit (“FEU”), which became operational in 2019. Plant 1 production is expected to commence in late 2022 and the plant is expected to be fully operational in 2023. PCT has secured and contracted all the feedstock and product offtake for this initial plant.

 

Plant 1’s original budget was $242.1 million, which the $250 million Revenue Bond offering financed. As of September 30, 2021, the remaining capital, allocated from the Revenue Bond funds, was $155.9 million to complete Plant 1. As PCT continues to pursue timely completion of Plant 1, evaluate production improvements, and refine its estimates for plant construction costs, PCT currently anticipates that it will need to spend an additional $30 - $40 million to complete Plant 1. PCT believes these additional costs will de-risk PCT’s commercialization process by allowing it to process higher levels of solids and contaminants in its feedstocks. The additional costs include, among others, the purchase of additional equipment and those additional costs related to supply chain issues due to COVID.

 

The Augusta Plant

 

In July 2021, PCT reached an agreement with The Augusta Economic Development Authority to build its first U.S. cluster facility in Augusta, Georgia (the “Augusta Plant”). PCT expects the approximately 200-acre location to represent the Company’s first “cluster site,” where five production lines will ultimately produce up to 650 million pounds/year. When fully operational, each purification line at the Augusta Plant is expected to have annual production capacity of 130 million pounds of UPRP. PureCycle has allocated 40% of the Augusta Facility output to existing customers and expects that additional offtake agreements will close throughout the remainder of the year.

 

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Feedstock Pricing

 

PCT sees a robust pipeline of demand for its recycled polypropylene and PCT is seeing market acceptance of its new “Feedstock+” pricing model for UPRP. The “Feedstock+” pricing model employs a fixed price plus the market cost of feedstock, which is then divided by a set yield-loss, to pass on the cost of feedstock to de-risk PCT’s operating margin volatility.

 

For the Ohio Phase II Facility, PCT’s feedstock price was linked, in part, to changes in the IHS Markit Index, the index for virgin polypropylene, in a price schedule that contained a fixed, collared price around an index price range, which was further adjusted based on the percentage of polypropylene in the feedstock supplied. For the Augusta Plant and beyond, PCT plans to link the feedstock price, in part, to the price of a #5 plastic bale of polypropylene as reported by recyclingmarkets.net (“Feedstock Market Pricing”). PCT will procure both feedstock in line with Feedstock Market Pricing as well as low value feedstocks that can be processed by PCT, below Feedstock Market Pricing for the Augusta facility.

 

PreP Facilities

 

In conjunction with the first U.S. cluster facility, PCT will also build and operate Feed PreP facilities in locations geographically near the feed sources to optimize PCT’s supply chain economics. PCT will locate its first Feed PreP Facility in Winter Garden, Florida, which is expected to be operational in the first half of 2022. Throughout the second half of 2021, PCT has been developing a feedstock processing system with advanced sorting capabilities that can handle various types of plastics in addition to polypropylene (designated as #5 plastic). PCT’s enhanced sorting should allow PCT to process and procure all plastic bales between #3 and #7. PureCycle’s new Feed PreP facilities will extract polypropylene and ship it to PCT’s purification lines, while the non-polypropylene feed will be sorted, baled, and subsequently sold on the open market.

 

Letter of No Objection Submission

 

On September 10, 2021, after conducting necessary laboratory testing and reviewing results with our consultants over several months, PCT filed for a U.S. Food and Drug Administration (“FDA”) Letter of No Objection (“LNO”), for Conditions of Use A - H. Conditions of Use describe the temperature and duration at which a material should be tested to simulate the way the material is intended to be used. The LNO submission also defines the feedstock sources for the Company’s planned commercial recycling process to include curbside post-consumer recycled and food grade post-industrial recycled feedstocks.

 

Future Expansion

 

PCT is also planning to expand production capabilities into Europe and Asia Pacific and is currently performing site selection activities in Europe and negotiating joint ventures with counterparties in Japan and South Korea for in-country production and sales.

 

Basis of Presentation

 

The accompanying condensed consolidated interim financial statements include the accounts of the Company. The condensed consolidated interim financial statements are presented in U.S. Dollars. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions were eliminated upon consolidation. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes of ROCH and Legacy PCT for the fiscal year ended December 31, 2020 as filed in our prospectus filed pursuant to Rule 424(b)(3) of the Securities Act on July 1, 2021. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2021. The accompanying condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented.

