PURECYCLE TECHNOLOGIES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)


The following discussion and analysis provides information which PCT's
management believes is relevant to an assessment and understanding of PCT's
consolidated results of operations and financial condition. The discussion
should be read together with the unaudited condensed consolidated interim
financial statements, together with related notes thereto, included elsewhere in
this Quarterly Report on Form 10-Q. This discussion may contain forward-looking
statements based upon current expectations that involve risks, uncertainties,
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those set forth under "Risk Factors" elsewhere in this Quarterly Report on Form
10-Q. Unless the context otherwise requires, references in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" to
"we", "us", "our", and "the Company" are intended to mean the business and
operations of PCT and its consolidated subsidiaries.
Overview
PureCycle Technologies, Inc. ("PCT" or "Company") is a Florida-based corporation
focused on commercializing a patented purification recycling technology (the
"Technology"), originally developed by The Procter & Gamble Company ("P&G"), for
restoring waste polypropylene into resin with near-virgin characteristics. PCT
refers to this resin as ultra-pure recycled polypropylene ("UPRP"), which has
nearly identical properties and applicability for reuse as virgin polypropylene.
PCT has a global license for the Technology from P&G. PCT's goal is to create an
important new segment of the global polypropylene market that will assist
multinational entities in meeting their sustainability goals, providing
consumers with polypropylene-based products that are sustainable, and reducing
overall polypropylene waste in the world's landfills and oceans.
PCT's process includes two steps: Feed Pre-Processing ("Feed PreP") and the use
of PCT's recycling technology for purification. The Feed PreP step will collect,
sort, and prepare polypropylene waste ("feedstock") for purification. The
purification step is a purification recycling process that uses a combination of
solvent, temperature, and pressure to return the feedstock to near-virgin
condition through a novel configuration of commercially available equipment and
unit operations. The purification process puts the plastic through a physical
extraction process using super critical fluids that both extract and filter out
contaminants and purify the color, opacity, and odor of the plastic without
changing the bonds of the polymer. By not altering the chemical makeup of the
polymer, the Company is able to use significantly less energy and reduce
production costs as compared to virgin resin.
Plant 1 or the Ohio Phase II Facility
PCT is currently building its first commercial-scale plant in Ironton, Ohio
(referred to herein as "Plant 1" or the "Ohio Phase II Facility"), which is
expected to have nameplate UPRP capacity of approximately 107 million
pounds/year when fully operational. The Ohio Phase II Facility leverages the
existing infrastructure of PCT's pilot facility known as the Feedstock
Evaluation Unit ("FEU"), which became operational in 2019. Plant 1 production is
expected to commence in late 2022 and the plant is expected to be fully
operational in 2023. PCT has secured and contracted all the feedstock and
product offtake for this initial plant.
Plant 1's original budget was $242.1 million, which the $250 million Revenue
Bond offering financed. As of September 30, 2021, the remaining capital,
allocated from the Revenue Bond funds, was $155.9 million to complete Plant 1.
As PCT continues to pursue timely completion of Plant 1, evaluate production
improvements, and refine its estimates for plant construction costs, PCT
currently anticipates that it will need to spend an additional $30 - $40 million
to complete Plant 1. PCT believes these additional costs will de-risk PCT's
commercialization process by allowing it to process higher levels of solids and
contaminants in its feedstocks. The additional costs include, among others, the
purchase of additional equipment and those additional costs related to supply
chain issues due to COVID.
The Augusta Plant
In July 2021, PCT reached an agreement with The Augusta Economic Development
Authority to build its first U.S. cluster facility in Augusta, Georgia (the
"Augusta Plant"). PCT expects the approximately 200-acre location to represent
the Company's first "cluster site," where five production lines will ultimately
produce up to 650 million pounds/year. When fully operational, each purification
line at the Augusta Plant is expected to have annual production capacity of 130
million pounds of UPRP. PureCycle has allocated 40% of the Augusta Facility
output to existing customers and expects that additional offtake agreements will
close throughout the remainder of the year.
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Feedstock Pricing
PCT sees a robust pipeline of demand for its recycled polypropylene and PCT is
seeing market acceptance of its new "Feedstock+" pricing model for UPRP. The
"Feedstock+" pricing model employs a fixed price plus the market cost of
feedstock, which is then divided by a set yield-loss, to pass on the cost of
feedstock to de-risk PCT's operating margin volatility.
For the Ohio Phase II Facility, PCT's feedstock price was linked, in part, to
changes in the IHS Markit Index, the index for virgin polypropylene, in a price
schedule that contained a fixed, collared price around an index price range,
which was further adjusted based on the percentage of polypropylene in the
feedstock supplied. For the Augusta Plant and beyond, PCT plans to link the
feedstock price, in part, to the price of a #5 plastic bale of polypropylene as
reported by recyclingmarkets.net ("Feedstock Market Pricing"). PCT will procure
both feedstock in line with Feedstock Market Pricing as well as low value
feedstocks that can be processed by PCT, below Feedstock Market Pricing for the
Augusta facility.
PreP Facilities
In conjunction with the first U.S. cluster facility, PCT will also build and
operate Feed PreP facilities in locations geographically near the feed sources
to optimize PCT's supply chain economics. PCT will locate its first Feed PreP
Facility in Winter Garden, Florida, which is expected to be operational in the
first half of 2022. Throughout the second half of 2021, PCT has been developing
a feedstock processing system with advanced sorting capabilities that can handle
various types of plastics in addition to polypropylene (designated as #5
plastic). PCT's enhanced sorting should allow PCT to process and procure all
plastic bales between #3 and #7. PureCycle's new Feed PreP facilities will
extract polypropylene and ship it to PCT's purification lines, while the
non-polypropylene feed will be sorted, baled, and subsequently sold on the open
market.
Letter of No Objection Submission
On September 10, 2021, after conducting necessary laboratory testing and
reviewing results with our consultants over several months, PCT filed for a U.S.
Food and Drug Administration ("FDA") Letter of No Objection ("LNO"), for
Conditions of Use A - H. Conditions of Use describe the temperature and duration
at which a material should be tested to simulate the way the material is
intended to be used. The LNO submission also defines the feedstock sources for
the Company's planned commercial recycling process to include curbside
post-consumer recycled and food grade post-industrial recycled feedstocks.
Future Expansion
PCT is also planning to expand production capabilities into Europe and Asia
Pacific and is currently performing site selection activities in Europe and
negotiating joint ventures with counterparties in Japan and South Korea for
in-country production and sales.
Basis of Presentation
The accompanying condensed consolidated interim financial statements include the
accounts of the Company. The condensed consolidated interim financial statements
are presented in U.S. Dollars. Certain information in footnote disclosures
normally included in annual financial statements was condensed or omitted for
the interim periods presented in accordance with the rules and regulations of
the U.S. Securities and Exchange Commission (the "SEC") and accounting
principles generally accepted in the United States of America ("U.S. GAAP").
Intercompany balances and transactions were eliminated upon consolidation. These
condensed consolidated interim financial statements should be read in
conjunction with the consolidated financial statements and accompanying notes of
ROCH and Legacy PCT for the fiscal year ended December 31, 2020 as filed in our
prospectus filed pursuant to Rule 424(b)(3) of the Securities Act on July 1,
2021. The results of operations for the nine months ended September 30, 2021 are
not necessarily indicative of the results to be expected for the entire year
ending December 31, 2021. The accompanying condensed consolidated interim
financial statements reflect all adjustments, consisting of normal recurring
adjustments, that are, in the opinion of management, necessary to present a fair
statement of the results for the interim periods presented.


