EX-99.2 3 tm2120717d1_ex99-2.htm EXHIBIT 99.2

Exhibit 99.2

 

Consolidated Financial Statements and Report of Independent

Registered Public Accounting Firm

 

PureCycle Technologies, Inc.

 

December 31, 2020 and 2019

 

 

 

  Page
   
Report of Independent Registered Public Accounting Firm 3
Consolidated Financial Statements  
Balance sheets 4
Statements of operations 5
Statements of stockholders’ equity 6
Statements of cash flows 7
Notes to the consolidated financial statements 8

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

PureCycle Technologies, Inc.

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of PureCycle Technologies, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2019.

 

Chicago, Illinois

June 25, 2021

  

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PureCycle Technologies, Inc.

 

CONSOLIDATED BALANCE SHEETS (revised, see Note 1)

 

(in United States dollars, except shares)

 

As of December 31,

 

ASSETS

 

   2020   2019 
CURRENT ASSETS          
Cash  $64,491,660   $150,050 
Prepaid royalties and licenses   2,890,000    2,000,000 
Prepaid expenses and other current assets   445,546    720,578 
Total current assets   67,827,206    2,870,628 
Restricted cash   266,081,603    - 
Property, plant and equipment, net   70,218,354    30,410,094 
TOTAL ASSETS  $404,127,163   $33,280,722 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES          
Accounts payable  $1,057,753   $2,364,542 
Accrued expenses   26,944,163    326,630 
Accrued interest   4,951,102    896,062 
Notes payable - current   121,917    3,601,246 
Related party notes payable - current   -    3,303,694 
Total current liabilities   33,074,935    10,492,174 
Deferred research and development obligation   1,000,000    1,000,000 
Notes payable   26,477,285    1,000,000 
Bonds payable   235,675,506    - 
Related party notes payable   -    12,000,000 
Redeemable warrants   -    6,408,411 
TOTAL LIABILITIES   296,227,726    30,900,585 
Commitments and contingencies (Note 8)          
STOCKHOLDERS’ EQUITY          
Class A Common Shares – $0.001 par value; 41,885,068 shares authorized; 37,997,470 and 27,156,371 shares issued and outstanding as of December 31, 2020 and December 31, 2019   37,997    27,156 
Class B Preferred Shares – $0.001 par value; 20,628,619 shares authorized; 20,628,619 and 18,388,147 shares issued and outstanding as of December 31, 2020 and 2019   20,628    18,388 
Class B-1 Preferred Shares – $0.001 par value; 16,917,778 shares authorized, 16,322,679 and 9,299,695 shares issued and outstanding as of December 31, 2020 and 2019   16,323    9,300 
Class C Profits Shares – $0.001 par value; 9,964,563 shares authorized; 7,471,414 and 4,787,672 shares issued and 6,701,665 and 4,060,745 shares outstanding as of December 31, 2020 and 2019   6,702    4,061 
Additional paid-in capital   192,380,776    30,043,285 
Accumulated deficit   (84,562,989)   (27,722,053)
Total stockholders’ equity   107,899,437    2,380,137 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $404,127,163   $33,280,722 

 

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

 

4

 

 

PureCycle Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF OPERATIONS (revised, see Note 1)

 

(in United States dollars, except share and per share amounts)

 

For the years ending December 31,

 

   2020   2019 
Costs and expenses          
Operating costs  $8,602,970   $5,965,960 
Research and development   647,495    526,127 
Selling, general and administrative   39,525,058    11,478,286 
Total operating costs and expenses   48,775,523    17,970,373 
Interest expense   7,954,888    1,012,402 
Other expense   110,525    329,943 
Net loss  $(56,840,936)  $(19,312,718)
Accretion of cumulative earnings to preferred stockholders   3,306,884    2,434,241 
Net loss attributable to common stockholders   (60,147,820)   (21,746,959)
Loss per share          
Basic and diluted  $(2.09)  $(0.80)
Weighted average common shares          
Basic and diluted   28,731,952    27,156,371 

 

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

 

5

 

 

PureCycle Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (revised, see Note 1)

 

(in United States dollars, except shares)

 

For the years ending December 31,

 

   Class A Common   Class B Preferred   Class B-1 Preferred   Class C     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Total
stockholders'
investment		   Additional
paid-in
capital		   Accumulated
deficit		   Total
stockholders'
equity		 
Balance, December 31, 2018   2,581,282   $387,192    1,727,843   $1,898,469    326,026   $12,260,210    75,830   $24,488   $14,570,359   $32,884   $(8,409,335)  $6,193,908 
Conversion of stock   24,575,089    (360,036)   16,660,304    (1,880,081)   4,488,667    (12,255,395)   630,943    (23,781)   (14,519,293)   14,519,293    -    - 
Balance at December 31, 2018, effect of reverse recapitalization (refer to Note 1)   27,156,371    27,156    18,388,147    18,388    4,814,693   $4,815    706,773    707    51,066    14,552,177    (8,409,335)   6,193,908 
Issuance of shares   -   $-    -   $-    4,485,002   $4,485    -   $-   $4,485   $11,390,823   $-   $11,395,308 
Redeemable warrants   -    -    -    -    -    -    -    -    -    74,294    -    74,294 
Issuance of shares upon vesting of profits shares   -    -    -    -    -    -    3,360,990    3,361    3,361    4,045,272    -    4,048,633 
Redemption of vested profit units   -    -    -    -    -    -    (7,018)   (7)   (7)   (19,281)   -    (19,288)
Net loss   -    -    -    -    -    -    -    -    -    -    (19,312,718)   (19,312,718)
Balance, December 31, 2019   27,156,371   $27,156    18,388,147   $18,388    9,299,695   $9,300    4,060,745   $4,061   $58,905   $30,043,285   $(27,722,053)  $2,380,137 
Issuance of shares   10,841,099    10,841    2,240,472    2,240    7,022,984    7,023    370,025    370    20,474    125,655,433    -    125,675,907 
Issuance of shares upon vesting of profits shares   -    -    -    -    -    -    2,278,855    2,279    2,279    5,623,698    -    5,625,977 
Redemption of vested profit units   -    -    -    -    -    -    (7,960)   (8)   (8)   (16,391)   -    (16,399)
Beneficial conversion feature upon issuance of convertible notes   -    -    -    -    -    -    -    -    -    31,074,751    -    31,074,751 
Net loss   -    -    -    -    -    -    -    -    -    -    (56,840,936)   (56,840,936)
Balance, December 31, 2020   37,997,470   $37,997    20,628,619   $20,628    16,322,679   $16,323    6,701,665   $6,702   $81,650   $192,380,776   $(84,562,989)  $107,899,437 

 

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

 

6

 

 

PureCycle Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (revised, see Note 1)

 

(in United States dollars)

 

For the years ending December 31,

 