 

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Components of Results of Operations

 

Revenue

 

To date, we have not generated any operating revenue. We expect to begin to generate revenue by the end of 2022, which is when we expect the Ohio Phase II Facility to become commercially operational.

 

Operating Costs

 

Operating expenses to date have consisted mainly of personnel costs (including wages, salaries and benefits) and other costs directly related to operations at the Phase I Facility, including rent, depreciation, repairs and maintenance, utilities and supplies. Costs attributable to the design and development of the Ohio Phase II Facility are capitalized and will be depreciated over the useful life of the Ohio Phase II Facility, which we expect to be approximately 40 years. We expect our operating costs to increase substantially as we continue to scale operations and increase headcount.

 

Research and Development Expense

 

Research and development expenses consist primarily of costs related to the development of our patented purification recycling technology (the “Technology”), the facilities and equipment that will use the Technology to purify recycled polypropylene, and the processes needed to collect, sort, and prepare feedstock for purification. These include mainly personnel costs, third-party consulting costs, and the cost of various recycled waste. We expect our research and development expenses to increase for the foreseeable future as we increase investment in feedstock evaluation, including investment in new frontend feedstock mechanical separators to improve feedstock purity and increase the range of feedstocks PCT can process economically. In addition, we are increasing our in-house feedstock analytical capabilities, which will include additional supporting equipment and personnel.

 

Selling, General and Administrative Expense

 

Selling, general and administrative expenses consist primarily of personnel-related expenses for our corporate, executive, finance and other administrative functions and professional services, including legal, audit and accounting services. We expect our selling, general, and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

 

Results of Operations

 

Comparison of three and nine month periods ended September 30, 2021 and 2020

 

The following table summarizes our operating results for the three and nine month periods ended September 30, 2021 and 2020:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(in thousands, except %)  2021   2020  

$

Change

  

%

Change

   2021   2020  

$

Change

  

%

Change

 
Costs and expenses                                        
Operating costs  $2,687   $3,564   $(877)   (25)%  $7,228   $7,040   $188    3%
Research and development   330    171    159    93%   1,101    528    573    109%
Selling, general and administrative   24,489    2,232    22,257    997%   39,372    4,518    34,854    771%
Total operating costs and expenses   27,506    5,967    21,539    361%   47,701    12,086    35,615    295%
Interest expense   1,843    642    1,201    187%   5,722    1,827    3,895    213%
Change in fair value of warrants   (8,369)       (8,369)   (100)%   4,893    1,775    3,118    176%
Other expense   (3)       (3)   (100)%   (206)   (100)   (106)   106%
Net loss  $20,977   $6,609   $14,368    217%  $58,110   $15,588   $42,522    273%

 

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Operating Costs

 

The decrease for the three month period was primarily due to lower operating payroll costs related to reallocation of resources to focus on developing the Company’s administrative functions. The results for the nine month period were materially consistent for each year presented.

 

Research and Development Expenses

 

The increases for the three and nine month period were primarily additional costs to further evaluate and improve the process and technology for feedstock and supply chain management.

 

Selling, General and Administrative Expenses

 

The increases for the three and nine month period were attributable to increased equity compensation expense of $11.3 million and 11.9 million, increased wages and benefits related to increased resources and headcount devoted to development of the Company’s administrative functions of $4.3 million and $7.4 million, increased expenses related to the new short-term incentive program of $3.1 million and $3.1 million, transaction-related expenses of $0 and $3.2 million, higher professional and legal services expense, public company expenses, and other initiatives of $2.7 million and $7.6 million, and increase in D&O insurance expense of $0.9 million and $1.8 million, respectively.

 

Interest Expense

 

The increases for the three and nine month period were primarily attributable to interest on the Convertible Notes.

 

Change in fair value of warrants

 

The decrease for the three month period was attributable to an $8.4 million decrease in fair value of the liability-classified RTI and private warrants compared to no change in fair value for the P&G warrants in 2020. The increase for the nine month period was attributable to a $4.9 million net increase in fair value of the liability-classified RTI and private warrants compared to a $1.8 million increase in fair value of P&G warrants in 2020.