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Components of Results of Operations
Revenue
To date, we have not generated any operating revenue. We expect to begin to
generate revenue by the end of 2022, which is when we expect the Ohio Phase II
Facility to become commercially operational.
Operating Costs
Operating expenses to date have consisted mainly of personnel costs (including
wages, salaries and benefits) and other costs directly related to operations at
the Phase I Facility, including rent, depreciation, repairs and maintenance,
utilities and supplies. Costs attributable to the design and development of the
Ohio Phase II Facility are capitalized and will be depreciated over the useful
life of the Ohio Phase II Facility, which we expect to be approximately 40
years. We expect our operating costs to increase substantially as we continue to
scale operations and increase headcount.
Research and Development Expense
Research and development expenses consist primarily of costs related to the
development of our patented purification recycling technology (the
"Technology"), the facilities and equipment that will use the Technology to
purify recycled polypropylene, and the processes needed to collect, sort, and
prepare feedstock for purification. These include mainly personnel costs,
third-party consulting costs, and the cost of various recycled waste. We expect
our research and development expenses to increase for the foreseeable future as
we increase investment in feedstock evaluation, including investment in new
frontend feedstock mechanical separators to improve feedstock purity and
increase the range of feedstocks PCT can process economically. In addition, we
are increasing our in-house feedstock analytical capabilities, which will
include additional supporting equipment and personnel.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist primarily of
personnel-related expenses for our corporate, executive, finance and other
administrative functions and professional services, including legal, audit and
accounting services. We expect our selling, general, and administrative expenses
to increase for the foreseeable future as we scale headcount with the growth of
our business, and as a result of operating as a public company, including
compliance with the rules and regulations of the SEC, legal, audit, additional
insurance expenses, investor relations activities, and other administrative and
professional services.
Results of Operations
Comparison of three and nine month periods ended September 30, 2021 and 2020
The following table summarizes our operating results for the three and nine
month periods ended September 30, 2021 and 2020:
                                                     Three Months Ended September 30,                                               Nine Months Ended September 30,
                                                                               $                 %                                                              $                 %
(in thousands, except %)                2021                2020            Change             Change                 2021                  2020       
     Change             Change
Costs and expenses
Operating costs                    $      2,687          $ 3,564          $   (877)               (25) %       $     7,228               $  7,040          $    188                  3  %
Research and development                    330              171               159                 93  %             1,101                    528               573                109  %
Selling, general and
administrative                           24,489            2,232            22,257                997  %            39,372                  4,518            34,854                771  %
Total operating costs and
expenses                                 27,506            5,967            21,539                361  %            47,701                 12,086            35,615                295  %
Interest expense                          1,843              642             1,201                187  %             5,722                  1,827             3,895                213  %
Change in fair value of
warrants                                 (8,369)               -            (8,369)              (100) %             4,893                  1,775             3,118                176  %
Other expense                                (3)               -                (3)              (100) %              (206)                  (100)             (106)               106  %
Net loss                           $     20,977          $ 6,609          $ 14,368                217  %       $    58,110               $ 15,588          $ 42,522                273  %


