PureCycle Technologies, Inc. Q3 FY2021 Earnings Call

Good morning, everyone, and thank you for participating in today's conference call. I would like to turn the call over to Mr. David Brenner as he reads the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. That provides important cautions regarding forward-looking statements. David, please go ahead.

Great. Thank you, Peter. Welcome to PureCycle Technologies' Third Quarter Earnings Conference Call Update. I am David Brenner, Chief Commercial Officer, and joining me today are Chairman and Chief Executive Officer, Mike Otworth; Chief Manufacturing Officer, Dustin Olson; and Chief Financial Officer, Michael Dee. This morning, we will be highlighting our corporate developments for Q3. This presentation will be available on our IR page of our website, purecycle.com. Many of the statements made today will be forward-looking and are based on management's beliefs and assumptions, and information currently available to management at this time. The statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in our Safe Harbor provisions for forward-looking statements, that can be found at the end of our third quarter 2021 corporate update press release, and in our Form 10-Question, both of which were filed yesterday, as well as in our other reports on file with the SEC that provide further detail about the risks related to our business. Additionally, please note that the company's actual results may differ materially from those anticipated, and, except as required by law, we undertake no obligation to update any forward-looking statement. Our remarks today may also include non-GAAP financial measures. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our slide presentation and in our third quarter 2021 corporate update press release, issued yesterday. You're welcome to follow along with our slide deck, or if joining us by phone, you can access it at any time on purecycle.com. We're excited to share updates from the previous quarter with you. And I will now turn it over to Mike Otworth, PureCycle Chairman and Chief Executive Officer. Mike?

Good morning and thank you for joining us. As David stated, today we'll be reviewing highlights from our third quarter. We will review updates on our feedstock strategy, the launch of our PureZero program with the Cleveland Browns, discuss the location of our first feedstock preprocessing facility in Florida, provide an update on our Ironton plant, discuss our FDA Letter of No Objection, and we will then dive into our customer pipelines. Now, moving to slide number three, on slide three, you'll see that our 2021 Q3 highlights include wins across operations, feedstock, commercialization, and finance. I'll take a few moments to highlight a couple of key areas for you. Executing operationally remains at the heart of everything we do here at PureCycle. And despite a challenging supply chain environment, our Ironton facility remains on track to begin operations in Q4 of next year. We recently approved a series of additional investments in Ironton that are designed to both de-risk operations and broaden our processing capabilities to handle an ever wider range of feedstocks. In Q1, we outlined our feedstock strategy regarding how we would target post-consumer feedstock and build an awareness for the value of number 5 polypropylene plastic. I'm excited to report that we're executing that strategy, and have identified over 1.6 billion pounds of feedstock. Since last quarter, we've signed six LOIs, accounting for 168 million pounds of feedstock. These LOIs will help supply our first preprocessing facility in Central Florida. Additionally, we've developed and launched our PureZero program geared toward helping make stadiums, entertainment venues, and retail more sustainable. We launched this program in partnership with the Cleveland Browns, and we couldn't be more thrilled about this partnership. We intend for this to represent an actionable pathway for similar organizations to progress their sustainability ambitions. We launched our first commercial product, with EC30, a Procter & Gamble brand that is built around sustainability. We submitted our FDA Letter of No Objection in September, and progressed customer discussions representing 277 million pounds across existing and new market segments, using a feedstock-plus pricing model. And lastly, from a finance perspective, we're ending the third quarter with $494 million in total cash and investments, and have spent $45 million progressing our key projects. Moving to slide four, you can see PureCycle continues to expand our global footprint in the markets that offer the best opportunity. We're progressing toward definitive agreements with our previously announced MOU partners, and continue to evaluate additional opportunities. Slide five highlights evolving consumer trends that drive demand for sustainable products. As mentioned, our first commercial product hit the digital shelves with EC30 shampoo dispenser, made of ultra-pure recycled polypropylene produced from our Ironton facility. EC30 was really the perfect partner for our first product launch, as they are equally focused on offering truly sustainable products with the smallest carbon footprint. This type of product demonstrates to brand owners our resin's ability to deliver exceptional aesthetic and mechanical properties that meet both sustainability goals and delight the consumer. Consumers don't want greenwashing; they expect companies to deliver high-quality products with high percentages of recycled content. And this launch proves that PureCycle products deliver on both points. Now, Dustin Olson, our Chief Manufacturing Officer, will discuss our execution progress across these goals.