 

Liquidity and Capital Resources

 

We have not yet begun commercial operations and we do not have any sources of revenue. Our ongoing operations have, to date, been funded by a combination of equity financing through the issuance of units and debt financing through the issuance of Convertible Notes and Revenue Bonds and the Closing of the Business Combination. As of September 30, 2021, we had cash and cash equivalents on hand of $309.6 million, as well as $184.6 million of investment holdings in highly liquid debt securities and commercial paper with an average maturity of less than one year. Of the total cash balance, $272.9 million is included in Restricted Cash on the Condensed Consolidated Balance Sheet. This balance is restricted in terms of use based on the Loan Agreement and requires PCO to use the proceeds of the Revenue Bonds exclusively to construct and equip the Ohio Phase II Facility, fund a debt service reserve fund for the Series 2020A Bonds, finance capitalized interest, and pay the costs of issuing the Revenue Bonds. The following is a summary of the components of the Restricted Cash balance as of September 30, 2021:

 

(in millions)  September 30,
2021
    
Equity Escrow Reserve  $50.0   represents required equity reserves
Capitalized Interest Reserve   43.8   represents interest payments through 12/1/2023
Debt Service Reserve   21.0   represents a portion of future principal payments
Bond Funds Available for Use for Ironton        
Ironton Plant 1 Construction   155.9    
Letter of Credit for Ironton Utilities   2.1    
Other        
Collateral for Company Credit Cards   0.1    
   $272.9    

 

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PCT also had $319.0 million in debt and accrued interest, less $19.3 million of discount and issuance costs, as of September 30, 2021.

 

Further, in conjunction with the closing of the Business Combination, PCT received $326.0 million of gross proceeds related to the transaction closing and the release of the PIPE investment funds. The gross proceeds were offset by $27.9 million of capitalized issuance costs.

 

The proceeds and restricted cash described above are intended to be used for: construction of our Ohio Phase II Facility, approximately $8.0 - 10.0 million related to designing and building PCT’s overall global digital footprint, and for other general corporate purposes. The Ohio Phase II Facility original budget was $242.1 million. As of September 30, 2021, the remaining capital, allocated from the SOPA Bond funds was $155.9 million to complete the Ohio Phase II Facility. As we continue to pursue timely completion of the Ohio Phase II Facility based on current estimates, we continue to evaluate production improvements and refine our estimates for plant construction costs. We currently anticipate that we will spend an additional $30.0 - $40.0 million for additional costs that we believe will further de-risk our commercialization process by allowing us to process higher levels of solids and contaminants in our feedstocks. This encompasses certain identified costs that weren’t originally anticipated, including those related to supply chain issues due to COVID, as well as other additional costs.

 

Our future capital requirements will depend on many factors, including actual construction costs for our Ohio Phase II Facility, the construction of additional plants, including the Augusta Facility, funding needs to support our business growth and to respond to business opportunities, and challenges or unforeseen circumstances. If our forecasts prove inaccurate, we may be required to seek additional equity or debt financing from outside sources, which we may not be able to raise on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.

 

Indebtedness

 

Convertible Notes Offering

 

On October 6, 2020, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with certain funds managed by Magnetar Capital LLC or its affiliates (“Magnetar Investors”), providing for the purchase of up to $60.0 million in aggregate principal amount of our Convertible Senior Secured Notes due 2022 (the “Convertible Notes”) issuable under an indenture dated as of October 7, 2020 (the “Magnetar Indenture”) between us and U.S. Bank National Association, as trustee and collateral agent.

 

On October 7, 2020, we issued $48.0 million in aggregate principal amount of Convertible Notes (the “First Tranche Notes”). On December 29, 2020, we issued $12.0 million in aggregate principal amount of Convertible Notes (the “Second Tranche Notes”). In the event that the Business Combination was not consummated within 180 days of the entry into the Merger Agreement, the Second Tranche Notes were subject to a special mandatory redemption at a redemption price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest.