   2020   2019 
Cash flows from operating activities          
Net loss  $(56,840,936)  $(19,312,718)
Adjustments to reconcile net loss to net cash used in operating activities          
Equity-based compensation   5,625,977    4,048,633 
Non cash issuance of shares   333,333    - 
Issuance of warrants   -    6,482,705 
Change in fair value of warrants   11,553,667    - 
Depreciation expense   1,896,069    900,437 
Accretion of debt instrument discounts   48,277    - 
Amortization of debt issuance costs   172,966    - 
Amortization of beneficial conversion feature   648,189    - 
Loss on sale of equipment   -    255,650 
Loss on the exercise of warrants   210,525    - 
Changes in operating assets and liabilities          
Prepaid expenses and other current assets   275,032    151,014 
Prepaid royalties and licenses   (890,000)   (2,000,000)
Accounts payable   233,788    1,026,944 
Accrued expenses   14,724,937    326,630 
Accrued interest   4,055,040    806,136 
Deferred research and development obligation   -    1,000,000 
Net cash used in operating activities   (17,953,136)   (6,314,569)
Cash flows from investing activities          
Construction of plant   (26,219,188)   (5,992,062)
Purchase of property, plant, and equipment   (3,592,545)   - 
Proceeds from sale of equipment   -    110,000 
Net cash used in investing activities   (29,811,733)   (5,882,062)
Cash flows from financing activities          
Proceeds from secured term loan   313,500    1,000,000 
Payments on promissory notes with related parties   (12,600,000)   - 
Payments on advances from related parties   (2,703,694)   - 
Payments on secured promissory note   (6,141,822)   - 
Proceeds from promissory note from related parties   -    600,000 
Proceeds from advances from related parties   -    63,868 
Proceeds from the exercise of warrants   1    - 
Issuance of convertible notes   60,000,000    - 
Convertible note issuance costs   (3,357,776)   - 
Issuance of bonds   244,074,532    - 
Bond issuance costs   (8,550,229)   (294,021)
Proceeds from issuance of shares   107,169,969    10,895,308 
Payments on redemption of vested profit units   (16,399)   (19,288)
Net cash provided by financing activities   378,188,082    12,245,867 
Net increase in cash and restricted cash   330,423,213    49,236 
Cash and restricted cash, beginning of year   150,050    100,814 
Cash and restricted cash, end of year  $330,573,263   $150,050 
Supplemental disclosure of cash flow information          
Non-cash operating activities:          
Interest paid during the year, net of capitalized interest  $2,141,426   $1,861 
Non-cash investing activities:          
Additions to property, plant, and equipment in accounts payable  $-   $(624,313)
Additions to property, plant, and equipment in accrued expenses  $11,892,596   $- 
Non-cash financing activities:          
Issuance of shares upon exercise of warrants  $18,172,604   $- 
Beneficial Conversion Feature of convertible notes  $31,074,751   $- 
Conversion of accounts payable to promissory notes  $1,540,576   $3,601,246 
Conversion of accounts payable to equity  $-   $500,000 

 

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

 

7

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2020 and 2019

 

NOTE 1 - ORGANIZATION

 

Formation and Organization

 

PureCycle Technologies, Inc. (“PureCycle”, “PCT” or the “Company”) was formed as a Delaware limited liability company (“LLC”) on September 15, 2015 (“Date of Formation”), as Advanced Resin Technologies, LLC. In November 2016, the Company changed its name from Advanced Resin Technologies, LLC to PureCycle Technologies LLC (“PCT LLC” and “Legacy PCT”). Innventure LLC (“Innventure”) holds an investment in PureCycle. In 2020, Innventure changed its name from WE-Innventure LLC to Innventure LLC. As a result of Innventure changing its name in 2020, Innventure1 LLC (“Innventure1”), which owns a majority of Innventure, changed its name from Innventure LLC to Innventure1 LLC.

 

PureCycle and its wholly owned subsidiaries, PureCycle: Ohio LLC, PCT Managed Services LLC and PCO Holdco, LLC (“PCO”) are businesses whose planned principal operations are to conduct business as a plastics recycler using PureCycle’s patented recycling process. Developed and licensed to PureCycle by Procter & Gamble (“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 facility and conducting research and development activities to operationalize the licensed technology.

 

On November 16, 2020, the Company entered into a certain agreement and plan of merger (the “Merger Agreement and Plan of Merger”), by and among PCT, Roth CH Acquisition I Co. (“ROCH”), Merger Sub Corp., Merger Sub LLC, and Roth CH Acquisition I Co. Parent Corp. (“ParentCo”).

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements have been prepared assuming that the Company will continue as a going concern

 

Business Combination

 

On March 17, 2021, PureCycle consummated the previously announced 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 (“Merger Sub LLC”), Roth CH Merger Sub Corp., a Delaware corporation and wholly owned direct subsidiary of Parent Co (“Merger Sub Corp”) and PureCycle Technologies LLC (“PCT LLC”) pursuant to the Agreement and Plan of Merger dated as of November 16, 2020, as amended from time to time (the “Merger Agreement”).

 

Immediately 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 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 25,000,000 shares of common stock at $10.00 per share (the “PIPE Shares”) for an aggregate purchase price of $250,000,000 (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.

 

Upon the closing of the Business Combination, there were approximately there were approximately 5.7 million Public Warrants and 0.2 million Private Warrants outstanding to purchase shares of PCT common stock that were issued by ROCH prior to the Business Combination. These outstanding warrants were assumed by PCT stockholders upon the closing of the Business Combination.

 

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PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

PCT stockholders will be issued up to 4.0 million additional shares of the Company’s common stock if certain conditions are met (“the Earnout”). The PCT stockholders 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 PCT stockholders will be entitled to 2.0 million shares upon the 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.

 

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 as the equivalent of Legacy PCT issuing stock for the net assets of ROCH, accompanied by a recapitalization.

 

The consolidated statements of stockholders’ equity and these notes to the consolidated financial statements reflect the reverse recapitalization as discussed above. The consolidated balances and the audited consolidated financial statements of PCT and the share activity and per share amounts in these consolidated statements of equity were retroactively adjusted, where applicable, using the recapitalization exchange ratio of 10.52 for Class A shares. Class B Preferred shares were converted into shares of common stock at a share conversion factor of 10.642 whereas Class B-1 Preferred shares were converted into shares of common stock at a share conversion factor of 14.768 as a result of the reverse recapitalization. Class C shares were converted into shares of PCT common stock at a share conversion factor of 9.32, 7.40, 6.76, or 2.747, based on the distribution threshold of the Class C share.

 

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

 

With the global spread of the COVID-19 pandemic in the first half of 2020 and resulting shelter-in-place orders covering the Company’s corporate headquarters, its Ohio plant operations, and employees, the Company has implemented policies and procedures to continue its operations under minimum business operations guidelines. The extent to which the COVID-19 pandemic impacts the Company’s business, financial condition or results of operations will depend on future developments, which are highly uncertain and cannot be accurately predicted.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, and all significant intercompany transactions and balances have been eliminated in consolidation.

 

Liquidity

 

The Company evaluated whether there are any conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern over the next twelve months. Since its inception, the Company has sustained recurring losses and negative cash flows from operations. As reflected in the accompanying consolidated financial statements, the Company has not yet begun commercial operations and the Company does not have any sources of revenue. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

As of December 31, 2020 and 2019, the Company had an unrestricted cash balance of $64,491,660 and $150,050, respectively, a working capital surplus of $34,752,271 and a deficit of $7,621,546, respectively, and an accumulated deficit of $84,562,989 and $27,722,053, respectively. During the years ended December 31, 2020 and 2019, the Company incurred a net loss of $56,840,936 and $19,312,718 respectively.

 

9

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

In prior periods, substantial doubt was raised about the ability of Legacy PCT to continue as a going concern. As of the completion of the Business Combination on March 17, 2021, the Company believes that the total capital raised of over $700,000,000 will be sufficient to adequately fund its future obligations for at least one year from the date the consolidated financial statements are available to be issued.

 

The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern and does not include any adjustments to reflect the possible future effects of this uncertainty.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2020, with no effect on previously reported net income or stockholders' equity.

 

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 December 31, 2020 and 2019, 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.

 

Restricted Cash

 

Proceeds from the issuance of convertible notes and revenue bonds are restricted for use in construction of the production facility. The cash is presented as a long-term asset on the consolidated balance sheet.