Thank you, Mike. As you can see, we continue to expand our footprint in the United States and around the globe. Our first commercial facility, in Ironton, Ohio, is well underway, and expected to be operational in the fourth quarter of 2022. This facility will produce 107 million pounds per year of ultra-pure recycled resin. In the second quarter of next year, in preparation for the startup of the facility, we plan to begin Ironton feed prep operations. This will be a significant milestone for the company. During the third quarter, PureCycle approved additional investments at Ironton focused on de-risking and process expansion, which increases the total project cost by $30 million to $40 million relative to the initial budget. Approximately two-thirds of the additional cost represents an investment to process a higher percentage of feed contaminants and process safety design improvements, while the remaining one-third represents an escalation in base material pricing. PureCycle has deployed a strategy for constructing plant lines that is designed to allow us to reduce the construction risk and scale more efficiently. To that end, we have invested capital to expand our construction capability to handle the build-out of three full plants concurrently, and also deploy the Born Digital platform to streamline all construction and operational readiness activities. As we look forward to plant operation next year, we have hired approximately 15 operators and staff over the last six months. These individuals represent critical operational roles for Phase 2 in Ironton, and are in line with our operational readiness plan. Our process safety management and training development is also on track. Our Phase 1 Augusta OSBL and ISBL line engineering activities are complete, and efforts to progress detailed head start engineering for the long lead equipment is in process. We have engaged our key long lead strategic suppliers to ensure that our timeline is secured for mid-2023 startup. We are also finalizing engineering procurement and construction contracts, and expect site work to begin in Q1 of next year. Over the last quarter, our European expansion efforts have focused on site selection. We have identified five suitable locations, identified feedstocks, and intend to leverage the data used for our FDA letter of non-objection submission in preparation for engaging the European Food Safety Authority, EFSA. We also made significant announcements in Q3 as it relates to our expansion into Asia-Pacific. We are continuing to progress our memoranda of understanding with SK Geo Centric in South Korea and Mitsui in Japan to definitive agreements. Our Augusta, Georgia facility, announced in July, is the future home of five purification lines, with space for up to eight total lines. Our first five lines are designed to represent a nameplate capacity of approximately 650 million pounds annually when fully constructed. We have spent much of the last quarter building out the financing package and are working to close our offtake and feedstock arrangements. The details of the project financing will become clear as the debt is finalized. But for now, we are assuming multiple debt draws to finance five purification lines. We are currently in the process of building purification plants that will process our goal of 1 billion pounds of polypropylene waste by 2025. As you can see on slide eight, we are on the path of achieving that goal. We have provided specifics about capacity by quarter, and also revised the production ramp bar to show the timeline for nameplate capacity. You will note that we are on track for production, and that timing depends on securing debt financing. As additional operations are established, we will add them to this chart to map the detailed timeline. I would also like to highlight the strength of our modular manufacturing strategy. In a global environment where numerous projects seem to be behind schedule, and with significant cost surges, we have been able to work closely with our suppliers to limit global interruptions to schedule and cost overruns. Over the last few months, you've heard us talk more and more about this PreP concept. I'd like to take a few minutes to highlight what a feed processing facility is and why it's important to PureCycle. Our PrePs will be regional preprocessing facilities that sort, wash, and densify feedstock to prepare for purification. In Ironton, our preprocessing facility is co-located with our purification line and is designed to process film, fiber, and mixed rigids with a capacity to deliver over 126 million pounds per year. Our recently announced Central Florida facility, which is expected to provide feedstock to our Augusta Purification Plant, is designed to process mixed rigids. We anticipate being able to process 75 million pounds per year initially, and then we expect to scale to 150 million pounds of capacity. We plan to initiate commercial operations in the third quarter of 2022. We also signed an MOU with Titus, a secondary Murf operator on the west coast to supplement feed supply to both Ironton and Augusta while building a supply source for a third U.S. location. This will ultimately serve to diversify our overall feed system. Our PrePs allow us to do a couple of critical activities. First, our PrePs allow us to build strong regional relationships that might be cost prohibitive with a centralized strategy. Second, our PrePs allow us to customize facilities based on the feedstock in the region. And third, our PrePs allow us to minimize our carbon footprint by only shipping polypropylene to our purification facilities. Next, I would like to share how Tamsin Ettefagh, our Chief Sustainability Officer, is charting a path to 1 billion pounds of polypropylene.

Over the last six months, we have grown our team across several pillars to begin building our feedstock network. We are optimizing our search across multiple feedstock lanes in conjunction with our feedstock procurement strategy. We are building PureCycle's relationship in the marketplace. This effort has resulted in identifying over 1.6 billion pounds of feedstock. During this quarter, our team has signed letters of intent for 160 million pounds of feedstock. We are executing against our strategy to secure feedstock from diverse suppliers across the United States and are proactively seeking to acquire three diverse types of waste streams. The first is post-consumer curbside. PureCycle's ability to process the stream opens a wide variety of contaminated feedstocks. As such, we have identified 270 million pounds of feedstock opportunities, 10% of which are diverted from landfills or incineration. We currently have 30 million pounds contracted and 14 million pounds signed under letters of intent. The second pillar is post-consumer non-curbside. This post-consumer non-curbside stream we are targeting to implement, we're targeting and look to implement circularity programs. To date, we have identified 1.1 billion pounds of feedstock opportunities, 50% of which are diverted from ending up in landfills or incineration. With this stream, we have 80 million pounds of feedstock contracted and 154 million pounds signed under letters of intent. The third feedstock lane is post-industrial. Here we are targeting volumes direct from industry and brokered waste opportunities. To date, we have identified 225 million pounds of feedstock opportunities and have 100 million pounds of feedstock contracted. We watch the price and availability of feedstock options very closely. Since the PureCycle technology can handle a wider variety of feed streams, it gives us the option to optimize into or out of feed streams. For example, today, market prices have recently risen for post-industrial waste, and we are in the process of evaluating the segment for the best opportunities to yield high volume at the best price possible. Partnerships are a key component to our overall strategy to build awareness of PureCycle and what that means for sustainability. It's a strategy that allows us to multiply our efforts to secure feedstock, work with brands on commercial products, and help us raise awareness of PureCycle's work to tackle the plastic waste crisis. We see an opportunity to increase the awareness of PureCycle's technology and increase the recycling efforts to a broader group by tapping into feedstock across sports stadiums, conference, and entertainment venues, and even retail. We launched our PureZero program this week with an exciting partnership with the Cleveland Browns as their plastic recycling partner. PureZero is our approach to maximizing recycling and minimizing the environmental impact on these venues. PureCycle sustainability teams have examined the level of plastic waste generated, and we see considerable opportunity to not only secure feedstock but also forge long-lasting strategic partnerships.