 

In connection with the Business Combination, we and each of our subsidiaries (the “Magnetar Guarantors”) was required to unconditionally guarantee, on a senior basis, all of our obligations with respect of the Convertible Notes. The Convertible Notes are our senior obligations and are fully and unconditionally guaranteed by the Magnetar Guarantors. On March 17, 2021, we entered into a supplemental indenture (the “Second Supplemental Indenture”) with PureCycle Technologies LLC, PureCycle Technologies Holdings Corp., and U.S. Bank National Association, as trustee and collateral agent, pursuant to which (i) we and PureCycle Technologies Holdings Corp. agreed to guarantee our obligations under the Convertible Notes and (ii) we and PureCycle Technologies Holdings Corp. unconditionally assumed all of our obligations under the Convertible Notes and the Magnetar Indenture relating to, among other things, our obligations relating to the authorization, issuance and delivery of our common stock issuable upon conversion of the Convertible Notes.

 

Also, in connection with the Closing of the Business Combination, the Liens on all Collateral that secured the Convertible Notes and the Note Guarantees were automatically terminated and released (as such terms are defined in the Magnetar Indenture).

 

Also, on March 17, 2021, we signed the Joinder Agreement (the “Joinder Agreement”) to the Note Purchase Agreement. The Joinder Agreement made us a party to the Notes Purchase Agreement for purposes of the indemnification provisions therein. Execution of the Joinder Agreement was a closing condition to the Merger Agreement.

 

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Under the Magnetar Indenture for the Convertible Notes, we and the Magnetar Guarantors will, subject to certain exceptions, be restricted from incurring indebtedness that ranks senior in right of payment to the Convertible Notes and if we or the Magnetar Guarantors incur pari passu indebtedness that is secured by a lien, we and such Magnetar Guarantors are required to also provide an equal and ratable lien in favor of the holders of the Convertible Notes. The Convertible Notes are subject to certain customary events of default.

 

Unless earlier converted, redeemed or repurchased in accordance with the terms of the Magnetar Indenture, the Convertible Notes will mature on October 15, 2022, subject to an extension that may be exercised at our sole discretion to April 15, 2023 with respect to 50% of the then outstanding Convertible Notes. The Convertible Notes will bear interest from their date of issue at a rate of 5.875% per year, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2021. Interest on the Convertible Notes is payable, at our option, entirely in cash or entirely in kind in the form of additional Convertible Notes. The first and second interest payments of approximately $1.7 million and $1.8 million, respectively, were due on April 15, 2021 and October 15, 2021, respectively, and were paid entirely in kind, meaning that the principal amount of the Convertible notes was increased by approximately $3.5 million.

 

The Convertible Notes are convertible at the option of the holders at any time, until the close of business on the business day immediately preceding the maturity date. Following the consummation of the Business Combination, however, each holder was required to agree not to convert its Convertible Notes (except in connection with a Change of Control or Fundamental Change (each as defined in the Magnetar Indenture)) for a period not to exceed one hundred eighty (180) days following the consummation of the Business Combination, or September 13, 2021).

 

Following the consummation of the Business Combination, the conversion rate per $1,000 principal amount of Convertible Notes is approximately 144.4: the quotient of (A) $1,000 and (B) the SPAC Transaction PIPE valuation; provided that if the Equity Value of the Company in connection with the SPAC Transaction is greater than $775.0 million, the conversion rate will equal the product of (1) the amount that would otherwise be calculated pursuant to the clause set forth above and (2) a fraction equal to the Equity Value of the Company divided by $775.0 million (as such terms are defined in the Magnetar Indenture). Immediately following the consummation of the Business Combination, 8,661,290 shares of our Common Stock were issuable upon conversion of the Convertible Notes. As of September 30, 2021, 8,903,842 shares of our Common Stock were issuable upon conversion of the Convertible Notes. Up to 951,360 additional shares of our Common Stock will be issuable upon conversion of the Convertible Notes assuming all remaining interest payments are made to holders of the Convertible Notes entirely in kind and the maturity date of the Convertible Notes is extended through April 15, 2023 (from October 15, 2022) at our election with respect to 50% of the amount outstanding under the Convertible Notes at October 15, 2022 (as described above).

 

On October 21, 2021, the Company received notice that certain holders of the Convertible Notes intended to convert $45.3 million of the principle amount of the Convertible Notes. On October 22, the Company issued 6,533,532 shares of common stock to such converting holders of the Convertible Notes (the “Initial Conversion”). Following the Initial Conversion, 2,631,856 shares are issuable upon conversion of the remaining Convertible Notes. Up to 199,020 additional shares of our common stock are issuable upon conversion of the remaining Convertible Notes after the Initial Conversion assuming all remaining interest payments are made to holders of the Convertible Notes entirely in kind and the maturity date of the Convertible Notes is extended through April 15, 2023 (from October 15, 2022) at the our election with respect to 50% of the amount outstanding under the Convertible Notes at October 15, 2022.