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Operating Costs
The decrease for the three month period was primarily due to lower operating
payroll costs related to reallocation of resources to focus on developing the
Company's administrative functions. The results for the nine month period were
materially consistent for each year presented.
Research and Development Expenses
The increases for the three and nine month period were primarily additional
costs to further evaluate and improve the process and technology for feedstock
and supply chain management.
Selling, General and Administrative Expenses
The increases for the three and nine month period were attributable to increased
equity compensation expense of $11.3 million and 11.9 million, increased wages
and benefits related to increased resources and headcount devoted to development
of the Company's administrative functions of $4.3 million and $7.4 million,
increased expenses related to the new short-term incentive program of $3.1
million and $3.1 million, transaction-related expenses of $0 and $3.2 million,
higher professional and legal services expense, public company expenses, and
other initiatives of $2.7 million and $7.6 million, and increase in D&O
insurance expense of $0.9 million and $1.8 million, respectively.
Interest Expense
The increases for the three and nine month period were primarily attributable to
interest on the Convertible Notes.
Change in fair value of warrants
The decrease for the three month period was attributable to an $8.4 million
decrease in fair value of the liability-classified RTI and private warrants
compared to no change in fair value for the P&G warrants in 2020. The increase
for the nine month period was attributable to a $4.9 million net increase in
fair value of the liability-classified RTI and private warrants compared to a
$1.8 million increase in fair value of P&G warrants in 2020.
Liquidity and Capital Resources
We have not yet begun commercial operations and we do not have any sources of
revenue. Our ongoing operations have, to date, been funded by a combination of
equity financing through the issuance of units and debt financing through the
issuance of Convertible Notes and Revenue Bonds and the Closing of the Business
Combination. As of September 30, 2021, we had cash and cash equivalents on hand
of $309.6 million, as well as $184.6 million of investment holdings in highly
liquid debt securities and commercial paper with an average maturity of less
than one year. Of the total cash balance, $272.9 million is included in
Restricted Cash on the Condensed Consolidated Balance Sheet. This balance is
restricted in terms of use based on the Loan Agreement and requires PCO to use
the proceeds of the Revenue Bonds exclusively to construct and equip the Ohio
Phase II Facility, fund a debt service reserve fund for the Series 2020A Bonds,
finance capitalized interest, and pay the costs of issuing the Revenue Bonds.
The following is a summary of the components of the Restricted Cash balance as
of September 30, 2021:
                                           September 30,
(in millions)                                   2021
Equity Escrow Reserve                     $        50.0    represents