 

Bond Issuance Costs

 

The Company has incurred costs which are directly attributable to the Company’s revenue bond financing. These costs include items such as document preparation costs, underwriting fees, and other external, incremental expenses paid to advisors that directly relate to the financing. Upon successful completion of the bond offering in 2020, these costs were reclassified to reduce the carrying amount of the bond liability and will be amortized ratably over the term of the bond using the effective interest method. During the years ended December 31, 2020 and 2019, the Company incurred $8,775,228 and $294,021 respectively, of bond issuance costs. Of this amount, $225,000 is recorded in prepaid expenses and other current assets in the balance sheet, as these costs are reimbursed. As of December 31, 2020, the Company has capitalized bond issuance costs totaling $8,103,822, which are recorded as an offset to Bonds Payable on the consolidated balance sheet. As of December 31, 2019, the Company has capitalized bond issuance costs totaling $615,896, which are recorded in Prepaid Expenses and Other Current Assets on the consolidated balance sheet.

 

Convertible Notes Issuance Costs

 

The Company has incurred costs which are directly attributable to the Company’s convertible note financing. These costs include items such as document preparation costs, underwriting fees, and other external, incremental expenses paid to advisors that directly relate to the financing. Upon successful completion of the convertible note offering, these costs were reclassified to reduce the carrying amount of the note liability and will be amortized ratably over the term of the notes. During the years ended December 31, 2020 and 2019, the Company incurred $3,357,776 and $0 respectively, of convertible note issuance costs, and as of December 31, 2020 and 2019, the Company has capitalized note issuance costs totaling $3,287,736 and $0, respectively, which are recorded within Notes Payable on the consolidated balance sheet.

 

Property, Plant and Equipment

 

As of December 31, 2020 and 2019, the Company’s property, plant and equipment consists of building, land, office equipment and furniture, machinery and equipment, fixtures and furnishings and construction in progress. All property, plant and equipment are located within the United States. Property, plant and equipment are recorded at cost and are depreciated over their estimated useful lives, unless the useful life is indefinite, using the straight-line method over the following table:

 

10

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Building  39 years
Land  Indefinite
Office equipment and furniture   7 years
Machinery and equipment  5-10 years
Fixtures and Furnishings   5 years

 

Construction in progress relates to costs capitalized in conjunction with major improvements that have not yet been placed in service, and accordingly are not currently being depreciated. The Company capitalizes interest cost incurred on funds used to construct property, plant and equipment. On June 30, 2019 the Feedstock Evaluation Unit (“FEU”) and associated assets were determined to be substantially completed and ready for intended use. In accordance with ASC 835, Interest, the interest capitalization period covers the duration of the activities required to get the asset ready for its intended use and capitalization continues as long as the activities and incurrence of cost continues. As the FEU unit and associated assets were determined to be ready for intended use on June 30, 2019, the interest capitalization on the Company loans related to those assets ends at that point in time. From July 1, 2019 and going forward, the Company applied a capitalization rate to the average amount of accumulated expenditures related to the current plant being built. The capitalized interest is recorded as part of the asset to which it relates over the asset’s estimated useful life. Interest cost capitalized as of December 31, 2020 and 2019 totaled $2,021,892 and $1,846,209 respectively.

 

As of December 31, 2020, the Company determined that there were no indicators of impairment and did not recognize any impairment of its property, plant and equipment.

 

Operating Costs

 

Operating costs are expensed as incurred. Operating costs consist of facility employee personnel costs, expense for supplies and materials, depreciation, transportation and other operating related expense.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development expenses consist of expenses for services provided by third parties, and payroll and benefits of those employees engaged in research, design and development activities, costs related to design tools, license expenses related to intellectual property, and supplies and services.

 

Selling, General, and Administrative Expenses

 

Selling, general and administrative expenses are expensed as incurred. Selling, general, and administrative expenses consist of personnel costs, allocated facilities expenses, facility rent, repairs and utilities, office insurance, travel, sales and marketing costs.

 

Income Taxes

 

Prior to the Business Combination on March 17, 2021, the Company was a limited liability company and had elected to be treated as a partnership for income tax purposes. The Company’s taxable income or loss is allocated to its members. The Company is not directly liable for income taxes for federal purposes. The Company is, however, subject to annual state LLC franchise taxes and state LLC fees. During the years ended December 31, 2020 and 2019, these taxes and fees amounted to $80,277 and $375, respectively, and are included in selling, general and administrative expenses.

 

Management has evaluated the Company’s tax positions, including their status as a pass-through entity for federal and state tax purposes, and has determined that the Company has taken no uncertain tax positions that require adjustment to the consolidated financial statements.

 

11

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Net Loss Per Share

 

The Company computes net loss per share in accordance with ASC 260, Earnings per Share. Basic (loss) earnings per share is computed by dividing (loss) income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted- average number of shares of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the potentially dilutive securities had been issued, using the treasury stock method.

 

Equity-Based Compensation

 

The Company issues grants of incentive shares to select employees and service providers. The equity-based compensation cost for the incentive shares is measured at the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period, which is the vesting period. In accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”), 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 percent forfeiture rate for its equity-based awards, as such awards have been granted to a limited number of employees and service providers. A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate.

 

Warrants

 

Following the adoption of ASU 2018-07, Compensation – Stock Compensation (Topic 718), the Company accounts for its warrants issued to nonemployees in accordance with ASC 718, which requires all nonemployee transactions, in which goods or services are the consideration received in exchange for equity instruments, to be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Accordingly, the Company determines the fair value of the equity instruments issued as of the warrant issuance date, and the fair value is then expensed in accordance with the vesting terms of the warrant agreement. In the event the warrants are issued with other debt instruments, the Company accounts for its warrants in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), for unit of account analysis. In the event the terms of the warrants qualify as a liability under ASC 480, the Company accounts for the instrument as a liability recorded at fair value each reporting period.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses for the period presented. The Company's most significant estimates and judgments involve valuation of the Company's equity, including assumptions made in the fair value of equity-based compensation and the fair value of warrants it has issued to service providers. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from these estimates.

 

Segment Information

 

Under ASC 280, Segment Reporting, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), in deciding how to allocate resources and in assessing performance. The Company has one component. Therefore, the Company's Chief Executive Officer, who is also the CODM, makes decisions and manages the Company's operations as a single operating segment, which is conducting business as a plastic recycler. To date, the Company has not begun production and measures performance on a consolidated basis.

 

Emerging Growth Company

 

Subsequent to the Business Combination, 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.

 

12

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

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.

 

Fair Value of Financial Instruments

 

The Company applies fair value accounting in accordance with ASC 820, Fair Value Measurements (“ASC 820”) for valuation of financial instruments. ASC 820 defines fair value and establishes a framework for measuring fair value and making disclosures about fair value measurements. This framework applies to all financial assets and liabilities that are being measured and reported at fair value and for disclosures of fair value.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 lease standard for private companies, private 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, 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 June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 extends the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 as of January 1, 2020. The adoption did not have a material impact on the Company.

 

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. ASU 2020-06 is effective for the Company for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2023, and early adoption is permitted. Two methods of transition were permitted upon adoption: full retrospective and modified retrospective. The Company elected early adopt and 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, Additional paid-in-capital (“APIC”), and Accumulated deficit.

