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 consolidated results of operations and financial condition. The discussion should be read together with the audited consolidated financial statements, together with related notes thereto, included elsewhere in this 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 ofDecember 31, 2021 , the remaining capital, allocated from the Revenue Bond funds, was$121.3 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$30 -$40 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 those 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 will ultimately produce up to 650 million pounds per year. When fully operational, each purification line at the Augusta Facility is expected to have annual production capacity of approximately 130 million pounds of UPR resin.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. 28
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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 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
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 Ironton Facility to become commercially operational.
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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 the years ended
The following table summarizes our operating results for the years endedDecember 31, 2021 and 2020: Years ended December 31, $ % (in thousands, except %) 2021 2020 Change Change Costs and expenses Operating costs$ 10,554 $ 8,603 $ 1,951 23 % Research and development 1,411 648 763 118 % Selling, general and administrative 57,615 27,971 29,644 106 % Total operating costs and expenses 69,580 37,222 32,358 87 % Interest expense 6,652 4,106 2,546 62 % Change in fair value of warrants 1,476 11,554 (10,078) (87) % Other (income) expense (206) 110 (316) (287) % Net loss$ 77,502 $ 52,992 $ 24,510 46 % Operating Costs
The increase was primarily attributable to increased operational consulting
costs of
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Research and Development Expenses
The increase was primarily additional costs to further evaluate and improve the process and technology for feedstock and supply chain management.
Selling, General and Administrative Expenses
The increase was attributable to increased equity compensation expense of$17.0 million , higher wages and benefits related to increased resources and headcount devoted to development of the Company's administrative functions of$3.9 million , higher professional, legal, and public company expenses of$3.1 million , increase in D&O insurance expense of$2.6 million , increased IT and infrastructure spend of$1.4 million ; higher travel costs of$0.8 million ; and increase in other administrative costs of$0.8 million .
Interest Expense
The increase was primarily attributable to additional interest due on the Convertible Notes (as defined below).
Change in fair value of warrants
The decrease was attributable to a$1.5 million net increase in fair value of the liability-classified RTI and private warrants compared to an$11.6 million increase in fair value of the P&G warrants in 2020.
Comparison of the years ended
For discussion of the comparison of our operating results for the years endedDecember 31, 2020 and 2019, please read the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Prospectus filed with theSecurities and Exchange Commission onJune 25, 2021 pursuant to Rule 424(b)(3), which section is incorporated herein by reference.
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 2022 (the "Convertible Notes"), 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 Series A Warrants to purchase an aggregate of 17.9 million shares of the Company's common stock, 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 "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 based on the Loan Agreement and requiresPureCycle Ohio LLC , anOhio limited liability company ("PCO") to use the proceeds of the Revenue Bonds 31
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exclusively to construct and equip the Ironton Facility, fund a debt service
reserve fund for the Series 2020A Bonds, finance capitalized interest, and pay
the costs of issuing the Revenue Bonds.
December 31,
(in millions) 2021 2020
Cash $ 33.4 $ 64.5
Debt Securities Available for Sale 167.4 -
Unrestricted Liquidity $ 200.8 $ 64.5
Ironton Facility Construction $ 121.3 $ 177.4
Equity Escrow Reserve 50.0 -
Capitalized Interest Reserve 34.6 55.7
Debt Service Reserve 21.0 21.0
Convertible Note Escrow - 12.0
Collateral for Company Credit Cards 3.5 -
Restricted Cash $ 230.4 $ 266.1
Bonds and Notes Payable $ 232.5 $ 262.3
Add: Discount and Issuance Costs 17.1 17.2
Add: Beneficial Conversion Feature - 30.4
Gross Bonds and Notes Payable $ 249.6 $ 309.9 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 pre-engineering design work;
•Design, construction, and investment in multiple Feed PreP facilities;
•Design and build of PCT's overall global digital footprint;
•Other general corporate purposes.
Based on management's estimates we believe that current funds on hand, inclusive of the$250 million of gross proceeds received in the Offering inMarch 2022 , will be sufficient for us to continue operations beyond twelve months from the filing of this Annual Report on Form 10-K. This consideration includes the currently contemplated additional$30.0 -$40.0 million of construction costs for the Ironton Facility that we believe will further de-risk our commercialization process by allowing us to process higher levels of solids and contaminants in our feedstocks. These additional expenses encompass certain identified costs that weren't originally anticipated, including those related to supply chain issues due to COVID-19, as well as other additional costs. 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 32
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unconditional and definite agreements subject only to customer closing conditions, and do not qualify as off-balance sheet arrangements required for disclosure.