capital reserves required

                                                           represents interest payments through
Capitalized Interest Reserve                       43.8    12/1/2023
                                                           represents a portion of future principal
Debt Service Reserve                               21.0    payments
Bond Funds Available for Use for Ironton
Ironton Plant 1 Construction                      155.9
Letter of Credit for Ironton Utilities              2.1

Other

Collateral for Company Credit Cards                 0.1
                                          $       272.9


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PCT also had $319.0 million in debt and accrued interest, less $19.3 million of
discount and issuance costs, as of September 30, 2021.
Further, in conjunction with the closing of the Business Combination, PCT
received $326.0 million of gross proceeds related to the transaction closing and
the release of the PIPE investment funds. The gross proceeds were offset by
$27.9 million of capitalized issuance costs.
The proceeds and restricted cash described above are intended to be used for:
construction of our Ohio Phase II Facility, approximately $8.0 - 10.0 million
related to designing and building PCT's overall global digital footprint, and
for other general corporate purposes. The Ohio Phase II Facility original budget
was $242.1 million. As of September 30, 2021, the remaining capital, allocated
from the SOPA Bond funds was $155.9 million to complete the Ohio Phase II
Facility. As we continue to pursue timely completion of the Ohio Phase II
Facility based on current estimates, we continue to evaluate production
improvements and refine our estimates for plant construction costs. We currently
anticipate that we will spend an additional $30.0 - $40.0 million for additional
costs that we believe will further de-risk our commercialization process by
allowing us to process higher levels of solids and contaminants in our
feedstocks. This encompasses certain identified costs that weren't originally
anticipated, including those related to supply chain issues due to COVID, as
well as other additional costs.
Our future capital requirements will depend on many factors, including actual
construction costs for our Ohio Phase II Facility, the construction of
additional plants, including the Augusta Facility, funding needs to support our
business growth and to respond to business opportunities, and challenges or
unforeseen circumstances. If our forecasts prove inaccurate, we may be required
to seek additional equity or debt financing from outside sources, which we may
not be able to raise on terms acceptable to us, or at all. If we are unable to
raise additional capital when desired, our business, financial condition and
results of operations would be adversely affected.
Indebtedness
Convertible Notes Offering
On October 6, 2020, we entered into a Note Purchase Agreement (the "Note
Purchase Agreement") with certain funds managed by Magnetar Capital LLC or its
affiliates ("Magnetar Investors"), providing for the purchase of up to $60.0
million in aggregate principal amount of our Convertible Senior Secured Notes
due 2022 (the "Convertible Notes") issuable under an indenture dated as of
October 7, 2020 (the "Magnetar Indenture") between us and U.S. Bank National
Association, as trustee and collateral agent.
On October 7, 2020, we issued $48.0 million in aggregate principal amount of
Convertible Notes (the "First Tranche Notes"). On December 29, 2020, we issued
$12.0 million in aggregate principal amount of Convertible Notes (the "Second
Tranche Notes"). In the event that the Business Combination was not consummated
within 180 days of the entry into the Merger Agreement, the Second Tranche Notes
were subject to a special mandatory redemption at a redemption price equal to
100% of their aggregate principal amount, plus accrued and unpaid interest.
In connection with the Business Combination, we and each of our subsidiaries
(the "Magnetar Guarantors") was required to unconditionally guarantee, on a
senior basis, all of our obligations with respect of the Convertible Notes. The
Convertible Notes are our senior obligations and are fully and unconditionally
guaranteed by the Magnetar Guarantors. On March 17, 2021, we entered into a
supplemental indenture (the "Second Supplemental Indenture") with PureCycle
Technologies LLC, PureCycle Technologies Holdings Corp., and U.S. Bank National
Association, as trustee and collateral agent, pursuant to which (i) we and
PureCycle Technologies Holdings Corp. agreed to guarantee our obligations under
the Convertible Notes and (ii) we and PureCycle Technologies Holdings Corp.
unconditionally assumed all of our obligations under the Convertible Notes and
the Magnetar Indenture relating to, among other things, our obligations relating
to the authorization, issuance and delivery of our common stock issuable upon
conversion of the Convertible Notes.
Also, in connection with the Closing of the Business Combination, the Liens on
all Collateral that secured the Convertible Notes and the Note Guarantees were
automatically terminated and released (as such terms are defined in the Magnetar
Indenture).
Also, on March 17, 2021, we signed the Joinder Agreement (the "Joinder
Agreement") to the Note Purchase Agreement. The Joinder Agreement made us a
party to the Notes Purchase Agreement for purposes of the indemnification
provisions therein. Execution of the Joinder Agreement was a closing condition