 

13

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

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:

 

   December 31, 2020   January 1, 2021 
   As reported   Adjustments   As adjusted 
Notes payable  $26,599,202   $30,637,854   $57,237,056 
APIC   192,380,776    (31,074,750)   161,306,026 
Accumulated deficit  $84,562,989   $436,896   $84,999,885 

 

NOTE 3 – NOTES PAYABLE AND DEBT INSTRUMENTS

 

Convertible Notes

 

On October 6, 2020, PureCycle entered into a Senior Notes Purchase Agreement (the “Agreement”) with certain investors. The Agreement provides for the issuance of Senior Convertible Notes (the “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 Indenture on October 7, 2020, upon which $48,000,000 in aggregate principal of Notes were issued to the Investors (“First Closing”). The Agreement also includes an obligation for the Company to issue and sell, and for each of the Investors to purchase, Notes in the principal amount of $12,000,000 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. The Notes are convertible through the Maturity Date. As of December 31, 2020, none of the notes were converted into common shares. The Notes are recorded within Notes Payable in the consolidated balance sheet. The Company incurred $661,997 of interest cost during 2020. As the Notes were used to construct the Company’s property, plant and equipment, a portion of the interest costs incurred was capitalized within Property, Plant and Equipment as described in Note 2.

 

The Convertible Notes issued in both the First and Second Closing Obligations included a beneficial conversion feature (“BCF”) as their fair value was greater than the conversion price. The conversion price of the notes as of December 31, 2020 is 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 7,198,019Class A shares at $87.69 per share as discussed in Note 4 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 Convertible Notes). The Company recognized the embedded BCF as of the First and Second Closing commitment dates by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital (“APIC”). The BCF is amortized ratably over the term of the notes. As of December 31, 2020, the BCF recorded to APIC was $31,074,751.

 

14

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Revenue Bonds

 

On October 7, 2020, the Southern Ohio Port Authority (“SOPA”) issued certain revenue bonds (“Bonds”) and loaned the proceeds from their sale to 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 Plant; (ii) fund a debt service reserve fund for the Series 2020A Bonds; (iii) finance capitalized interest; and (iv) pay the costs of issuing the Bonds. The Bond 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”), 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 $5,500,000. 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. PCT 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. PCT has executed a Guaranty of Completion dated as of October 7, 2020 (“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 (as defined in the Loan Agreement) 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 defined in the Loan Agreement). In addition, pursuant to the Guaranty, PCT is obligated to fund and maintain a liquidity reserve for the Project during the term of the Guaranty in the amount of $50,000,000 to be held in an escrow account with U.S. Bank, N.A., 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.

 

Bond Series  Term  Principal Amount  Interest Rate  Maturity Date
2020A  A1  $12,370,000  6.25%  December 1, 2025
2020A  A2  $38,700,000  6.50%  December 1, 2030
2020A  A3  $168,480,000  7.00%  December 1, 2042
2020B  B1  $10,000,000  10.00%  December 1, 2025
2020B  B2  $10,000,000  10.00%  December 1, 2027
2020C  C1  $10,000,000  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 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 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, PCT and certain affiliates contributed $60,000,000 in equity at closing and committed to contribute an additional $40,000,000 in equity upon the closing of the business combination described in Note 1. Subsequent to year end, PureCycle provided the Liquidity Reserve for the Ohio Plant construction of $50,000,000 and deposited the amount upon the Closing of the Business Combination described in Note 1. In addition, PCT must maintain at least $75,000,000 of cash on its balance sheet as of July 31, 2021 and $100,000,000 of cash on its balance sheet as of January 31, 2022, in each case, including the Liquidity Reserve.

 

15

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

The Bonds are recorded within Bonds Payable in the consolidated balance sheet.  The Company incurred $4,289,186 of interest cost during 2020. As the Bond proceeds will be used to construct the Company’s property, plant and equipment, a portion of the interest costs incurred was capitalized within Property, Plant and Equipment as described in Note 2.

 

As part of the equity requirement for the Bonds, on October 4, 2020, the Company raised gross proceeds of $15,000,000 through the sale of 1,821,540 Class A shares, of which 1,214,360 Class A shares, or $10,000,000, were sold to a related party that purchased, on December 2, 2020, an additional 1,821,540 Class A shares, or $15,000,000, upon the satisfaction of certain conditions, including the signing of the Merger Agreement. This related party previously purchased Class B-1 preferred shares from the Company, holds a board seat and was issued 277,519 Class C shares in August 2020 and 370,025 Class C shares in October 2020.

 

Pursuant to a 2019 agreement between Innventure1 and the Company, the Chief Science Officer, Dr. John Scott, and a certain consultant of Innventure1 are entitled to share equally in a project fee calculated based on a percentage of the Bonds. Pursuant to such agreement, the fee is equal to 1.5% of the total financing, reduced by the amount of retainer fees paid to such consultant. The Bonds closed in October 2020, and, as result, Dr. Scott received a partial payment of $50,000, with the remaining balance of approximately $1,519,125 paid to Dr. Scott in November 2020.

 

Secured Term Loan

 

On February 28, 2019, the Company entered into a subordinated debt agreement with Enhanced Capital Ohio Rural Fund, LLC. The agreement provides for principal of $1,000,000 with an interest rate of the U.S. Federal prime rate per annum. The interest rate increased to the U.S. Federal prime rate plus 3% per annum subsequent to the completion of the Company’s revenue bond financing.

 

In conjunction with the Revenue Bond offering, the Company repaid the note payable with Enhanced Capital Ohio Rural Fund, LLC for the full outstanding balance of $1,000,000. The Company incurred $29,069 of interest cost during 2020. As the secured term loan was used to construct the Company’s property, plant and equipment, a portion of the interest costs incurred was capitalized within Property, Plant and Equipment as described in Note 2.

 

Paycheck Protection Program

 

On May 4, 2020, the Company entered into a Paycheck Protection Program (the “Program”, or “PPP”) Term Note with PNC Bank to obtain principal of $313,500. This Note is issued pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program. During a period from May 4, 2020 until the forgiveness amount is known, (“Deferral Period”), interest on the outstanding principal balance will accrue at the Fixed Rate of 1% per annum, but neither principal nor interest shall be due during the Deferral Period. The Company has applied for loan forgiveness as of December 31, 2020 but has not yet received the forgiveness amount. All or a portion of this Facility may be forgiven in accordance with the program requirements. The amount of forgiveness shall be calculated in accordance with the requirements of the Program, including provisions of Section 1106 of the CARES Act. The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first ten months.

 

As of December 31, 2020, the outstanding balance on the loan is $313,500. $121,917 is recorded as Notes payable – current and $191,583 is recorded as Notes payable in the consolidated balance sheets.

 

Promissory Notes

 

Koch Modular Process Systems Secured Promissory Note

 

On December 20, 2019, the Company 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. The Company issued a Secured Promissory Note for a principal amount of $1,677,489, with a maximum advance of funds up to $3,077,489. This loan provides the Company with the ability to draw additional funds by rolling invoices from KMPS into the balance. In 2020, the Company converted $1,540,576 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.

 

16

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

The promissory note is secured by a first priority of the Company’s fixtures and personal property of every kind and all proceeds and products of each of the foregoing. The Company has the option to prepay the loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Any amount of principal prepaid may not be reborrowed.

 

The aggregate unpaid principal amount of the Loan, all accrued and unpaid interest, and all other amounts payable under this Note are due and payable on the maturity date. The loan maturity date is September 30, 2020 unless PureCycle repays the principal and accrued and unpaid interests from closing of the revenue bond financing earlier.

 

During 2020, in conjunction with the Revenue Bond offering, the Company repaid the balance of the loan totaling $3,150,083. The Company incurred $351,345 of interest cost during 2020.

 

Denham-Blythe Company, Inc. Secured Promissory Note

 

On December 20, 2019, the Company 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. The Company issued a Secured Promissory Note for a principal amount of $2,000,000. The rate of interest on the loan balance is 24% per annum for December 2019 and thereafter with interest on the loan payable monthly.