And we launched our first commercial product this week with EC30, a Procter & Gamble brand that is built around sustainability. Our aim is not only to energize the next generation of stem and eco-driven consumers, but also to make PureCycle a household name. The commercial team continues to make progress in building our pipeline with new customers and establishing the visibility of PureCycle products in the marketplace. This is a unique time for sustainability, and PureCycle is positioned to help eco-focused brands meet their sustainability goals. Early in our evolution, we saw strong interest in the packaging and consumer goods space, but sustainability has grown from an insulated segment to a global mandate. We're starting to see interest from broader market verticals like health and auto. This slide, slide 14, highlights the broad applications that have been made from our resin, including the first commercially available PureCycle product from blow molding to injection molding to thermal forming parts. We're targeting a broad range of applications to prove the versatility of our resin. We are fortunate to have strategic partners who see tremendous potential in our resin and value it brings to their customers.

Thank you, Dustin. On slide 15, we will begin with our liquidity position of $494.1 million. This is cash on the balance sheet. Of this in blue on the right, you will see $273 million of restricted cash and in green on the left $221.1 million of unrestricted cash. Now the restricted cash is set aside for the Ironton plant and that totals $156 million in addition to three reserves totaling $114.8 million and $2.2 million of other. These reserves are required under our bond agreement. Our unrestricted cash of $221.1 million is sufficient to continue operational activities and is expected to be supplemented with additional project financing as we build out in Augusta, Georgia. I would note that the additional $30 million to $40 million that we anticipate spending in Ironton will be spread out over the coming year and will be funded from unrestricted cash. In slide 16, we review the third quarter liquidity and changes from the prior quarter. Of the approximately $45 million of capital spent in the third quarter, $27.9 million or 62% was spent on Ironton construction, which remains on schedule for expected completion in Q4 2022. $7.7 million or 17% of the total spend for the quarter was spent on increasing our feed prep and future capacity. Included in this $7.7 million are $2.5 million to acquire the Winter Garden preprocessing location, $2.9 million for the preprocessing facility in Ironton, and a $2.3 million investment in preparation for the Augusta build. Finally, $9.3 million, or 20%, was spent on operating expenses. This includes $4 million for payroll expenses, $1.4 million for third-party service providers, $900,000 relating to our digital strategy and $2.9 million of other expenses, including rent and insurance. In summary, we are continuing to meet our commitments. We're staffed with very highly experienced talent. And with our engineering nearing completion for Augusta, we will be initiating the project financing process this quarter to raise the capital to begin the procurement of the long lead time items for Augusta. Now, let me turn it over to Mike Otworth again, our CEO.

Thank you, Michael. PureCycle is changing the game when it comes to plastic waste, and not just in an incremental way, but in a truly transformational way. We offer more than just ultra-pure recycled resin; we offer an opportunity for businesses to create truly sustainable products and fully close the loop on plastic. So, now, I'm going to focus on a few key takeaways. First, our flagship facility in Ironton is well underway and is expected to be operational in Q4, 2022, with a projected capacity to produce 107 million pounds of ultra-pure recycled resin. And I can't stress this enough, our team has been and continues to be laser-focused on commissioning Plant 1 in Ironton. We heavily invested in purification capacity optimization for our Ironton plant. We continue to do everything possible to minimize risk and ever increase the possibility that everything will start up there as planned and on time. We're deploying a feedstock strategy that aims to diversify our supply, and LOIs this quarter equate to 168 million pounds of feedstock. We're actively decentralizing our feedstock intake process so we can more easily and cost-effectively collect plastic waste from across all U.S. regions. As Dustin mentioned, we opened our first satellite preprocessing facility in Central Florida, and we expect to have the capacity to produce up to 150 million pounds of plastic waste there. We expect to break ground and begin construction on the Augusta plant in the first quarter of 2022, with the first of five purification lines expected to be completed in the second half of 2023. We have a strong customer pipeline, with 277 million pounds of offtake in active discussion. As promised, we submitted our Letter of No Objection to the FDA in September. And we also saw the first PureCycle product hit the digital shelves with EC30's shampoo dispenser, which I now have one sticking on my shower wall. And we've developed and deployed our PureZero program to target plastic waste at stadiums, entertainment venues, and even at retail stores. The first team sports to adopt this program is the Cleveland Browns, and I anticipate the Browns will be the first of many. At PureCycle, we know that a more sustainable planet starts with people and their relationship with the environment. More than ever, consumers are putting sustainability at the top of their list when it comes to where they shop and what they buy. The consumer data tells the story. And we know it's not just us who see the enormous potential in PureCycle. We know there's major consumer demand for companies to truly tackle the plastic waste crisis, not just check a box to say they're green. What we are creating at PureCycle is more than plastic that can be infinitely sustainable; we're giving our customers and potential customers an opportunity to be deliberate when it comes to creating sustainable products that put our environment at the forefront. Thank you for your time this morning. We'll now open the call up to questions.

And your first question will come from Noah Kaye with Oppenheimer. Your line is open.

Hi, good morning. I have a number of operational and financing questions, but I think we need to start with the disclosure in the 10-Q last night, around the SEC investigation. What can you share with us, in terms of color, on the investigation? What can you share with us around scope, and if possible, around the timing that you might be expecting for a resolution of this? And any confidence you can give investors at this point regarding the matter?

Thank you, Noah. It's Michael Dee. Let me give you the best answer that I can. As we disclosed in our 10-Q, at the end of September, the SEC issued an investigative subpoena to the CEO of PureCycle, requesting testimony in connection with an investigation. This investigation is a non-public fact-finding inquiry. We are disclosing this because we feel it is important to be transparent, and to inform our shareholders of the existence of this matter. It is important to note that the fact-finding nature of this investigation does not infer any conclusions that any violations have occurred. The nature of the subpoena and the investigation itself is not judgmental, and does not indicate a negative opinion of either the recipient or the facts of the matter. We will fully cooperate with the SEC. I'm sure you can appreciate that we are not able to take further questions on this at this time. Thanks, Noah. Your next question?

