PURECYCLE TECHNOLOGIES, INC. The following discussion and analysis provides information which PCT's management believes is relevant to an assessment and understanding of PCT's condensed consolidated results of operations and financial condition. The discussion should be read together with the audited Consolidated Financial Statements and the accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's most recent Annual Report on Form 10-K, as well as 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" in the Company's most recent Annual Report on Form 10-K. 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 aFlorida -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, called ultra-pure recycled ("UPR") resin, 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.
The Ironton Facility
PCT is currently building its first commercial-scale plant inLawrence County, Ohio (referred to herein as the "Ironton Facility"), which is expected to have UPR resin capacity of approximately 107 million pounds/year when fully operational. The Ironton Facility leverages the existing infrastructure of PCT's pilot facility known as the Feedstock Evaluation Unit (the "FEU"), which became operational in 2019. Production at the Ironton Facility 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. The Ironton Facility's original budget was$242.1 million , which the$250 million Revenue Bond offering financed. As ofMarch 31, 2022 , the remaining capital, allocated from the Revenue Bond funds, was$82.7 million to complete the Ironton Facility. As PCT continues to pursue timely completion of the Ironton Facility, evaluate production improvements, and refine its estimates for plant construction costs, PCT currently anticipates that it will need to spend an additional$55 -$65 million to complete the Ironton Facility. 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 additional costs related to supply chain issues due to COVID-19.
The Augusta Facility
InJuly 2021 , PCT reached an agreement withThe Augusta Economic Development Authority to build its firstU.S. cluster facility inAugusta, Georgia (the "Augusta Facility"). PCT expects the approximately 200-acre location to represent the Company's first "cluster site," where up to eight production lines are expected to have UPR resin production capacity of approximately 1 billion pounds per year. When fully operational, each purification line at theAugusta Facility is expected to have annual production capacity of approximately 130 million pounds of UPR resin. 32 --------------------------------------------------------------------------------PureCycle Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUEDFeedstock 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 its UPR
resin. 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 Ironton 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 Facility and future purification facilities, PCT plans
to link the feedstock price, in part, to the price of a no. 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 Augusta Facility, PCT also plans to 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 inWinter Garden, Florida , which is expected to be operational in the second half of 2022. Throughout the second half of 2021, PCT developed a feedstock processing system with advanced sorting capabilities that can handle various types of plastics in addition to polypropylene (designated as no. 5 plastic). PCT's enhanced sorting should allow PCT to process and procure all plastic bales between no. 3 and no. 7. PCT'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
OnSeptember 10, 2021 , after conducting necessary laboratory testing and reviewing results with its consultants over several months, PCT filed for aU.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, and this LNO submission includes curbside post-consumer recycled and food grade post-industrial recycled feedstocks. The FDA confirmed receipt of the submission onSeptember 13, 2021 and followed up with additional questions and request for clarification in a letter received by PCT onJanuary 7, 2022 . In its letter, the FDA took the position that one of the migration calculations was incorrect. PCT responded to theFDA's questions onFebruary 17, 2022 . Consequently, PCT revised its application solely for Conditions of Use C-G based on a review of the revised calculations. PCT is awaiting a determination from the FDA on this revised submission. Conditions of Use C-G address many consumer product packaging requirements, including applications for hot filled and pasteurized, as well as room temperature, refrigerated and frozen applications. Generally speaking, Conditions of Use A, B and H relate to extreme temperature applications. While awaiting a determination on Conditions of Use C-G, PCT is taking steps to initiate new testing protocols for Conditions of Use A, B and H and intends to pursue an LNO for these Conditions of Use following receipt of satisfactory test results. Future Expansion
PCT is also planning to expand production capabilities into
33
--------------------------------------------------------------------------------
PureCycle Technologies, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUEDComponents 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 Ironton 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 FEU, including rent, depreciation, repairs and maintenance, utilities and supplies. Costs attributable to the design and development of theIronton Facility are capitalized and, when placed in service, will be depreciated over the useful life of the Ironton 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 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 front-end 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 theSEC , legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services. Results of Operations
Comparison of three month periods ended
The following table summarizes our operating results for the three month periods
ended
Three Months Ended March 31,
$ %
(in thousands, except %) 2022 2021 Change Change
Costs and expenses
Operating costs $ 4,048 $ 2,130 $ 1,918 90 %
Research and development 339 547 (208) (38) %
Selling, general and administrative 14,747 7,624 7,123 93 %
Total operating costs and expenses 19,134 10,301 8,833 86 %
Interest expense 444 2,043 (1,599) (78) %
Change in fair value of warrants 5,835 13,621 (7,786) (57) %
Other expense 19 109 (90) (83) %
Net loss $ 25,432 $ 26,074 $ (642) (2) %
34
--------------------------------------------------------------------------------
PureCycle Technologies, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Operating Costs
The increase was primarily attributable to increased operational consulting
costs of $0.7 million , higher rent for operating facilities of $0.5 million ,
higher employee costs of $0.4 million due primarily to increased headcount, and
higher depreciation expense of $0.3 million .