 

The promissory note is secured by a first priority lien of the Company’s fixtures and personal property of every kind and all proceeds and products of each of the foregoing. The Company has the option to prepay the loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Any amount of principal prepaid may not be reborrowed.

 

The loan maturity date is September 30, 2020 unless PureCycle repays the principal and accrued and unpaid interests from closing of the revenue bond financing. In conjunction with the Revenue Bond offering, the Company repaid the note payable with Denham-Blythe Company, Inc. for the full outstanding balance of $2,003,693.

 

The Company incurred $363,993 of interest cost during 2020. As the promissory note was used to construct the Company’s property, plant and equipment, a portion of the interest costs incurred was capitalized within Property, Plant and Equipment as described in Note 2.

 

Promissory Note to Related Parties

 

Innventus Fund I, LP

 

On July 19, 2019, the Company entered into Note and Warrant Financing agreement with Innventus Fund I, LP to obtain a $600,000 loan and warrant financing. The Negotiable Promissory Note has a maturity date of October 21, 2019, and an interest rate of 1-month LIBOR plus 8.00%. The aggregate unpaid principal amount of the loan and all accrued and unpaid interest is due on the maturity date. On February 15, 2020, the Company repaid the principal and all accrued and unpaid interest. The Company incurred $4,831 of interest cost during 2020.

 

See Note 6 for further information on the issuance of warrants.

 

Auto Now Acceptance Company, LLC

 

On May 5, 2017, the Company entered into a revolving line of credit facility (the “Credit Agreement”) with Auto Now Acceptance Company, LLC, a related party. The credit facility provided for a $13,292,000 revolving line of credit. The revolving line of credit was due on demand with interest payable monthly, bearing interest at a rate of 5.0%.

 

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 $14,000,000, bearing interest at a rate of LIBOR plus 6.12% per annum, payable monthly. The maturity date was extended to August 15, 2018. The Credit Agreement was also amended to state that the agreement is collateralized by substantially all assets of the Company.

 

17

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

On July 31, 2018, the Credit Agreement was amended to extend the maturity date to February 15, 2019. Under the agreement, the Auto Now’s advances of funds to the Company will cease on July 31, 2018. Upon execution of the amendment, the agreement was accounted for as a promissory note as the Company was no longer able to draw additional funds on the facility. As the cash flows were not substantially different, the Company accounted for the extension as a debt modification. No additional fees were incurred in connection with the extension, and consequently there was no impact on the carrying value of the debt. As the Company has defaulted the principal payment, the interest is accrued at the annual rate of a month LIBOR plus 10% per annum.

 

On May 29, 2020, the Company 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 Acceptance Company, LLC. 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

 

On December 21, 2020, the Company repaid the outstanding balance on the note. The Company incurred $1,560,658 and $1,337,857 of interest cost during 2020 and 2019, 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 as described in Note 2.

 

Advances from Related Parties

 

PureCycle received funding and support services from Innventure1. During the years ended December 31, 2020 and 2019, PureCycle received $0 and $63,868 from Innventure1. This advance was unsecured, non-interest bearing with no formal terms of repayment. In 2020, the Company repaid the balance to Innventure1. The outstanding balance due to Innventure1 as of December 31, 2020 and 2019 is $0 and $1,957,611, respectively, recorded within Related party notes payable – current in the consolidated balance sheets as of December 31, 2020 and 2019.

 

Principal repayments due on the Notes payable and Bonds payable over the next five years are as follows:

 

Years ending December, 31  Amount 
2021  $- 
2022   60,000,000 
2023   - 
2024   6,975,000 
2025   16,730,000 
Thereafter   225,845,000 
Total  $309,550,000 

 

NOTE 4 - STOCKHOLDERS’ EQUITY

 

Prior to the Business Combination as described in Note 1, the Company operates subject to the terms and conditions of the amended and restated PureCycle Technologies LLC., Limited Liability Company Agreement (the “LLC Agreement”) dated September 7, 2018. The LLC Agreement was subsequently amended in 2020.

 

18

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

The LLC Agreement provides for overall management and control of the Company to be vested in the Board of Managers (the “Board”). The members interests are represented by four classes: Class A units, Class B preferred units, Class B-1 preferred units and Class C units. Members owning a majority of the Class A units, Class B preferred units and Class B-1 preferred units are required to elect managers to the Board to serve the Class A unit, Class B preferred unit and Class B-1 preferred unit member interests. Each holder of Class A units, Class B preferred units, and Class B-1 preferred units (“Voting Members”) shall be entitled to one vote per unit held. The holders of Class C units do not have voting rights in respect to their units held. No Member shall be liable for any debts or losses of capital or profits of the Company or be required to guarantee the liabilities of the Company.

 

Class A Shares

 

The Board authorized the equivalent of up to 41,885,068 Class A shares. As of December 31, 2020 and 2019, 37,997,470 and 27,156,371 shares are issued and outstanding. The Company issued 10,841,099 shares in 2020. Of these shares, 3,643,080 were issued at $86.63 per share and 7,198,019 were issued at $87.69 per share.

 

Class B Preferred Shares

 

The Board authorized the equivalent of up to 20,628,619 Class B preferred shares. As of December 31, 2020 and 2019, there are 20,628,619 and 18,388,147 Class B preferred shares issued and outstanding, respectively. No additional Class B preferred shares are issuable under the LLC Agreement. The Class B preferred stockholders are entitled to receive a cumulative preferred return at the rate of eight percent (8%) per year on the sum of the unreturned preferred capital and unpaid preferred return through the date of such distribution.

 

Class B-1 Preferred Shares

 

In 2020, the Company amended its LLC agreement to increase the number of authorized (equivalent) shares to 16,917,778. In 2020 and 2019, the Company issued 7,022,984 and 4,485,002 Class B-1 preferred shares at a purchase price of $37.61 per B-1 preferred share. On October 29, 2019, the Company entered into a Class B-1 Preferred Unit Purchase Agreement with a third-party contractor to exchange an outstanding accounts payable balance of $500,000 into 196,353 Class B-1 preferred shares at a purchase price of $37.61 per B-1 preferred share.

 

On August 30, 2019, the Company entered into a B-1 Purchase Agreement with a third-party vendor, Aptar, for the purchase of 392,706 shares for total consideration of $1,000,000. In addition to the initial investment to capitalize the Company, described above, the Class B-1 Preferred Unit Purchase Agreement also includes two Milestone Tranches. The first milestone is satisfied by completing the Testing Milestone, or the Company’s completion of testing for recycled product. The first milestone was reached in 2020, and Aptar elected to invest the additional $1,000,000 for another 392,706 shares. The second milestone will be complete upon the end of all testing and approval from the FDA. If at that point Aptar elects the second milestone tranche investment of $1,000,000, Aptar may also elect to invest an additional $5,000,000. In addition to the investment tranches, Aptar provides an equivalent of a full-time employee for three one-year increments beginning on August 30, 2019. Upon completion of each year, the Company issues $333,333 worth of shares to Aptar, which is recognized as compensation cost in the statement of operations.

 

In connection with the business combination discussed further in Note 1, this agreement was amended on November 20, 2020 to replace Company shares with shares of the surviving company after the Closing.

 

As of December 31, 2020, and 2019, there are 16,322,679 and 9,299,695 Class B-1 preferred shares issued and outstanding, respectively. The Class B-1 preferred stockholders are entitled to receive a cumulative preferred return at the rate of eight percent (8%) per year on the sum of the unreturned preferred capital and unpaid preferred return through the date of such distribution.