 

In connection with certain transactions resulting in a change of control (not including the Business Combination), the Convertible Notes will be convertible at the option of the holders until the 35th business day following the change of control becoming effective at an initial conversion rate equal to the quotient of $1,000 and 80% of the per share amount of consideration received by holders of common stock in such change of control transaction. In each case, the conversion rate is subject to adjustment under certain circumstances, including certain dilutive events, in accordance with the terms of the Magnetar Indenture.

 

If certain fundamental change or change of control transactions occur with respect to us, holders of the Convertible Notes may require the repurchase for cash of all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.

 

We may not redeem the Convertible Notes at our option at any time, and no sinking fund is provided for by the Magnetar Indenture.

 

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Cash Flows

 

A summary of our cash flows for the periods indicated is as follows:

 

  Nine Months Ended September 30, 
(in thousands, except %)  2021   2020   $
Change
   %
Change
 
Net cash used in operating activities  $(41,958)  $(10,784)  $(31,174)   289%
Net cash used in investing activities   (273,139)   (2,423)   (270,716)   11,173%
Net cash provided by financing activities   294,074    13,165    280,909    2,134%
Cash and cash equivalents, beginning of period   330,574    150    330,424    220,283%
Cash and cash equivalents, end of period  $309,551   $108   $309,443    286,521%

 

Cash Flows from Operating Activities

 

The $31.2 million increase in net cash used in operating activities for the nine months ending September 30, 2021 compared to the same period in 2020 was primarily attributable to the increase in transaction and other related payments that were paid as part of the Business Combination of $13.9 million, $3.4 million paid for D&O insurance, approximately $10.0 million net impact related to increased employee costs, $1.6 million related to the Impact License agreement, $1.3 million prepayment for reservation of future supplier manufacturing capacity, and $6.0 million due to higher professional, legal, and other costs, partially offset by the $5.0 million receipt of the Total pre-payment release.

 

Cash Flows from Investing Activities

 

The $270.7 million increase in net cash used in investing activities for the nine months ending September 30, 2021 related to same period in 2020 was attributable to $229.2 million in purchases of available for sale debt securities and $85.7 million additional capital expenditure payments related to construction of the Company’s Ohio Phase II Facility and related capitalized interest payments, offset by $44.2 million in maturities and sales of available for sale debt securities.

 

Cash Flows from Financing Activities

 

The $280.9 million increase in net cash provided by financing activities for the nine months ending September 30, 2021 related to same period in 2020 was primarily attributable to $298.5 million from the closing of the Business Combination, net of capitalized issuance costs and a decrease in payments to related parties of $3.3 million. This increase was offset by an increase in debt issuance costs paid of $4.4 million and a decrease in proceeds from issuance of Legacy PCT units of $17.2 million.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We do not have any off-balance sheet arrangements or interests in variable interest entities that would require consolidation. Note that while certain legally binding offtake arrangements have been entered into with customers, these arrangements are not unconditional and definitive agreements subject only to customary closing conditions, and do not qualify as off-balance sheet arrangements required for disclosure.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated interim financial statements and accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions the Company may undertake in the future, actual results could differ from those estimates and assumptions.

 

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Income Taxes

 

To calculate the interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. The effect of changes in the enacted tax laws or rates is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.

 

Furthermore, in December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The new guidance affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The Company adopted ASU 2019-12 during the first quarter of 2021 using a prospective approach. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated interim financial statements.

 

Equity-Based Compensation

 

Legacy PCT issued grants of Legacy PCT incentive units to select employees and service providers. The equity- based compensation cost for the units is measured at the grant date based on the fair value of the award over the requisite service period, which is the vesting period on the straight-line basis. In the event of modification, the Company recognizes the remaining compensation cost based on the grant date fair value over the new requisite service period. The Company applies a zero-forfeiture rate for its equity-based awards, as such awards have been granted to a limited number of employees and service providers. The Company revises the forfeiture rate prospectively as a change in an estimate, when a significant forfeiture or an indication that significant forfeiture occurs.