Research and Development Expenses
Research and development expenses did not significantly change period over period.
Selling, General and Administrative Expenses
The increase was attributable to increased equity compensation expense of$2.9 million , higher bonus expense of$1.5 million , higher wages and benefits related to increased resources and headcount devoted to development of the Company's administrative functions of$4.1 million , the increase in D&O and other insurance expense of$0.9 million , increased IT and infrastructure costs of$0.6 million , and the increase in other administrative costs of$0.7 million , offset by lower professional, legal, and public company expenses of$3.6 million due primarily to costs incurred in the first quarter of 2021 related to the Business Combination that were not repeated in first quarter 2022.
Interest Expense
The decrease was primarily attributable to lower interest after full conversion of the Convertible Notes (as defined below) to common stock in the fourth quarter of 2021.
Change in fair value of warrants
The decrease was attributable to a$5.8 million increase in fair value of the Company's liability-classified warrants in the first quarter of 2022 compared to a$13.6 million increase in first quarter 2021.
Liquidity and Capital Resources
We have not yet begun commercial operations and we do not have any sources of revenue. We currently expect to commence operations at the Ironton Facility in the fourth quarter of 2022, and begin generating revenue in 2023. 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 our Convertible Senior Secured Notes due in 2022 (the "Convertible Notes"), and a series of tax-exempt and taxable bonds, (the "Revenue Bonds"), and the Closing of the Business Combination. Additionally, in March of 2022, we consummated an offering pursuant to which we sold to certain investors, in a private placement, an aggregate of 35.7 million shares of the Company's common stock and warrants to purchase an aggregate of 17.9 million shares of the Company's common stock (the "Series A Warrants"), at a price of$7.00 per Common Stock and one-half of one Series A Warrants, for gross proceeds of approximately$250 million (the "2022 PIPE Offering"). The Company incurred approximately$0.8 million of expenses primarily related to advisory fees in conjunction with the 2022 PIPE Offering. The following is a summary of the components of our current liquidity. The Debt Securities Available for Sale represent investment holdings in highly liquid debt securities and commercial paper with an average maturity of less than one year. The Restricted Cash is restricted in terms of use primarily based on the Loan Agreement and requiresPureCycle :Ohio LLC , anOhio limited liability company ("PCO") to use the proceeds of the Revenue Bonds exclusively to construct and equip the Ironton Facility, fund a debt service reserve fund for the Series 2020A Bonds, 35 --------------------------------------------------------------------------------PureCycle Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
finance capitalized interest, and pay the costs of issuing the Revenue Bonds.
(in millions) March 31, 2022 December 31, 2021
Cash $ 198.2 $ 33.4
Debt Securities Available for Sale 219.8 167.4
Unrestricted Liquidity$ 418.0 $
200.8
Ironton Facility Construction $ 79.7 $
121.3
Equity Escrow Reserve 50.0
50.0
Capitalized Interest and Debt Reserve 55.6
55.6
Other Required Reserves 3.0
-
Letters of Credit and Other Collateral 3.6 3.5 Restricted Cash$ 191.9 $ 230.4 Bonds and Notes Payable$ 232.8 $ 232.5 Add: Discount and Issuance Costs 16.8 17.1 Gross Bonds and Notes Payable$ 249.6 $ 249.6
The Cash, Debt Securities Available for Sale, and Restricted Cash described above are intended to be used for:
•Construction of the Ironton Facility;
•Augusta Facility initial construction and pre-order of long-lead items;
•Design, construction, and investment in multiple Feed PreP facilities;
•Design and build of PCT's overall global digital footprint;
•Other general corporate purposes.
Our future capital requirements will depend on many factors, including actual construction costs for the Ironton Facility, the construction of theAugusta Facility and others outsidethe United States , build out of multiple Feed PreP facilities, funding needs to support other business opportunities, and challenges or unforeseen circumstances. For this future growth and investment, we expect to seek additional debt financing from outside sources, which we may not be able to raise on terms favorable to us, or at all. If we are unable to raise additional debt when desired, our business, financial condition and results of operations would be adversely affected. 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 are 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 definite agreements subject only to customer closing conditions, and do not qualify as off-balance sheet arrangements required for disclosure. 36 --------------------------------------------------------------------------------PureCycle Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Cash Flows
A summary of our cash flows for the periods indicated is as follows:
Three Months Ended March 31,
$ %
(in thousands, except %) 2022 2021 Change Change
Net cash used in operating activities $ (16,924) $ (20,568) $ 3,644 (18) %
Net cash used in investing activities (105,058) (33,891) (71,167) 210 %
Net cash provided by financing activities 248,166 293,969 (45,803) (16) %
Cash and cash equivalents, beginning of period 263,858 330,574 (66,716) (20) %
Cash and cash equivalents, end of period $ 390,042 $ 570,084 $ (180,042) (32) %
Cash Flows from Operating Activities
The$3.6 million decrease in net cash used in operating activities for the three months endingMarch 31, 2022 compared to the same period in 2021 was primarily attributable to the decrease in transaction and other related payments that were paid as part of the 2021 Business Combination of$13.9 million , decrease of$1.6 million related to the Impact License agreement payment in the first quarter of 2021 that was not repeated in first quarter 2022,$1.2 million related to lower D&O and other insurance premium payments, and$0.2 million of decreases in other operating cash activities, offset by approximately$8.3 million in higher cash payments for employee costs, including$4.7 million cash paid for bonuses in first quarter 2022, as well as the receipt of the$5.0 million Total pre-payment in the first quarter of 2021 that was not present in first quarter 2022.