 

19

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

A summary of the accumulated but unpaid distributions for the Class B and Class B-1 preferred shares as of December 31, 2020 and 2019 is as follows:

 

   Class B   Class B-1 
Accumulated and unpaid, January 1, 2019  $418,918   $279,971 
Accumulated   160,713    1,574,354 
Distributed   -    - 
Accumulated and unpaid, December 31, 2019   579,631    1,854,325 
Accumulated   173,570    3,133,314 
Distributed   -    - 
Accumulated and unpaid, December 31, 2020  $753,201   $4,987,639 

 

Class C Shares

 

The Board authorized the equivalent of up to 9,963,724 Class C shares. Class C shares are non-voting profits interest incentive shares pursuant to individual award agreements determined by the Voting Stockholders at the time of the awards, which set forth such additional terms and conditions, including the vesting and forfeiture terms. Class C shares or any other shares that the Company issued as profits interests are considered as Distribution Threshold shares and are entitled only to their Sharing Percentage of excess distributions over and above its Distribution Thresholds. During 2020 and 2019, the Company granted 2,744,530 and 2,175,889 of Class C incentive shares, respectively, pursuant to the Company’s equity incentive plan. See Note 5 for further information. As of December 31, 2020 and 2019, 6,701,665 and 4,060,745 Class C shares are issued and outstanding, respectively.

 

Distribution Preferences

 

Distributions are authorized at the discretion of the Board. Distributions shall be made first to the holders of Class B-1 preferred shares and Class B preferred shares, ratably among such holders based on the relative aggregate unpaid preferred return with respect to all outstanding preferred shares held by each such holder immediately prior to such distribution, until the aggregate unpaid return for the preferred shares has been reduced to $0.

 

Distributions shall be made second to the holders of Class B-1 preferred shares and Class B preferred shares, ratably among such holders based on the relative aggregate unreturned preferred capital with respect to all outstanding preferred shares held by each such holder immediately prior to such distribution, until the aggregate unreturned capital for the preferred shares has been reduced to $0.

 

Distributions will then be made to all stockholders in proportion to their ownership percentages.

 

Liquidation Preferences

 

In the event of the dissolution of the Company, the Company’s cash and proceeds obtained from the disposition of the Company’s noncash assets shall be distributed. Distributions shall be made first to the Company’s creditors, including stockholders who are creditors, to satisfy the liabilities of the Company. The remaining cash will then be distributed to the stockholders following the normal distribution preferences described above.

 

NOTE 5 - EQUITY-BASED COMPENSATION

 

The Company established an equity incentive plan (the “Plan”) on June 1, 2018 to provide for the grant of Class C incentive units, characterized as profits interests, to certain executives, directors, key employees, and non-employee service providers of the Company. The aggregate number of shares that can be granted under the Plan is subject to the authorized amount of Class C shares per the LLC Agreement, which is 9,964,563 shares.

 

The shares 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 distribution threshold is determined by the Board at the time shares are granted. The Company has the option to repurchase all vested shares upon a stockholder’s termination of employment or service with the Company.

 

20

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

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 shares is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions:

 

   2020  2019
Expected annual dividend yield  0.0%  0.0%
Expected volatility  42.1 - 78.2%  42.1 - 67.2%
Risk-free rate of return  0.1 – 1.8%  1.55 – 2.0%
Expected option term (years)  0.14 – 4.9  1.0 – 5.0

 

The expected term of the shares granted is determined based on the duration 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 since the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using a hybrid method consisting of an option pricing method and an initial public offering scenario.

 

In connection with the Business Combination, on March 17, 2021, the Company entered into restricted stock agreements with various PureCycle employees who held unvested Legacy PCT Class C Units at the closing. The outstanding unvested Legacy PCT Class C Units, issued pursuant to the PCT 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 replaced.

 

A summary of incentive share activity for the years ended December 31, 2020 and 2019 is as follows:

 

   Number of
shares		   Weighted average
grant date fair
value		   Weighted
average
remaining
recognition
period (years)		 
Non-vested at January 1, 2019   204,389    0.21      
Recapitalized   1,700,623    (0.19)     
Non-vested at January 1, 2019 (after effect of recapitalization)   1,905,012   $0.02    2.12 
Granted   2,175,889    1.92      
Vested   (3,360,986)   1.21      
Forfeited   (39,789)   0.02      
Non-vested at December 31, 2019   680,125    0.22    1.74 
Granted   2,749,191    2.45      
Vested   (2,656,839)   2.19      
Forfeited   (10,681)   1.95      
Non-vested at December 31, 2020   761,796   $1.39    2.12 

 

Total equity-based compensation cost for 2020 and 2019 totaled $5,625,977 and $4,048,633, respectively, and is recorded within the selling, general and administrative expenses and operating costs on the consolidated statement of operations. The total unrecognized compensation cost of non-vested awards not yet recognized for 2020 and 2019 is $941,057 and $157,297, respectively.

 

21

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

NOTE 6 - REDEEMABLE WARRANTS

 

Warrants issued to purchase Class B Preferred Shares

 

On October 16, 2015, the Company issued a Unit Purchase Warrant to P&G in connection with the patent licensing agreement described in Note 11, for 2,240,472 warrant units at an exercise price of $1, allowing P&G to purchase a variable number of Class B preferred shares 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 shares available to P&G to purchase is equal to an amount that initially represents 5% of all outstanding equity of the Company 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.

 

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.

 

On October 15, 2020, P&G exercised all 2,240,472 of the warrants for total proceeds of $1. The fair value of the Class B preferred shares on the date of exercise was $18,172,604 and was recorded in APIC. In connection with the exercise, the Company recorded a loss of $210,525 in other expense in the statement of operations.

 

A summary of the Class B warrant activity for the years ended December 31, 2020 and 2019 is as follows:

 

   Number of
warrants		   Weighted average
exercise price		   Weighted
average grant
date fair value		   Weighted
average
remaining
contractual term
(years)		 
Outstanding at January 1, 2019   -   $-   $-      
Granted   2,240,472    1.00    2.88      
Exercised   -    -    -      
Outstanding at December 31, 2019   2,240,472   $1.00   $2.88    4.29 
Exercisable   2,240,472                
Outstanding at January 1, 2020   2,240,472   $1.00   $2.88    4.29 
Granted   -    -    -      
Exercised   (2,240,472)   1.00    2.88    - 
Outstanding at December 31, 2020   -   $-   $-    - 
Exercisable   -                

 

The Company recognized expense of $11,553,667 and $6,408,411 for 2020 and 2019, respectively, in connection with these warrants, which was recorded within selling, general and administrative expenses on the consolidated statement of operations.

 

Warrants issued to purchase Class B-1 Preferred Shares

 

On June 5, 2019, in connection with Class B-1 Preferred Unit Purchase Agreement with a related party, the Company issued a Unit Purchase Warrant for 7,978 warrants at an exercise price of $37.61, allowing the Company to purchase a variable number of Class B-1 preferred shares during the exercise period of June 5, 2019 through June 4, 2024.

 

The Company determined the warrants are not a freestanding instrument under ASC 480. Also, the warrants are determined to be clearly and closely related to the Class B-1 Preferred shares under ASC 815, Derivatives and Hedging. Accordingly, they are not recorded in the financial statements until exercised. Subsequent to year end, the warrants were cancelled prior to the closing of the Business Combination.

 

On July 22, 2019, in connection with a Bridge Note and Warrant Financing agreement with Innventus Fund I, LP, the Company issued a Unit Purchase Warrant for 4,787 warrants at an exercise price of $37.61, allowing the Company to purchase a variable number of Class B-1 preferred shares during the exercise period of July 22, 2019 through July 22, 2024.