Okay, I will move on, I guess.

Your next question will come from Gerry Sweeney with ROTH Capital. Your line is open.

Thanks for taking my call. It seems like Noah got interrupted. I have a question about the process improvements at the Ironton facility. I understand that the processes allow for a higher amount of contaminated material to be processed. However, if there's a higher level of contamination in that feedstock, doesn't that mean there will be a lower amount of purified polypropylene produced? I'm interested in understanding how this operates, as well as your expectations regarding the return on this investment.

Yes, so, thanks. This is Dustin. With respect to the investment that we're making in Ironton or the incremental investment we're making in Ironton, first of all, it doesn't have any impact on the backend capacity for polypropylene production. In fact, what it really does is it opens up the spectrum of feed that we can bring into the facility, and gives us an opportunity to, let's say, diversify the feed slate and be more selective with the cost profiles of the feeds that we bring in. It's partially that. The second piece of this is really a way to improve the operation and the process safety management of the facility. And that effectively has no capacity implication on the plant, but it improves the overall reliability of the final operation.

Okay. Switching gears to the SK Geo Centric Mitsui MOUs, in the press release you stated that they're moving forward. Do you have any update on terms of timing how far along these agreements are from maybe finalization, any comment on that front?

Yes, regarding that question, I can say that discussions with SK and Mitsui are progressing well across multiple areas to address their inquiries about our company and technology, helping them feel confident about our future collaboration. At this moment, we don't have a detailed timeline to provide. However, I can assure you that the discussions are going smoothly, and we are making good progress in all areas.

So, that's for that question. Yes, I'll say that the discussions with SK and Mitsui are going very well and are progressing across multiple lanes to answer all of the questions they have about our company and our technology to get them comfortable with what we want to do together going forward. At this point, we don't have a detailed timeline to share yet. But I can assure you that the discussions are going very well, and we're making good progress on all fronts there.

I would just add that the reaction that we're getting as a result of their respective technical teams coming here has been overwhelmingly positive. So, there's good momentum behind those relationships, and I think that's really all we can say with regard to timing.

Got it. And for the final question, I noticed in the presentation there was a comment indicating that the Augusta facility is on schedule. However, I believe that depends on finalizing the project financing. How is that progressing? Are there any concerns that this might be delayed or not meet your expectations, possibly regarding debt-to-equity ratios?

Yes, thanks. It's Michael. We are just initiating the process. Given that we only recently announced Augusta, we had been working on the engineering well in advance of making that announcement. And so, as the engineering work begins to finish, we then have the ability to go out and engage in discussions on conducting that project finance. We have capital to begin the process, as we already have announced. But we do want to get the project financing done, so we will be initiating discussions with both intermediaries and banks this quarter in order to get that started. We take great comfort in the fact that even before there was a merger, a pipe convertible and all the financings that we did last year, we raised $250 million of debt in the public tax-exempt market. As I mentioned, in the last quarter, those bonds have traded extremely well, trading up approximately 15 to 20 points from where they were issued. And so, we feel we have a very solid credit curve out there that investors will be able to look at. Thank you.

Got it. That's it from me. I appreciate it. Thank you.

And we have a follow-up question from Noah Kaye with Oppenheimer. Your line is open.

Thank you. So, regarding FDA NOLs, I was wondering if you can share your current expectation on timing. Obviously, you filed with the FDA, but what may be reasonable expectations in terms of hearing back and getting that letter of no objection?

David Brenner, you want to answer that?

Absolutely, this is David Brenner, Chief Commercial Officer. As we mentioned, we submitted it in September. We anticipate that we would have a response by the end of the year. But again, the actual time that it will take the FDA to provide a response to our submission could vary, so we're hoping for the end of the year, but that could vary.

Okay, great. Turning to the contracting for the offtake, just looking at the slide 13, showing that you have the split of allocated versus contracting versus early discussions, up to 625 million pounds, I guess it'd be helpful to understand the activity behind that. You've probably got prospective customers coming in, looking at the origin plan, but if you could give us some more indications on where some of the contracting discussions are going, what being indicated in terms of pricing structure. Are more folks entering the plants now, just give us a flavor of how demand is trending?

Yes, it's a fantastic question, Noah. From our standpoint, one of the things that we've really been able to do over the last couple of months is host more and more of these prospective customers at the FAU, which has been problematic over the last two years due to COVID. As for your question around both the early discussions in contracting, we follow a very straightforward process when we engage with a customer, where we essentially talk about the key terms that are comprised of our long-term offtake agreements. We spend a number of weeks discussing what those key terms are; one of the central pillars of all of our agreements is this feedstock plus model, which is essentially a fixed price, plus the cost of feedstock divided by yield loss. This really allows us to mitigate the volatility that has existed over the last six months for the price of recycled polypropylene or a bale of polypropylene. And then from there, once we sign a term sheet or have agreement on that term sheet, we provide a small sample for additional testing. And once that sample and that test are complete, we are either simultaneously progressing the commercial agreement or we then sign that commercial agreement. I would describe the state of discussions today as a very strong pipeline with a number of those customers that are acknowledged on the key terms and are working towards the final details of the commercial agreements.

Okay, and then on the feedstock side, it sounds like the largest quantity in terms of LOIs is for post-consumer non-curbside. Now are those generally number five, are they mixed bales because it certainly seems like a big part of what you've been doing over the last couple of quarters has been to develop more preprocessing capability, which I think includes sortations. So, I guess it'd just be helpful to understand the composition of the feedstock you've identified.