to the Merger Agreement.
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Under the Magnetar Indenture for the Convertible Notes, we and the Magnetar
Guarantors will, subject to certain exceptions, be restricted from incurring
indebtedness that ranks senior in right of payment to the Convertible Notes and
if we or the Magnetar Guarantors incur pari passu indebtedness that is secured
by a lien, we and such Magnetar Guarantors are required to also provide an equal
and ratable lien in favor of the holders of the Convertible Notes. The
Convertible Notes are subject to certain customary events of default.
Unless earlier converted, redeemed or repurchased in accordance with the terms
of the Magnetar Indenture, the Convertible Notes will mature on October 15,
2022, subject to an extension that may be exercised at our sole discretion to
April 15, 2023 with respect to 50% of the then outstanding Convertible Notes.
The Convertible Notes will bear interest from their date of issue at a rate of
5.875% per year, payable semi-annually in arrears on April 15 and October 15 of
each year, beginning on April 15, 2021. Interest on the Convertible Notes is
payable, at our option, entirely in cash or entirely in kind in the form of
additional Convertible Notes. The first and second interest payments of
approximately $1.7 million and $1.8 million, respectively, were due on April 15,
2021 and October 15, 2021, respectively, and were paid entirely in kind, meaning
that the principal amount of the Convertible notes was increased by
approximately $3.5 million.
The Convertible Notes are convertible at the option of the holders at any time,
until the close of business on the business day immediately preceding the
maturity date. Following the consummation of the Business Combination, however,
each holder was required to agree not to convert its Convertible Notes (except
in connection with a Change of Control or Fundamental Change (each as defined in
the Magnetar Indenture)) for a period not to exceed one hundred eighty (180)
days following the consummation of the Business Combination, or September 13,
2021).
Following the consummation of the Business Combination, the conversion rate per
$1,000 principal amount of Convertible Notes is approximately 144.4: the
quotient of (A) $1,000 and (B) the SPAC Transaction PIPE valuation; provided
that if the Equity Value of the Company in connection with the SPAC Transaction
is greater than $775.0 million, the conversion rate will equal the product of
(1) the amount that would otherwise be calculated pursuant to the clause set
forth above and (2) a fraction equal to the Equity Value of the Company divided
by $775.0 million (as such terms are defined in the Magnetar Indenture).
Immediately following the consummation of the Business Combination, 8,661,290
shares of our Common Stock were issuable upon conversion of the Convertible
Notes. As of September 30, 2021, 8,903,842 shares of our Common Stock were
issuable upon conversion of the Convertible Notes. Up to 951,360 additional
shares of our Common Stock will be issuable upon conversion of the Convertible
Notes assuming all remaining interest payments are made to holders of the
Convertible Notes entirely in kind and the maturity date of the Convertible
Notes is extended through April 15, 2023 (from October 15, 2022) at our election
with respect to 50% of the amount outstanding under the Convertible Notes at
October 15, 2022 (as described above).
On October 21, 2021, the Company received notice that certain holders of the
Convertible Notes intended to convert $45.3 million of the principle amount of
the Convertible Notes. On October 22, the Company issued 6,533,532 shares of
common stock to such converting holders of the Convertible Notes (the "Initial
Conversion"). Following the Initial Conversion, 2,631,856 shares are issuable
upon conversion of the remaining Convertible Notes. Up to 199,020 additional
shares of our common stock are issuable upon conversion of the remaining
Convertible Notes after the Initial Conversion assuming all remaining interest
payments are made to holders of the Convertible Notes entirely in kind and the
maturity date of the Convertible Notes is extended through April 15, 2023 (from
October 15, 2022) at the our election with respect to 50% of the amount
outstanding under the Convertible Notes at October 15, 2022.
In connection with certain transactions resulting in a change of control (not
including the Business Combination), the Convertible Notes will be convertible
at the option of the holders until the 35th business day following the change of
control becoming effective at an initial conversion rate equal to the quotient
of $1,000 and 80% of the per share amount of consideration received by holders
of common stock in such change of control transaction. In each case, the
conversion rate is subject to adjustment under certain circumstances, including
certain dilutive events, in accordance with the terms of the Magnetar Indenture.
If certain fundamental change or change of control transactions occur with
respect to us, holders of the Convertible Notes may require the repurchase for
cash of all or any portion of their Convertible Notes at a fundamental change
repurchase price equal to 100% of the principal amount of the Convertible Notes
to be repurchased, plus accrued and unpaid interest to, but excluding, the
repurchase date.
We may not redeem the Convertible Notes at our option at any time, and no
sinking fund is provided for by the Magnetar Indenture.