Cash Flows
A summary of our cash flows for the periods indicated is as follows:
Years ended December 31,
$ %
(in thousands, except %) 2021 2020 Change Change
Net cash used in operating activities $ (54,507) $ (17,953) $ (36,554) 204 %
Net cash used in investing activities (305,575) (29,812) (275,763) 925 %
Net cash provided by financing activities 293,366 378,189 (84,823) (22) %
Cash and cash equivalents, beginning of period 330,574 150 330,424 220,283 %
Cash and cash equivalents, end of period $ 263,858 $ 330,574 $ (66,716) (20) %
Cash Flows from Operating Activities
The$36.6 million increase in net cash used in operating activities for the year endingDecember 31, 2021 compared to the same period in 2020 was primarily attributable to the$13.9 million of transaction and other related payments that were paid as part of the Business Combination,$9.5 million of increased employee costs,$5.9 million of higher professional, legal, and other costs,$3.8 million paid for D&O and other insurance,$1.5 million related to IT and infrastructure spend, a$1.3 million prepayment for the reservation of future supplier manufacturing capacity,$0.7 million for the Impact License agreement,$0.7 million related to other net prepayments to vendors,$0.8 million related to R&D spend,$0.7 million related to travel costs,$0.6 million related to repairs and maintenance and other operational costs,$0.5 million related to leases and rental payments, and$1.7 million related to other SG&A costs, partially offset by a prepayment of$5.0 million received fromTotal Petrochemicals & Refining S.A. /N.V. ("Total") for future receipt of offtake.
Cash Flows from Investing Activities
The$275.8 million increase in net cash used in investing activities for the year endingDecember 31, 2021 compared to the same period in 2020 was attributable to$229.2 million in purchases of Debt Securities Available for Sale and$107.6 million additional capital expenditure payments related to construction of the Ironton Facility and related capitalized interest payments, offset by$61.0 million in maturities and sales of Debt Securities Available for Sale.
Cash Flows from Financing Activities
The$84.8 million decrease in net cash provided by financing activities for the year endingDecember 31, 2021 related to the same period in 2020 was primarily attributable to the following decreases:$292.2 million less debt funding net of issuance costs received in 2021 relative to 2020, additional$4.5 million debt issuance costs paid in 2021 related to the debt financing received in 2020,$1.7 million payments to repurchase outstanding shares in 2021, as well as$0.1 million net decrease in other financing activities over 2020. These were offset by increases related to$192.3 million higher proceeds from equity issuances in 2021 compared to 2020 and$21.4 million lower payments on debt instruments in 2021 relative to 2020. 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 33
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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) Subordinated Exempt Facility Revenue Bonds (PureCycle Project ), Taxable Series 2020C ("Series 2020C Bonds").
Convertible Notes
OnOctober 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 Senior Convertible Notes (the "Convertible Notes"). During the fourth quarter of 2021, the entire principal balance of the Convertible Notes was converted into approximately 9.2 million shares of common stock.
For further information regarding PCT's debt instruments, see Note 3 ("Notes Payable and Debt Instruments") to the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10K.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date, as well as the reported expenses incurred during the reporting period. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our financial statements.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
While our significant accounting policies are described in Note 2 ("Summary of
Significant Accounting Policies") to the Notes to the Consolidated Financial
Statements appearing elsewhere in this Annual Report on Form 10K, we believe
that the following accounting policies require a greater degree of judgment and
complexity. Accordingly, these are the policies we believe are the most critical
to aid in fully understanding and evaluating our financial condition and results
of operations.
Equity-Based Compensation
We account for share-based payments that involve the issuance of shares of our
common stock to employees and nonemployees and meet the criteria for share-based
awards as share-based compensation expense based on the grant-date fair value of
the award.
For periods prior to the previously-announced business combination (the
"Business Combination") consummated on March 17, 2021 (the "Closing"), 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 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.
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"). Pursuant to the plan, PCT has issued restricted stock units
("RSUs"), performance-based stock units ("PSUs"), and stock options.
The fair value of the equity-based compensation awards was estimated at each
grant date using the appropriate models which require the input of the following
subjective assumptions:
a) The expected dividends, and
b) The volatility of our common stock price over the expected term,
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d) The length of time the awards are expected to be outstanding for RSUs and PSUs, or the length of time grantees will retain their vested stock options before exercising them ("expected term").
A summary of how each significant assumption was developed for our equity-based compensation awards is as follows:
? Expected dividend yield: The dividend yield is assumed to be zero since PCT has not historically paid dividends.
? Expected volatility: The expected volatility was based on PCT's capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, PCT considered industry, stage of life cycle, size and financial leverage. ? Expected term: For RSUs and PSUs, the expected term was determined based on the period of time the awards are expected to be outstanding. For stock options, the expected term is determined using the "simplified" method, as prescribed by theSEC's Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of the Company's employee stock options, which are considered to have "plain vanilla" characteristics. ? Risk-free interest rate: The risk-free interest rate was based upon quoted market yields for the United States Treasury instruments with terms that were consistent with the expected term of these awards.
Legacy PCT Incentive Units
The fair value of the Legacy PCT Incentive Units issued prior to the Business Combination was estimated at each grant date using the Black-Scholes model. The equity-based compensation cost is recognized based on grant date fair value over the requisite service period, which is the vesting period on the straight-line basis. The Company accounts for forfeitures as they occur for its equity-based awards.