This is Tamsin Ettefagh, Chief Sustainability Officer. And while our preprocessing has been somewhat focused on curbside collected, because that does have a great potential for growth, our LOI and our ability to find new feed has been mostly on post-consumer non-curbside. So, when you think about where polypropylene is used in such a variety of places, it's used in grocery stores for the bakeries, the foil department, the meat department, and even in the signage. And so, when you think about going to an organization say we can help you get it to zero waste, if you were to collect all this material and that adds up to quite a bit of material that wasn't recycled through traditional systems before. The Cleveland Browns and doing stadium service wear doing things like super sacks across the industry, consuming different materials, like coffee beans at a Starbucks manufacturing roasting plant goes through a lot of polypropylene super sacks. Those aren't highly contaminated; they're actually quite often higher percentages of polypropylene that just people haven't really looked into recycling that material. That's why when we go out and identify, we're claiming we've found over 1.6 billion pounds out there that might not necessarily have been identified in the past. So, I hope that helps to answer your question; things that have met their intended use but not collected in curbside, if that makes sense.

Yes, that's very helpful. Thank you.

Your next question will come from Eric Stine with Craig-Hallum. Your line is open.

Good morning, everyone.

Good morning.

Good morning.

I was wondering if you could just give a little more clarity in the release you talk about the 277 million pounds that where you're in active discussions. Is it fair to say that those would all be related to Augusta? And then I know in the presentation you did give kind of the pipeline by end use, but just curious if you could maybe talk about the pipeline by geography.

That pipeline is however, when we look at how we're executing in Europe as well as in Asia, the right of first offers that our partners have, we're not taken into account in that 277 number.

Okay. And I don't know if it was just my phone that cut out, but I did not hear the beginning of your answer there just related to the 277.

Understood. Yes, that 277 is really focused on the demand for Augusta.

Got it. Okay. And then, maybe just on Europe, I know that a while back Europe was kind of top of mind, then it took a backseat a little bit to Augusta. Now it seems like it's kind of accelerated again. You mentioned the identification of five sites maybe just some on how your current customers are involved in at least helping with that decision. And then just maybe any thoughts on a timeline when you may come to some decision.

Absolutely. So, in Europe, part of the delay was really focused on better understanding what feedstock was available as we saw a dramatic spike in feedstock pricing as the price of virgin increased. We've also learned a tremendous amount of information as we've progressed the Ironton design, which has allowed us to get more specific with our requirements for a European site. Most importantly, was having the FDA letter of no objection submitted so that we can begin to prepare for engaging with EFSA. What we've realized from talking with a number of our customers is that initial execution in Europe would be sufficient with an FDA letter of no objection in hand, which was new information for us and really kind of created a clearer path to investing in a facility in Europe. We continued to progress site selection and that work has not slowed down. From my perspective, we're quite excited at the discussions we're having on the feedstock side. Our team has been over to Europe a couple of times in the last 90 days and are progressing both the commercial and feedstock discussions to be ready to progress site selection and begin the debt financing process.

This is Mike Otworth. And just let me add this. On the European side, there is a huge amount of demand, but the overall equation with regard to feedstock, regulations and other elements is a bit more complicated. So, even our partners in Europe, who are very excited about our building capacity there opined that because availability of feedstock is so comparatively open in North America that we should really make sure that we weren't slowing down our focus on building out our footprint in North America and doing a bit of a land grab on feedstock, so we're doing that. But at the same time, we're seeing increased excitement from our European partners, the strategies coming together, both in terms of feedstock and a pricing model. I think we are operating with renewed enthusiasm for moving the ball forward in Europe, simultaneously to all the progress we're making here in North America.

Got you. That's helpful. Maybe last one for me, and I certainly can appreciate the inability to say much more about the subpoena, but given that that was on September 30th, I mean, is it fair to say that if there were something in there that elevated to a certain level that you would have had to disclose that knowing that in this case you're disclosing it at your choice rather than being forced to?

Yes. Thank you for that. I really hope you can appreciate that this is not something that we can comment on further at this time. We've really tried to make the disclosure that we feel is necessary even though not required. We will keep people informed as we go along, but this is really as far as we can go right now, you know what we know.

Yes. Thank you.

Your next question will come from Hamzah Mazari with Jefferies. Your line is open.

Hi, this is Mario Cortellacci filling in for Hamzah. Excuse me, appreciate the time. I just want to touch on one thing in the quarter and then maybe ask two questions that are just bigger picture. I guess just the first one is around the incremental costs. I guess what's your confidence level in terms of budgeting on the cost side going forward? Do you need to revise your expectations on OpEx and CapEx going forward for not only Ironton, but the additional facilities?

As we worked through the detailed engineering for Augusta, we continued to assess the overall capital expenditure story for that site. Currently, we have noticed some cost increases related to base material pricing and a slight expansion of the scope for the Ironton facility. However, even with these factors in mind, the scale efficiencies from the Augusta cluster complex will significantly reduce the overall capital expenditure for that project. Regarding operating expenses, we monitor them closely, particularly concerning labor and wage rates, but they do not represent a significant portion of the overall profit and loss for each facility. At this time, we do not see these as major factors impacting our operations.

Got it. One of my follow-ups is about the big picture regarding the technology. What can you share to reassure us about its reliability? This question is aimed at investors who are newer to the story and trying to understand your level of confidence in the technology. While your customers and the joint venture you are collaborating with have conducted their due diligence, can you highlight anything specific that boosts your confidence in the technology and perhaps helps us feel more at ease with it?