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

Nine months ended September 30,

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


Cash Flows from Operating Activities
The $31.2 million increase in net cash used in operating activities for the nine
months ending September 30, 2021 compared to the same period in 2020 was
primarily attributable to the increase in transaction and other related payments
that were paid as part of the Business Combination of $13.9 million, $3.4
million paid for D&O insurance, approximately $10.0 million net impact related
to increased employee costs, $1.6 million related to the Impact License
agreement, $1.3 million prepayment for reservation of future supplier
manufacturing capacity, and $6.0 million due to higher professional, legal, and
other costs, partially offset by the $5.0 million receipt of the Total
pre-payment release.
Cash Flows from Investing Activities
The $270.7 million increase in net cash used in investing activities for the
nine months ending September 30, 2021 related to same period in 2020 was
attributable to $229.2 million in purchases of available for sale debt
securities and $85.7 million additional capital expenditure payments related to
construction of the Company's Ohio Phase II Facility and related capitalized
interest payments, offset by $44.2 million in maturities and sales of available
for sale debt securities.
Cash Flows from Financing Activities
The $280.9 million increase in net cash provided by financing activities for the
nine months ending September 30, 2021 related to same period in 2020 was
primarily attributable to $298.5 million from the closing of the Business
Combination, net of capitalized issuance costs and a decrease in payments to
related parties of $3.3 million. This increase was offset by an increase in debt
issuance costs paid of $4.4 million and a decrease in proceeds from issuance of
Legacy PCT units of $17.2 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors. We do not have
any off-balance sheet arrangements or interests in variable interest entities
that would require consolidation. Note that while certain legally binding
offtake arrangements have been entered into with customers, these arrangements
are not unconditional and definitive agreements subject only to customary
closing conditions, and do not qualify as off-balance sheet arrangements
required for disclosure.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated interim financial statements and accompanying notes.
Although these estimates are based on the Company's knowledge of current events
and actions the Company may undertake in the future, actual results could differ
from those estimates and assumptions.