A summary of the significant assumptions used to estimate the fair value of
Legacy PCT Incentive Units granted during the years ended
2021 2020
Expected annual dividend yield - % - %
Expected volatility 49.1 % 42.1 - 78.2%
Risk-free rate of return 0.1 % 0.1 - 1.9%
Expected option term (years) 0.2 0.14 - 4.9
The fair value of the underlying Company shares for the years ended December 31,
2021 was determined using an initial public offering scenario. The fair value of
Legacy PCT Units, for the years ended December 31, 2020 , was determined using a
hybrid method consisting of an option pricing method and an initial public
offering scenario.
Performance Share Units with a Market Vesting Condition
The Company also issued grants of performance share units with a market vesting
condition to one employee. The fair value of this award was estimated on the
date of grant using a Monte-Carlo simulation. The equity-based compensation cost
for the units is recognized based on the fair value of the award over the
derived service period on the straight-line basis. The Company accounts for
forfeitures as they occur for its equity-based awards.
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A summary of the significant assumptions used to estimate the fair value of this award is as follows:
2021 2020
Expected annual dividend yield - % - %
Expected volatility 54.8 % - %
Risk-free rate of return 0.3 % - %
Expected option term (years) 2.7 0
Stock Options
The stock options issued by the Company 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 2021 Equity and Incentive Compensation Plan (the "Plan"). The
fair value of the stock options issued to employees was estimated at the grant
date using the Black-Scholes model. The Company recognizes compensation expense
for the options 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. A summary of the significant assumptions used to estimate the fair value
of stock option awards during the year ended December 31, 2021 is as follows:
2021 2020
Expected annual dividend yield - % - %
Expected volatility 47.5 % - %
Risk-free rate of return 0.7 % - %
Expected option term (years) 4.5 0
If factors change, and we utilize different assumptions, share-based
compensation cost on future award grants may differ significantly from
share-based compensation cost recognized on past award grants. Higher volatility
and longer expected terms result in an increase to share-based compensation
determined at the date of grant. Future share-based compensation cost will
increase to the extent that we grant additional share-based awards to employees
and non-employees. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate any remaining
unearned share-based compensation cost or incur incremental cost. Share-based
compensation cost affects our selling, general and administrative expenses
within the consolidated statements of comprehensive loss.
For further information regarding PCT's equity-based compensation, see Note 5 ("Equity-Based Compensation") to the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10K.
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 has determined its warrants to be a Level 3 fair value measurement and has used the Black-Scholes option pricing model, which requires the input of the following subjective assumptions:
a) The expected dividends,
b) The volatility of our common stock price over the expected term,
c) The length of time warrant holders will retain the warrants before exercising them ("expected term"), and
d) The risk-free interest rate over the warrant's expected term.
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A summary of how each significant assumption was developed for our warrant liabilities is as follows:
? Expected dividend yield: The dividend yield is assumed to be zero since PCT has not historically paid dividends
? Expected volatility: The expected volatility was based on PCT's capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, PCT considered industry, stage of life cycle, size and financial leverage
? Expected term: The expected term is determined based on the expected amount of time the warrants will be held before they are exercised.
? Risk-free interest rate: The risk-free interest rate was based upon quoted market yields for the United States Treasury instruments with terms that were consistent with the expected term of the warrants.
RTI Warrants
The Company initially determined the warrants issued to RTI ("RTI Warrants") in
connection with terms of a professional services agreement were 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 971.0 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.
A summary of the significant assumptions used to estimate the fair value of the
RTI Warrants as of December 31, 2021 and March 18, 2021 , the initial date of
recognition, is as follows:
December 31,
2021 March 18, 2021 (Initial Recognition)
Expected annual dividend yield - % - %
Expected volatility 59.6 % 48.5 %
Risk-free rate of return 0.97 % 0.54 %
Expected option term (years) 3.0 3.79
The Company recognized $5.2 million and $0 of expense related to the change in
fair value of the RTI warrant liability for the years ended December 31, 2021
and 2020, respectively.
Public 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. 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. 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.
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A summary of the significant assumptions used to estimate the fair value of the private warrants as ofDecember 31, 2021 andMarch 18, 2021 , the initial date of recognition, is as follows: December 31, 2021 March 18, 2021 (Initial Recognition) Expected annual dividend yield - % - % Expected volatility 69.5 % 47.3 % Risk-free rate of return 1.14 % 0.86 % Expected option term (years) 4.2 5.0 The Company recognized$3.7 million and$0 of benefit related to the change in fair value of the private warrant liability for the years endedDecember 31, 2021 and 2020, respectively. If factors change, and we utilize different assumptions, the calculated warrant liabilities and related change in fair value may differ significantly in future periods. Higher volatility and longer expected terms result in an increase to the warrant liabilities and related change in fair value at each measurement date. Future warrant liabilities will increase to the extent that we issue additional warrants to employees, as well as any increase in the market price of PCT's common stock. 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 consolidated statements of comprehensive loss.
For further information regarding PCT's warrant liabilities, see Note 6 ("Warrants") to the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10K.
Recent Accounting Pronouncements
See the audited consolidated financial statements and Note 2 to the audited consolidated financial statements and audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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.
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