Yes, thanks. This is Mike Otworth. I've been involved in and around early-stage technologies my whole career, or at least my whole adult career, and PureCycle is far and away the most due diligence technology I've ever been around. And so, we're supremely confident in the robustness of the technologies. I think look to our investors and strategic partners and joint venture partners. They comprise some very sophisticated companies with very deep and broad technical capabilities. And they've done extensive due diligence on the technology. That extensive due diligence started at P&G before the technology was even licensed to us and has continued non-stop over the seven years or so since we licensed the technology. These partners and companies have technical teams that have supremely good expertise and processes. In every instance, we've had some deep technical due diligence, sending teams of people to our facility in Ironton, they've come back to us very quickly wanting to do something with us. We've heard comments like there are things we do today that are harder than this and that what you have here really is a scaling challenge not really a core technical challenge. I really lose no sleep over worrying about the technology. We have a very big scaling and execution challenge. There is no question about that. But as far as the robustness and the realness of the technology, some of you on this call were a part of our Investor Day that we had in Ironton. You saw it yourself. We love to host people to come and see it because seeing is believing and it's the real deal. It's going to transform plastic recycling. And when you ask about my confidence, I have a supreme level of confidence in that. It's not amongst our bigger challenges.

Got it. And then just my last one again big picture, maybe you could just take us back to where you were in this story, say a year ago, and what you were saying and who you were as a company and the initiatives you laid out? And then maybe compare that to where you are today in the story and on those initiatives and then maybe some of the big achievements that you've had over the past 12 months.

Yes. We have tried very hard in PureCycle from the very beginning to be careful about what we say we're going to do and be laser-focused on delivering on what we've said we're going to do. I think we've been true to that mission and I continue to preach it to our team. The things that we've said we were going to achieve, keep Ironton on schedule, identify additional locations to start to build more capacity to meet the demand, increase awareness of PureCycle in terms of the potential to have a beneficial and transformative effect on the industry. We talked about the Cleveland Browns. I can tell you that there are many other organizations that we're talking to, some of which picked up the phone and called us on their own. That will be high profile announcements when they come to fruition. So, I think, in addition to continuing to broaden the spectrum of customers, broaden the spectrum on the side of feedstock and we're ever broadening the spectrum on just general awareness across different verticals of how we can create a beneficial transformation. As I said in my earlier comments, enable companies to do something that will be recognized as real and impactful and not anything near corporate greenwashing. I think our progress on all of those fronts has been significant. We'll continue to focus on what we've said we're going to do going into next year. We welcome the scrutiny of doing what we say and I'll let Michael make a couple of additional comments here because I can see that he's wanting to.

Yes. Thank you, Mike. Look, I think it's very important to look back a year, year and a half from when I first signed an NDA with the company back in January 5th of 2020 and first heard about the company in December of 2019. The transformation that this company has made over the last year, year and a half, and even over the last six to nine months has been amazing, really nothing short of amazing. I'm going to start with the people. The experience that we have at this company that sits around a table every Tuesday for an hour and a half, where we talk about every aspect of our business. We have in-person meetings, we do virtual meetings, but the experience around the table working out strategies, working out challenges, working out the idea that Augusta is the place to go, working out why we want to do 130 million pound plant rather than 165. We have decades and decades of experience sitting around this table. All of that experience is extremely entrepreneurial. Now, Larry Somma is going to come in to replace me as CFO; the fact that we can recruit somebody of Larry's caliber from a $30 billion producer of polypropylene is something everyone on this call should sit up and take notice of. The fact that we can recruit someone at that level of their career, in addition to recruiting people with the experience of Tamsin or Dustin Olson, or I could go down and name 20 other people, is incredible. And why do they do that? These are the people that work in the industry; they know that what we're doing can be done and it can happen. Is it easy? No. Do we work on it together? Yes. We have to modify our strategy based on market conditions. We are a learning organization. We have incredibly strong relationships with all of our partners. The fact that P&G has great confidence in us and the fact that we've raised approximately $750 million over the last year is also a testament.

Thank you very much.

Your next question will come from Hassan Ahmed with Alembic Global. Your line is open.

Good morning, guys, couple of questions. One on the EP&C side of things, right, I mean, we obviously in today's sort of market keep hearing about all these sort of supply chain constraints, logistical constraints and the like. I just want to get a better sense of how you guys have structured your contracts to basically sort of get some sort of assurances around the timeliness with the EP&C guys of what they're delivering in terms of building out your facilities. And also, being on budget and the like, particularly as we're living through these sort of unprecedented sort of situations with COVID and labor shortages and supply chain, logistical constraints and the like.

We're very aggressively closing the EPC contract strategy for Augusta. That activity has gone really well. We're bridging off of our knowledge and experience from Ironton to help structure the contracts for the future. I think it's a little bit, it's a little bit different, though. We've learned so much with our experience with Ironton that we're able to manage the key supplier relationships in a way that gives us a bit of an advantage when it comes to cost and the timeline for delivery of key long lead items. So, from an EPC perspective on guarantees for timeline and for cost, I mean, it really comes down to the long lead key pieces of equipment that we have to get on order in order to build the facilities.

And let me just say, there is these days in the current environment, buying involved selling, selling our company and selling our opportunity compared to other opportunities that these suppliers have in terms of who they can sell to. Dustin and his team have done an exceptional job of traveling around the world, selling these companies on PureCycle as the future of plastic recycling. Even though we may be a smaller customer today than some of your other options, we're going to be a very big customer in the future. That said, I've been surprised that he's needed to do that. But I've also been surprised pleasantly so in the success that he and his team have been able to achieve.