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Income Taxes
To calculate the interim tax provision, at the end of each interim period the
Company estimates the annual effective tax rate and applies that to its ordinary
quarterly earnings. The effect of changes in the enacted tax laws or rates is
recognized in the interim period in which the change occurs. The computation of
the annual estimated effective tax rate at each interim period requires certain
estimates and judgments including, but not limited to, the expected operating
income for the year, projections of the proportion of income earned and taxed in
other jurisdictions, permanent differences between book and tax amounts, and the
likelihood of recovering deferred tax assets generated in the current year. The
accounting estimates used to compute the provision for income taxes may change
as new events occur, additional information is obtained, or the tax environment
changes.
Furthermore, in December 2019, the FASB issued ASU No. 2019-12, Income Taxes:
Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The new guidance
affects general principles within Topic 740, Income Taxes. The amendments of ASU
2019-12 are meant to simplify and reduce the cost of accounting for income
taxes. The Company adopted ASU 2019-12 during the first quarter of 2021 using a
prospective approach. The adoption of ASU 2019-12 did not have a material impact
on the Company's condensed consolidated interim financial statements.
Equity-Based Compensation
Legacy PCT issued grants of Legacy PCT incentive units to select employees and
service providers. The equity- based compensation cost for the units is measured
at the grant date based on the fair value of the award over the requisite
service period, which is the vesting period on the straight-line basis. In the
event of modification, the Company recognizes the remaining compensation cost
based on the grant date fair value over the new requisite service period. The
Company applies a zero-forfeiture rate for its equity-based awards, as such
awards have been granted to a limited number of employees and service providers.
The Company revises the forfeiture rate prospectively as a change in an
estimate, when a significant forfeiture or an indication that significant
forfeiture occurs.
In connection with the Closing of the Business Combination, the Legacy PCT
incentive units were converted into restricted stock of the Company. The
restricted stock awards maintain the same vesting schedules as the Legacy PCT
incentive units.
The fair value of the awards is estimated on the date of grant using the
Black-Scholes option- pricing model using the following assumptions:
                                   2021              2020
Expected annual dividend yield     0.0  %                  0.0  %
Expected volatility               49.1  %            42.1 - 63.3%
Risk-free rate of return           0.1  %              1.6 - 1.7%
Expected option term (years)          0.2              0.75 - 4.4


The expected term of the restricted stock granted is determined based on the
period of time the awards are expected to be outstanding. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The
expected volatility was based on the Legacy PCT's capital structure and
volatility of similar entities referred to as guideline companies. In
determining similar entities, Legacy PCT considered industry, stage of life
cycle, size and financial leverage. The dividend yield is assumed to be zero
since Legacy PCT has not historically paid dividends. The fair value of the
underlying Company shares for the nine months ended September 30, 2021 was
determined using an initial public offering scenario. The fair value of Legacy
PCT Units, for the nine months ended September 30, 2020, was determined using a
hybrid method consisting of an option pricing method and an initial public
offering scenario.
2021 Equity Incentive Plans
The Company issued grants of restricted stock and performance share units to
select employees. The equity- based compensation cost for the units is measured
at the grant date based on the fair value of the award over the requisite
service period on the straight-line basis. In the event of modification, the
Company recognizes the remaining compensation cost based on the grant date fair
value over the new requisite service period. The Company applies a
zero-forfeiture rate for its equity-based awards, as such awards have been
granted to a limited number of
                                       46
--------------------------------------------------------------------------------

employees and service providers. The Company revises the forfeiture rate
prospectively as a change in an estimate, when a significant forfeiture or an
indication that significant forfeiture occurs.
The fair value of the performance share unit awards is estimated on the date of
grant using the Monte-Carlo simulation using the following assumptions:
                                   2021       2020
Expected annual dividend yield       -  %      -  %
Expected volatility               55.0  %      -  %
Risk-free rate of return             -  %      -  %
Expected option term (years)          2.7       0.0