 

22

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

The Company determined the warrants issued are equity classified under ASC 480. Accordingly, the warrants will be held at their initial fair value with no subsequent remeasurement. Subsequent to year end, the warrants were cancelled prior to the closing of the Business Combination.

 

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:

 

Expected annual dividend yield  0.0%
Expected volatility  54.2 – 63.6%
Risk-free rate of return  1.5 - 1.7%
Expected option term (years)  4.4 – 4.7

 

A summary of the Class B-1 warrant activity for the years ended December 31, 2020 and 2019 is as follows:

 

   Number of
warrants		   Weighted
average exercise
price		   Weighted
average grant
date fair value		   Weighted
average
remaining
contractual
term (years)		 
Outstanding at January 1, 2019   -   $-   $-      
Granted   4,787    37.61    15.52      
Exercised   -    -    -      
Outstanding at December 31, 2019   4,787   $37.61   $15.52    4.56 
Exercisable   4,787                
Outstanding at January 1, 2020   4,787   $37.61   $15.52      
Granted   -    -    -      
Exercised   -    -    -      
Outstanding at December 31, 2020   4,787   $37.61   $15.52    3.56 
Exercisable   4,787                

 

The Company recognized expense of $0 and $74,294 for 2020 and 2019, respectively, in connection with these warrants, which was recorded within selling, general and administrative expenses on the consolidated statement of operations and within APIC on the consolidated balance sheets.

 

Warrants issued to purchase Class C Shares

 

On June 29, 2018, the Board approved the issuance of warrants to RTI under the terms of a professional services agreement to purchase an aggregate of 970,864 of the Company’s Class C shares at an aggregated exercise price of $37.605 per share. 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 will be 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 970,864 shares of PCT common stock instead of Legacy PCT Class C shares 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 operations.

 

23

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

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

 

Expected annual dividend yield  0.0%
Expected volatility  50.0%
Risk-free rate of return  2.82%
Expected option term (years)  5.0

 

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 since the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using the Black-Scholes method.

 

A summary of the Class C warrant activity for the years ended December 31, 2020 and 2019 is as follows:

 

   Number of
warrants		   Weighted
average
exercise price		   Weighted
average grant
date fair value		   Weighted
average
remaining
contractual term
(years)		 
Outstanding at January 1, 2019   970,864   $5.56   $0.03    4.5 
Granted   -    -    -      
Exercised   -    -    -      
Outstanding at December 31, 2019   970,864   $5.56   $0.03    3.5 
Granted   -    -    -      
Exercised   -    -    -      
Outstanding at December 31, 2020   970,864   $5.56   $0.03    2.5 
Exercisable   970,864                

 

The Company did not recognize any expense in connection with these warrants in 2020.

 

NOTE 7 - RELATED PARTY TRANSACTIONS

 

Innventure has a significant ownership stake in the Company. Innventure, in turn, is majority owned by Innventure1. WE-INN LLC (“WE-INN”) holds a minority interest in Innventure, and WE-INN is majority owned by Wasson Enterprises.

 

Innventure holds significant interests in the following legal entities: Innventure Management Services LLC, Innventure GP LLC, and Aeroflexx LLC. Innventure has a significant financial interest over each of the legal entities within the group and has decision-making ability over the group whereby significant managerial and operational support is provided by Innventure personnel. This includes certain executive management and officers of PureCycle and other legal entities that are employees or officers of Innventure. The legal entities, including PureCycle, are deemed to be under common control by Innventure. There were no transactions between PureCycle and its affiliates, Innventure GP LLC and Aeroflexx LLC, during the years ended December 31, 2020 and December 31, 2019.

 

24

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Innventure Management Services LLC provides significant managerial support to the other legal entities below Innventure, including PureCycle.

 

Management services

 

During the years ended December 31, 2020 and 2019, PureCycle reimbursed Innventure Management Services LLC for certain expenses incurred on its behalf. For the years ended December 31, 2020 and 2019, the Company paid $291,142 and $579,620, respectively, to Innventure Management Services LLC related to this arrangement, which was included in selling, general and administrative expenses in the consolidated statement of operations. As of December 31, 2020, and 2019, the Company owed Innventure Management Services LLC $30,455 and $17,521, respectively, related to this arrangement, which is classified as Accounts Payable on the accompanying consolidated balance sheets.

 

Related party receivables

 

In 2020, the Company prepaid certain tax payments on behalf of stockholders. As of December 31, 2020 the receivable balance was $78,173 recorded in prepaid expenses and other current assets on the consolidated balance sheets.

 

Notes payable and debt instruments

 

On May 5, 2017, the Company entered into a revolving line of credit facility with Auto Now Acceptance Company, a related party through common control.

 

On July 19, 2019, the Company entered into Note and Warrant Financing agreement with Innventus Fund I, LP to obtain a $600,000 loan and warrant financing.

 

Since the inception of the company, PureCycle has been receiving advances from Innventure1, LLC and Wasson Enterprises.

 

Refer to Note 3 for notes payable and debt instruments to related parties.

 

Equity

 

In 2020 Pure Crown LLC (“Pure Crown”) purchased 3,035,900 Class A shares and 370,025 Class C shares for total consideration of $25,000,000. On October 4, 2020, 1,214,360 of the Class A shares were issued. On October 5, 2020, 370,025 Class C shares were issued. On December 22, 2020, the remaining 1,821,540 Class A shares were issued. Prior to this transaction, Pure Crown was a related party through the purchase of the Company’s B-1 preferred shares.

 

Leases

 

The Company shares an office space with and is reimbursed for the rent by Innventure, as described in Note 8.

 

Purchase of leased property

 

On October 8, 2020, the Company purchased property that it was previously leasing from Innventure1, LLC, a related party, as an operating lease. The property was sold to the Company for $2,658,010. On the date of the sale, the lease that previously existed between Innventure1, LLC and the Company was terminated. Additionally, $936,010 of closing costs were also incurred and capitalized as part of this property purchase. The Company allocated $1,150,000 to land, $150,000 to land improvements and $2,294,020 to buildings.

 

25

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

In 2018, the Company entered into a three year operating lease for office space in Ironton, Ohio, which commenced on January 23, 2018. The lease expires on January 23, 2021. Subsequent to year end, the Company renewed the lease for an additional five year term.

 

In 2020, the Company entered into a two-year operating lease for the Company’s primary office space in Florida, commencing on August 1, 2020. The lease ends after two years, on July 31, 2022. The office space is shared with Innventure, a related party, who reimburses the Company for 50% of rent and other costs.

 

Future minimum lease payments under non-cancellable operating leases for the years ending December 31 are as follows:

 

2021  $77,012 
2022   45,705 
2023   - 
2024   - 
2025   - 
Thereafter   - 
Total future minimum lease payments  $122,717 

 

Rent expense totaled $351,606 and $421,700 for the years ended December 31, 2020 and 2019.

 

NOTE 9 – 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 stockholders 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 Class B preferred, Class B-1 preferred and Class C shares for purposes of the loss per share calculation.

 

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 year ended (as adjusted for the recapitalization as described in Note 1):

 

   2020   2019 
Numerator:        
Net income (loss) attributable to PureCycle Technologies  $(56,840,936)  $(19,312,718)
Less cumulative earnings to preferred shareholder   3,306,884    2,433,956 
Net income (loss) attributable to common stockholders  $(60,147,820)  $(21,746,674)
Denominator:          
Weighted average common shares outstanding, basic and diluted   28,731,952    27,156,371 
Net loss per share attributable to common stockholder, basic and diluted  $(2.09)  $(0.80)

 

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, non-vested profits interest shares, and convertible notes.