Cash Flows from Investing Activities
The$71.2 million increase in net cash used in investing activities for the three months endingMarch 31, 2022 related to same period in 2021 was attributable to$98.1 million in purchases of available for sale debt securities and$18.3 million additional capital expenditure payments related to construction of the Company's operating facilities, offset by$45.2 million in maturities and sales of available for sale debt securities.
Cash Flows from Financing Activities
The$45.8 million decrease in net cash provided by financing activities for the three months endingMarch 31, 2022 related to same period in 2021 was primarily attributable to$298.5 million from the closing of the Business Combination, net of capitalized issuance costs, as well as share repurchase activity of$1.0 million to cover taxes due on employee restricted stock award vesting during the quarter. This decrease was offset by$249.2 million in proceeds from the 2022 PIPE Offering, net of related issuance costs, and a decrease in debt financing costs paid of$4.5 million . Indebtedness Revenue Bonds OnOctober 7, 2020 , theSouthern Ohio Port Authority ("SOPA") issued certain revenue bonds ("Revenue Bonds") and loaned the proceeds from their sale toPureCycle :Ohio LLC , anOhio limited liability company ("PCO"), pursuant to a loan agreement dated as ofOctober 1, 2020 between SOPA and PCO ("Loan Agreement"), to be used to (i) acquire, construct and equip the Ironton Facility (referred to within the Loan Agreement as the "Ohio Phase II Facility") and the FEU (referred to within the Loan Agreement as the "Phase I Facility", and together with the Ohio Phase II Facility, the "Project"); (ii) fund a debt service reserve fund for the Series 2020A Bonds; (iii) finance capitalized interest; and (iv) pay the costs of issuing the Revenue Bonds. The Revenue Bonds were offered in three series, including (i) Exempt Facility Revenue Bonds (PureCycle Project ), Tax-Exempt Series 2020A ("Series 2020A Bonds"); (ii) Subordinate Exempt Facility Revenue Bonds (PureCycle Project ), Tax-Exempt Series 2020B ("Series 2020B Bonds"); and (iii) Subordinate Exempt Facility Revenue Bonds (PureCycle Project ), Taxable Series 2020C ("Series 2020C Bonds"). 37 --------------------------------------------------------------------------------PureCycle Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Convertible Notes
On October 6, 2020 , PureCycle Technologies LLC ("Legacy PCT") entered into a
Senior Notes Purchase Agreement (the "Agreement") with certain investors. The
Agreement provides for the issuance of Convertible Notes (the "Convertible
Notes"). During the fourth quarter of 2021, the entire principal balance of the
Convertible Notes, which included two interest payments paid entirely in kind,
was converted into approximately 9.2 million shares of our common stock.
For further information regarding our debt instruments, see Note 3 ("Notes Payable and Debt Instruments") to the Notes to the Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10Q.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates from the information we provided in our Annual Report on Form 10-K, except for the liability that was recognized for issuance of the Series A Warrants (discussed below).
Series A Warrants
Upon closing of the 2022 Pipe Offering, there were approximately 17.9 million outstanding Series A Warrants to purchase shares of the Company's common stock, which were determined to be liability classified. Accordingly, the warrants were and will be 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. As these warrants have similar redemption features and the same exercise price as the Company's publicly-traded warrants, the market price of the publicly-traded warrants is utilized to value the Series A Warrants. Future warrant liabilities will increase to the extent that there are increases in the market price of the publicly-traded warrants. If there are any modifications or cancellations, this may impact the warrant liabilities and related expense or benefit recognized. Change in fair value of warrant liabilities is presented as its own line item within the condensed consolidated statements of comprehensive loss.
For further information regarding PCT's warrant liabilities, see Note 6 ("Warrants") to the Notes to the Interim Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10Q.
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
38
--------------------------------------------------------------------------------
PureCycle Technologies, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUEDchosen 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 theSEC or (d) the date on which PCT has issued more than$1.0 billion in non-convertible debt securities during the previous three years. 39 --------------------------------------------------------------------------------PureCycle Technologies, Inc.
© Edgar Online, source