 

In connection with the Closing of the Business Combination, the Legacy PCT incentive units were converted into restricted stock of the Company. The restricted stock awards maintain the same vesting schedules as the Legacy PCT incentive units.

 

The fair value of the awards is estimated on the date of grant using the Black-Scholes option- pricing model using the following assumptions:

 

   2021   2020 
Expected annual dividend yield   0.0%   0.0%
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    0.75 - 4.4 

 

The expected term of the restricted stock granted is determined based on the period of time the awards 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 Legacy PCT’s capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, Legacy PCT considered industry, stage of life cycle, size and financial leverage. The dividend yield is assumed to be zero since Legacy PCT has not historically paid dividends. The fair value of the underlying Company shares for the nine months ended September 30, 2021 was determined using an initial public offering scenario. The fair value of Legacy PCT Units, 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.

 

2021 Equity Incentive Plans

 

The Company issued grants of restricted stock and performance share units to select employees. The equity- based compensation cost for the units is measured at the grant date based on the fair value of the award over the requisite service period on the straight-line basis. In the event of modification, the Company recognizes the remaining compensation cost based on the grant date fair value over the new requisite service period. The Company applies a zero-forfeiture rate for its equity-based awards, as such awards have been granted to a limited number of employees and service providers. The Company revises the forfeiture rate prospectively as a change in an estimate, when a significant forfeiture or an indication that significant forfeiture occurs.

 

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The fair value of the performance share unit awards is estimated on the date of grant using the Monte-Carlo simulation using 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 

 

Warrants

 

The Company measures the warrants issued to nonemployees at the fair value of the equity instruments issued as of the warrant issuance date and recognizes that amount as selling, general, and administrative expense in accordance with the vesting terms of the warrant agreement. In the event that the terms of the warrants qualify as a liability, the Company accounts for the instrument as a liability recorded at fair value each reporting period through earnings.

 

The Company determined the warrants issued to RTI in connection with terms of a professional services agreement are equity classified. Accordingly, the warrant units were held at their initial fair value with no subsequent remeasurement.

 

In connection with the Business Combination discussed in Note 1, the Company modified the RTI warrant agreement to purchase 971 thousand shares of PCT common stock instead of Legacy PCT Class C Units on November 20, 2020. RTI can exercise these warrants upon the first anniversary of Closing of the Business Combination. The warrants expire on December 31, 2024. In connection with the closing of the Business Combination, the Company determined the warrants issued are liability classified under ASC 480. Accordingly, the warrants will be held at their initial fair value and remeasured at fair value at each subsequent reporting date with changes in the fair value presented in the statements of comprehensive loss.

 

The Company has determined its warrant to be a Level 3 fair value measurement and has used the Black-Scholes option pricing model to calculate its fair value using the following assumptions:

 

   September 30, 2021   March 18, 2021 (Initial
Recognition)
 
Expected annual dividend yield   %   %
Expected volatility   55.49%   48.51%
Risk-free rate of return   0.59%   0.54%
Expected option term (years)   3.25    3.79 

 

The Company has determined the private warrants are liability classified. Accordingly, the warrants were held at their initial fair value and remeasured at fair value at each subsequent reporting date with changes in the fair value presented in the statements of comprehensive loss.

 

The Company has determined these warrants to be a Level 3 fair value measurement and has used the Black-Scholes model to calculate their fair value using the following assumptions, which are subject to judgement and could result in higher or lower changes in fair value based on the inputs selected:

 

   September 30, 2021   March 18, 2021 (Initial
Recognition)
 
Expected annual dividend yield   %   %
Expected volatility   56.2%   47.3%
Risk-free rate of return   0.86%   0.86%
Expected option term (years)   4.47    5.0 

 

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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    0.0 

 

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.

 

Recent Accounting Pronouncements

 

See Note 2 to the unaudited condensed consolidated interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.

 

Emerging Growth Company Election

 

Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

 

PCT is an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. PCT expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare PCT’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

 

PCT will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of PCT’s fiscal year in which it had total annual gross revenue of at least $1.07 billion, (c) the date on which PCT is deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which PCT has issued more than $1.0 billion in non-convertible debt securities during the previous three years.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is not required to provide the information required under this Item 3.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2021.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021 due to the material weaknesses in our internal control over financial reporting described below. In l