Warrants
The Company measures the warrants issued to nonemployees at the fair value of
the equity instruments issued as of the warrant issuance date and recognizes
that amount as selling, general, and administrative expense in accordance with
the vesting terms of the warrant agreement. In the event that the terms of the
warrants qualify as a liability, the Company accounts for the instrument as a
liability recorded at fair value each reporting period through earnings.
The Company determined the warrants issued to RTI in connection with terms of a
professional services agreement are equity classified. Accordingly, the warrant
units were held at their initial fair value with no subsequent remeasurement.
In connection with the Business Combination discussed in Note 1, the Company
modified the RTI warrant agreement to purchase 971 thousand shares of PCT common
stock instead of Legacy PCT Class C Units on November 20, 2020. RTI can exercise
these warrants upon the first anniversary of Closing of the Business
Combination. The warrants expire on December 31, 2024. In connection with the
closing of the Business Combination, the Company determined the warrants issued
are liability classified under ASC 480. Accordingly, the warrants will be held
at their initial fair value and remeasured at fair value at each subsequent
reporting date with changes in the fair value presented in the statements of
comprehensive loss.
The Company has determined its warrant to be a Level 3 fair value measurement
and has used the Black-Scholes option pricing model to calculate its fair value
using the following assumptions:
                                                                            

March 18, 2021 (Initial

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


The Company has determined the private warrants are liability classified.
Accordingly, the warrants were held at their initial fair value and remeasured
at fair value at each subsequent reporting date with changes in the fair value
presented in the statements of comprehensive loss.
The Company has determined these warrants to be a Level 3 fair value measurement
and has used the Black-Scholes model to calculate their fair value using the
following assumptions, which are subject to judgement and could result in higher
or lower changes in fair value based on the inputs selected:
                                                                            

March 18, 2021 (Initial

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


                                       47
--------------------------------------------------------------------------------

Stock Options
The stock options issued pursuant to the Plan are time-based and vest over the
period defined in each individual grant agreement or upon a change of control
event as defined in the Plan.
The Company recognizes compensation expense for the shares equal to the fair
value of the equity-based compensation awards and is recognized on a
straight-line basis over the vesting period of such awards. The fair value of
the stock is estimated on the date of grant using the Black-Scholes
option-pricing model using the following assumptions:
                                   2021       2020
Expected annual dividend yield       -  %      -  %
Expected volatility               47.5  %      -  %
Risk-free rate of return           0.7  %      -  %
Expected option term (years)          4.5       0.0


The expected term of the shares granted is determined based on the period of
time the shares are expected to be outstanding. The risk-free rate is based on
the U.S. Treasury yield curve in effect at the time of grant. The expected
volatility was based on the Company's capital structure and volatility of
similar entities referred to as guideline companies. In determining similar
entities, the Company considered industry, stage of life cycle, size and
financial leverage. The dividend yield on the Company's shares is assumed to be
zero as the Company has not historically paid dividends. The fair value of the
underlying Company shares was determined using the Company's closing stock price
on the grant date.
Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated interim financial statements
included elsewhere in this Quarterly Report on Form 10-Q for more information
about recent accounting pronouncements, the timing of their adoption, and our
assessment, to the extent we have made one, of their potential impact on our
financial condition and our results of operations.
Emerging Growth Company Election
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended
transition period is irrevocable.
PCT is an "emerging growth company" as defined in Section 2(a) of the Securities
Act of 1933, as amended, and has elected to take advantage of the benefits of
the extended transition period for new or revised financial accounting
standards. PCT expects to continue to take advantage of the benefits of the
extended transition period, although it may decide to early adopt such new or
revised accounting standards to the extent permitted by such standards. This may
make it difficult or impossible to compare PCT's financial results with the
financial results of another public company that is either not an emerging
growth company or is an emerging growth company that has chosen not to take
advantage of the extended transition period exemptions because of the potential
differences in accounting standards used.
PCT will remain an emerging growth company under the JOBS Act until the earliest
of (a) December 31, 2025, (b) the last date of PCT's fiscal year in which it had
total annual gross revenue of at least $1.07 billion, (c) the date on which PCT
is deemed to be a "large accelerated filer" under the rules of the SEC or (d)
the date on which PCT has issued more than $1.0 billion in non-convertible debt
securities during the previous three years.

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