 

26

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

NOTE 10 – PROPERTY, PLANT AND EQUIPMENT

 

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

 

   As of December 31, 2020 
   Cost   Accumulated
Depreciation		   Net Book Value 
Building  $12,028,970   $386,686   $11,642,284 
Land   1,150,000    -    1,150,000 
Leaseholder Improvements   150,000    2,500    147,500 
Machinery and equipment   15,981,786    2,388,153    13,593,633 
Fixtures and Furnishings   104,484    22,389    82,095 
Construction in process   43,602,842    -    43,602,842 
Total property, plant and equipment  $73,018,082   $2,799,728   $70,218,354 

 

   As of December 31, 2019 
   Cost   Accumulated
Depreciation		   Net Book Value 
Building  $9,703,674   $122,384   $9,581,290 
Machinery and equipment   15,670,238    770,590    14,899,648 
Fixtures and Furnishings   104,484    7,463    97,021 
Construction in process   5,832,135    -    5,832,135 
Total property, plant and equipment  $31,310,531   $900,437   $30,410,094 

 

All of the Company’s fixed assets have been pledged as collateral for the Notes and Revenue Bonds that have been issued. Please refer to Note 3 for more details.

 

On March 28, 2019, the Company sold equipment for cash proceeds of $110,000. The net book value of this equipment was $365,650.

 

Depreciation expense is recorded within the operating costs in the consolidated statements of operations and amounted to $1,896,069 and $900,437 for the year ended December 31, 2020 and 2019, respectively.

 

NOTE 11 – DEVELOPMENT PARTNER ARRANGEMENTS

 

License Agreements

 

On October 16, 2015, the Company entered into a patent license agreement with P&G. The agreement outlines three phases with specific deliverables for each phase. During Phase 1 of the agreement, P&G provides the Company with up to one full-time employee to assist in the execution of the Company’s research and development activities. During Phase 2, P&G provides up to two full-time employees to assist in the execution of the Company’s research and development activities. During Phases 1 and 2 of the agreement, the Company is required to make payments to P&G in the amount of $100,000 and $200,000, respectively, every six months. These payments are amortized ratably to research and development expense over each six-month period. In April 2019, the Company elected to enter into Phase 3 of the agreement and prepaid a royalty payment in the amount of $2,000,000, which will be reduced against future royalties payable as sales occur. Phase 3 of the 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 product to P&G and 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 the 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.

 

27

 

 

PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

As of December 31, 2020, the Company is in Phase 3 of the agreement and has recorded $2,000,000 within Prepaid royalties on the consolidated balance sheets. For the years ended December 31, 2020 and 2019, the Company recorded $560,049 and $333,000, respectively, of research and development expenses in connection with this agreement.

 

On November 13, 2019, The Company 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 $2,500,000 and royalties on production using the license. In 2020, the Company paid $890,000 of the initial license fee, which is recorded in Prepaid Royalties and Licenses in the consolidated balance sheet and will be ratably amortized over the term of the patent using the straight-line method. Subsequent to year end, the Company paid an additional $750,000 of the initial fee. The remainder of the fee is due upon the earlier of (i) 10 days after the Closing of the transaction described in Note 1 and (ii) May 31, 2021. Subsequent to year end, the Company paid the remaining $1,610,000 of the initial fee.

 

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 $5,000,000 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 $370,000,000 has occurred. Subsequent to year end, the Company successfully raised the required capital and the $5,000,000 was released and recorded as deferred revenue in the condensed consolidated balance sheets.

 

Strategic alliance agreement

 

On December 13, 2018, the Company entered into a strategic alliance agreement with Nestec Ltd. (“Nestlé”), which expires on December 31, 2023. Upon execution of the agreement, Nestlé committed to provide $1,000,000 to the Company to fund further research and development efforts. The funding provided by Nestlé may be convertible, in whole or in part, into a prepaid product purchase arrangement at Nestlé’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 Nestlé 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.

 

The Company received the funding from Nestlé on January 8, 2019. As of December 31, 2020 and 2019, the Company has recorded $1,000,000 in Deferred research and development obligation. Recognition related to the funding received will be deferred until it is probable that Nestlé 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, the residual balance will be recognized as a reduction to research and development costs.

 

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 can access at the measurement date. The type of investments included in Level 1 includes listed equities.

 

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 using models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities, and certain over-the-counter derivatives. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.

 

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PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

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. Investments that are included in this category generally include equity and debt positions in private companies.

 

Liabilities measured and recorded at fair value on a recurring basis

 

As of December 31, 2020 and 2019, the Company’s financial liabilities measured and recorded at fair value on a recurring basis were classified within the fair value hierarchy as follow:

 

   2020   2019 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
P&G warrants  $-   $-   $-   $-   $-   $-   $6,408,411   $6,408,411 
Total  $-   $-   $-   $-   $-   $-    $ 6, 408,411   $6,408,411 

 

Changes in Level 3 liabilities measured at fair value for the years ended December 31, 2020 and 2019 are as follows:

 

   Fair value
(Level 3)		 
Balance at December 31, 2019  $6,408,411 
Change in fair value   11,553,667 
Exercise of warrants   (17,962,078)
Balance at December 31, 2020  $- 

 

There were no transfers between the levels during 2020 or 2019.

 

The fair value of the warrants described in Note 6 was determined using the Black-Scholes option pricing model, which is an income approach.

 

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.

 

NOTE 13 - SUBSEQUENT EVENTS

 

In connection with the preparation of the consolidated financial statements for the year ended December 31, 2020, management has evaluated events through June 25,2021, to determine whether any events required recognition or disclosure in the consolidated financial statements.

 

Paycheck Protection Program

 

On May 4, 2020, Legacy PCT was granted a loan (the “Loan”) from PNC Bank, National Association, in the aggregate amount of approximately $313,500, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. On April 9, 2021, the Small Business Administration remitted to the lender $313,500 in principal and $3,000 in interest for forgiveness of the PPP Loan.

 

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PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Revenue Bonds

 

As described in Note 3, Notes Payable and Debt Instruments, and 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 PureCycle 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, an amended and restated guaranty of completion (the “ARG”) was 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 would 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 $50,000,000, 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 $25,000,000 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.

 

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PureCycle Technologies, Inc.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2020 and 2019

 

Legal proceedings

 

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”). The plaintiffs in the Lawsuits seek to represent a class of investors who purchased or otherwise acquired PCT’s securities between November 16, 2020 and May 5, 2021. The plaintiffs in the Tennenbaum Lawsuit also seek to represent a class of all holders of ROCH CH Acquisition I Co. securities entitled to participate in the March 16, 2021 shareholder vote on the Business Combination. The complaints seek certification of the alleged class and compensatory damages. The Theodore Lawsuit also seeks punitive damages. The complaints rely on information included in a research report published by Hindenburg Research LLC. The time for the applicable defendants to answer, move or otherwise respond has not yet been scheduled. 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.

 

Equity-Based Compensation

 

As of June 25, 2021, the Company issued 143,209 profit units (as adjusted for the recapitalization described in Note 1) in accordance with The Plan as described in Note 5.

 

In connection with the Business Combination, on March 17, 2021, our stockholders approved the PureCycle Technologies, Inc. 2021 Equity and Incentive Compensation Plan (the “2021 Plan”). As of June 25, 2021, the Company issued 613,497 stock options in accordance with the 2021 Plan.

 

The Company is not aware of any additional subsequent events, other than those described above, that would require recognition or disclosure in the consolidated financial statements.

 

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