Understood. Understood, very helpful. As a follow-up, on the again, I completely am cognizant of the sensitivities around the ACC subpoena and the like. But I'm frankly very confused about it, right because, look, if I read the verbiage properly, they are questioning you about the technology and the financial projections, right? I mean my frustration basically is, I'm a chemical engineer by training. I have a master's in Industrial Engineering, and short, I mean in chemical engineering school, we would sit there and look at the technology, we set up a pilot plant, and we'd scale it up, right? I mean, that's the ethos of chemical engineering, right? So let's assume that these lovely lawyers from the SEC walk in and probably with no chemical engineering expertise, what is it that they will discover about the technology between now and Q4 2022, right? Because at the end of the day, I mean, you guys should have your facility up and running by Q4 of 2022. And if it's up and running, the technology works. You've scaled it up, right? If the technology works, and you've scaled it up, your financial projections are correct as well, because all you're doing is taking market prices of polypropylene, you have contracts in place for raw materials, right? So then the financial projections work as well. So, I mean, just broad stroke, just try to help me understand what these guys are looking for.

Yes, so I mean, maybe… Yes, it is and that's why the feedstock evaluation unit, which has now been running for two and a half years is so important because, and that's one thing. Secondly, having people like Dustin Olson and the breadth of his team, on the manufacturing side, coming from people who have been building polypropylene plants for their entire career, we have done and continue to do everything we can to mitigate and de-risk that process. We try to bring to you and this additional investment that Dustin talked about is a very important element. We sit and we have decisions that I have to make as CFO about investments. When we have an opportunity to make an investment that increases the probability that everything will come on stream as expected, we will make that and that investment that we're making in Ironton is good, it's important and it's the right decision to do, and we want to be about execution. That's why I always stressed the quality of the people that we have here. On execution, I'm going to ask Dustin to just talk for a minute about Gulfspan and why our investment in Gulfspan is so important.

Yes, I mean, I would just say that everything that we do when it comes to the execution plan for this company is centered around finding efficiency, okay, and doing the things most efficiently. If we focus on that, then everything else will fall into place. Michael's point about the Gulfspan construction capacity is really twofold. We will be able to scale more quickly with the Gulfspan facility because we have the capacity to build three plants concurrently. So, when we get the design finalized, and we start building the plants, we won't have a construction capacity risk. That's good. And that's important. You can buy capacity in the market; what you can't buy is the institutional, let's say experience build of the people doing that work. By concentrating our work at the Gulfspan facility, we protect our IP. But two, we train people on how to build, the people at Gulfspan will be building our first facility for Ironton, and then they will be building the subsequent facilities after that. That's one minor piece of the overall story of how we're going to scale efficiently. I think it's a great example of how we're going to do it with a focus on efficiency. You can say the same thing about our born digital strategy. I mean, born digital strategy is 100% focused on how do we scale most efficiently? How do we ensure that the learnings from one plant get applied to the second plant? How do we ensure that the training of an operator in Ironton gets translated to the training of an operator in Augusta? So, when we learn what works we keep, when we learn what doesn't work, we move on. We continue to build that institutional knowledge day in and day out. These two strategies in particular are really key foundational items, key pillars to us doing this efficiently. If we keep efficiency at the center of every decision that we make, our view is that we can't lose.

Very helpful, guys. Thank you so much.

Your next question will come from Steve Byrne with Bank of America. Your line is open.

Yes, I wanted to drill in a little bit about the technologies that you've been looking at for preprocessing and I know you're looking at a variety of technologies. Are you seeing any, any technologies that are kind of rising to the top that you think will likely be the technology you employ in these preprocessing plants that are best able to sort the PT from the PE and so forth, or would you characterize this as still fairly early in the review of these technologies and new entrants in the industry to develop these technologies? Do you anticipate you're having ownership of these technologies or is this all going to be licensed?

Yes, it's a good question, I'll let Dustin and maybe Tamsin may want to add something as well. But I would say on our team, we've seen everything probably that exists. We have kind of the resident knowledge of everything that's existed, probably going back 30 years to the present, and how it's evolved. And kind of what's out there in terms of kind of on the horizon. So, I'll let Dustin start by with his perspective on your question.

Yes, I think it's really important to start with, let's say why there isn't or why some of the polypropylene doesn't get mined out of the waste today. The reason that that hasn't happened at scale today is because there hasn't been a technology on the market that could transform a wide variety of plastic feedstock into an ultra-pure recycled polypropylene product. PureCycle brings that, and so as a result of our technology now being available, there is a greater opportunity to go find the polypropylene and bring it out of the waste into our technology.

And let me just help further distill this down to its basic elements. The problem is one of technology, but that problem with the technology creates a problem on the market side because you can't make high-value products that demand a premium price out of low-quality recycled polypropylene. We're enabling our customers to make products of the highest quality hence they're willing to pay more for the recycled polypropylene which means we can pay more for the feedstock. It creates a whole new viable business ecosystem that didn't exist in the past. If you ask somebody like one of our partners on processing side of the company called Ronky, if you ask them, well, why aren't you pulling the polypropylene out of your Cincinnati operation? They'll say because we haven't had consistent demand from a customer like what you're telling us you're willing to do. That has never existed in the past. We are creating a transformation in the supply chain driven by our rather revolutionary technology.

And I would say that as we now bring that technology to market, and we look to how we collect and aggregate this type of molecule, much of what we are doing is really just deploying traditional technologies in the feed preprocessing area. This is not, in many cases, it's not brand new tech that we need to prove out in order to make this work. This is established technology with very low risk of operation; we just need to get it out there to go find the polypropylene. The second point of this is something we mentioned in the script, which was depending on the feedstock available for recycling or the feedstock available for us to purchase, it may require a unique type of processing to prepare it for the purification facility. A good example are nets, and ropes, fishing nets, and ropes used to tie off cruise ships and things like that, like that is a very unique product and in order to preprocess that, to get it ready for purification, it takes a unique processing step to do it. In each region, where we set up the satellite prep facilities, we will evaluate what is around us and what we will need to put in place in order to process the feed that's available.

I think the last point Dustin made, I felt like it has moved us the most that we have put in equipment already that kind of puts us ahead in sorting, I would say post-consumer curbside material in comparison to what's out there today. I feel confident about being able to add on to that as we build the new equipment becomes available in a more robust way. I think AI is still a bit behind the scene, but it's getting there.

Next question?

Your next question will come from Thomas Boyes with Cowen & Company. Your line is open.

Great, thanks for taking my questions. Obviously, most of them have been asked already. But there's a couple of things I just wanted to drill down. In particular, I just noticed that the European study is I think now listed as 107 million pounds of capacity. And I believe it was 130 before, so I was wondering if you could just address the capacity shift there. Is that a function of what you think you can secure as far as feedstock is concerned, there's a demand to just picking the Ironton design over a cluster facility, is there a specific site constraint?

To be honest with you, the decision between 107 and 130 is still, let's say, yet to be made. We have the capability to deploy both technologies. Ultimately, it's going to come down to a decision between available feedstock that we can process as well as speed, if we get enough feedstock contracted to support a 130 million pound plant, then we'll do it, but if we can get started with a 107 million pound plant then we may make that decision. I will remind you that when we made the decision to go from 107 to 130, we actually used quite a lot of the same design from the 107 and just altered it a little bit to push it to 130. So, it's feasible to say that we could make some small modifications later in the process in order to make the decision between 107 and 130.

Got it. Now that makes sense. And then maybe just sticking on the European market really, really quickly, but given the letter of no objection that you'd have with the FDA, do you dual track that when you submit to the European Food Safety Authority, or do you kind of wait for that official sign off and then kind of submit everything to have all kind of the technical data that you submitted to the FDA's letter?

Yes, I think from our standpoint, we're preparing to engage with EFSA, but we believe we'll have the best path forward with the FDA letter of no objection in hand. So, right now, we're working through a lot of preparation activities to begin the engagement, but have not begun the formal engagement.

I think that much of the information required to submit for the FDA is similar to the information that will be required for EFSA. And so, the work done once does not need to be redone. That's why we think that there's benefits in leveraging the FDA for EFSA.

Great. I appreciate the color there. And then the other thing is just to be a bit more granular on the two-thirds of the cap increase that's not associated with inflationary cost on construction. I would imagine that the majority of that's related to the feedstock, contaminant processing and not safety, but maybe I'm wrong it's not like adding more handrails to the facility. Are they linked to some way that I'm not appreciating?

There are really two distinct paths, and I would point out one key differentiation. When we talk about process safety, it relates to the reliability of the plant and the assurance that its operation will be safe and reliable over time. It is less concerned with occupational safety risks like handrails. The cost profile for that activity hasn't changed much. Regarding the two-thirds versus one-third, the two-thirds mainly relates to the expansion of feed processing activities, supplemented by process safety, while the one-third pertains to material cost increases across the overall plant. Some suppliers have informed us that they cannot deliver equipment at the originally quoted price due to higher material costs than the final product price. We need to decide whether to find someone else to fulfill the order or adjust our pricing for the equipment to maintain the timeline.

It makes sense. And just maybe the final one, so, since you had highlighted kind of 1Q 2022 as a key financing window and with the pipelines in Augusta supported by like that three debt draws. Is there a specific amount of travel that you kind of need to secure in that timeframe against those long-lead time items, or is this really still TBD based on some of the engineering work that still has to happen in that location?

Yes. So, I would say that with respect to when the capital needs to be deployed, we really didn't speak in too much detail around the key supplier relationships here. But the reality is that when you look at the curve for spending across the plant and then you dissect that down to a curve for spending across each piece of equipment, you recognize that not a lot of capital needs to be deployed immediately. Most of the work that gets done at this stage in the game is detailed engineering. We can progress the timeline before we have the final financing, because it's a relatively low amount of capital required to do so. That said, we need to secure financing in the Q1 window, but by not having the financing today does not mean that we are slowing down on the Augusta build at all.

Right now, I appreciate the call. That was it for me.

And your next question will come from Barry Haimes with Sage Asset Management.

Thank you very much. I have a question regarding the scaling up process. As you work through the build process in Ironton, how many different key processes are involved? Will you be able to validate some of these as you progress, or is it more of a situation where you finish everything and then see if it works? I would appreciate any insights on how you approach validating the different processes and how much of that can be done before the final completion date. Thank you.

I believe the initial distinction in the processing involves the preparation and purification stages. The preparation activities in Ironton are set to commence in the second quarter of next year. This will serve as the first validation of the equipment we've acquired for preparing the feed for purification. We should quickly assess how well the preprocessing areas are functioning throughout 2022. This approach minimizes the operational risk associated with skill development by the time the purification plant is operational. Once construction of the purification plant is completed, we will conduct essential mechanical commissioning tests, including verifying that valves are functioning correctly, ensuring proper wiring, and passing pressure tests. Subsequently, a series of process commissioning steps will begin, which will involve processing virgin polypropylene to confirm proper flow through the plant. Over the commissioning process, we will gradually incorporate various levels of fully recycled material to test the overall operation. This is the clearest way to address that question.

Great, thanks. I appreciate the color.

Excuse me, speakers. I'm seeing no further questions at this time. You may continue.

Thank you all for joining today's call, and we look forward to updating you on our upcoming milestones.