PureCycle Technologies, Inc. (PCT) Q3 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the PureCycle Technologies Third Quarter 2022 Corporate Update. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to your host, Charlie Place. You may begin.

Thank you, Kevin and welcome to PureCycle Technologies third quarter 2022 corporate update conference call, coming to you from Orlando, Florida. As you may be aware, we had a Hurricane pass through here, early this morning, and while the worst of it has passed, if we lose power on this call, we will be calling back in and appreciate your patience. I am Charlie Place, Director of Investor Relations for PureCycle and joining me on the call today are Dustin Olson, our Chief Executive Officer; and Larry Somma, our Chief Financial Officer. This morning, we will be highlighting our corporate developments for the third quarter. This presentation we will – that we will be going through on this call can also be found on the Investor Relations page of our website at 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. These 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 2022 corporate update press release and in our filed quarterly report on Form 10-Q, filed yesterday, as well as our other reports on file with the SEC that provides 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 preliminary non-GAAP estimates and are subject to risks and uncertainties, including among others changes in connection with quarter-end and year-end adjustments. Any variation between the PCT’s actual results and the preliminary financial data set forth herein may be material. You are 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 are excited to share updates from the previous quarter with you. I will now turn it over to Dustin Olson, PureCycle's Chief Executive Officer. Dustin?

Thanks, Charlie. Good morning everyone. Thank you for joining our call today. I’m pleased to share with you the significant progress we’ve made at PureCycle since our last corporate update in August. But before we start, I want to share a bit of a reminder of our history and our mission. In 2012, Procter & Gamble invested in the new future. They looked around the sustainability ecosystem and they recognized that existing technologies would just not meet their global ambitions. So, they invented something new. In late 2015, PureCycle was founded and we started to scale this innovative idea. We made our first pellets of the feedstock evaluation unit in 2019 and now we're moments away from our commercial scale pellet production. So, why are we doing this? We have to remember. Every year approximately 850 billion pounds of plastic and 170 billion pounds of polypropylene are globally produced from fossil fuels. Every year approximately 16 billion of polypropylene is produced in the U.S., and every year less than 5% of polypropylene is recycled. Every year, people work really hard to meet their brand goals and every year our world falls short, and another 150 billion pound polypropylene opportunity slips away. It's easy to forget the core mission of PureCycle or why we are chasing this new future, but we need to remember who PureCycle is and why our company is so special. The world wants circularity. The world wants a new and real plastic solution and PureCycle is positioned to change the paradigm, and deliver a technical solution that the world so desperately needs. After a decade of R&D and seven years of scaling efforts, we're almost there. PureCycle's first commercial plant will be in Ironton. We will be domestically scaling in Augusta and we will start our global scaling in South Korea. We've built the right team, the right infrastructure and the right systems to scale our solution. Please move to Slide 4. Our flagship facility in Ironton, Ohio remains essentially on schedule with mechanical completion of pellet production now expected in the first quarter of 2023. The slight delay in construction is not unique to us and we believe we’ll have no impact on our nine-month ramp up timeline for Augusta operations as we previously discussed. We continue to work on Phase 1 ne of our Augusta project through lead times for delivery of certain critical equipment have increased. And while our debt financing is taking longer to close, given the current market conditions, we've generated substantial options designed to minimize our overall cost of capital. As a result, we now anticipate purification lines one and two in Augusta to be mechanically complete and begin ramp up of operations in the second half of 2024. In October, we signed a joint venture agreement with SK Geocentric for the construction of the purification facility in Ulsan, South Korea, representing our first non-U.S. facility and a key milestone in our global expansion strategy. This agreement is much more than just capacity. It represents trust in our core technology, a gateway into Asia and a deep technical bench. Our Ironton Feed PreP facility is in the final commissioning phase and beginning to process feedstock. I can tell you that our team was very excited to watch the first feedstock bail worked through the process and flow into our feedstock silos in Ironton. This is a big scaling step for our team. There's still more work to do, but a motivational step for our team nonetheless. As previously disclosed, an original pre-SPAC counterparty, which was contracted for both feedstock supply and offtake sought termination obligations. We disagree with the reasoning provided. We are now actively working to address their actions. We are in final negotiations for replacement contracts and will adapt pricing mechanisms that better reflect the market dynamics and create greater stability to PureCycle's economics. For Augusta, we continue to engineer our final PreP operations and are adjusting operational timelines for the three East Coast PreP facilities to match the new timeline for purification startup. We're very excited with how this operational design is coming together. It will create a foundational Eastern seaboard network for plastic waste collection and sortation. We continue to work to resolve the issues related to the Central Florida location. And while we're disappointed with some of the local government actions, we believe the overall impact to our PreP strategy is minimal. The volume is not needed until 2023 and we are working numerous solutions that are not material to the overall company or project economics. We continue to successfully execute our feedstock acquisition strategy. Both Ironton and Augusta lines 1 and 2 have feedstock LOIs sufficient to run at nameplate capacity, representing more than 408 million pounds of feedstock annually in aggregate. Our team continues to hold active discussions with feedstock sources to build a pipeline of supply to support our additional purification lines in Augusta. I'm very proud to report that our commercial sales team signed contracts, representing 106 million pounds of offtake since our last corporate update and that both Ironton and Augusta lines 1 to 2 offtake are now sold out. Additionally, we announced a new 100% recycled polypropylene concentrate developed in partnership with Milliken & Company. We continue to advance our feedstock in Europe, offtake and site selections and hope to be able to share with you more specifics during our next call. Despite very challenging market conditions since our last update, our finance team is still targeting completion of financing to fund Augusta project by year-end. We've allocated $168 million for the Augusta project to support the project execution with expectations for starting up operations in mid-2024. We ended the quarter with $416 million in total cash and investments. Moving to Slide 5. While the majority of our activities are focused on completing Ironton and Augusta, we continue to pursue opportunities to scale our technology globally. As previously mentioned, current market conditions have pushed back the development timeline by a couple of weeks in Ironton and approximately three to six months for future developments. We remain committed to financing activities to fund Phase 2 construction in Augusta, representing lines three and four, our South Korean facility and our European facility, all of which are currently expected to start-up and ramp the full operations in mid-2025. However, we will spend the time required to ensure the project is designed for process and cost efficiencies. Slide six is a fun slide for us. Every time we visit, Ironton, it's different, it's changed. It keeps looking more and more like a real facility every day. And for anyone that's ever completed a major capital project, you can appreciate how it feels when you get close to startup. And you could see how far we've come since 2021. As the final pieces of our modular construction are being put in place, it's very clear that our construction teams are zeroed in on completing this project. As you see, we are fast approaching the final steps of the Ironton project construction phase. We expect mechanical completion and initial pellet production in the first quarter of 2023. Slide 7 shows the details of the final construction activities. And despite delays in the delivery of a couple of pieces of equipment, all 26 modules have been delivered and lifted it into place. Our Feedstock PreP operations are in commissioning and beginning to process feedstock. The central utilities are [functionally mechanically complete] [ph] and near final commissioning, the control room, offtake and rail operations are expected to be mechanically complete by the end of November and purification and co products are expected to be mechanically complete in Q1 of 2023. Mechanical completion will be dependent on the final extruder delivery timeline. Our entire team is very proud of this achievement given the construction market headwinds we experienced in 2022, including the war in Ukraine, COVID-19 in Germany, supply chain issues, and more recently low water levels in the Mississippi River, impacting some of the module deliveries. By all external markets, however, it appears that our project schedule is outperforming other industry projects. PureCycle and its contracting partners are working relentlessly to reach mechanical completion, as soon as possible. We remain on track to reach full operating capacity during the nine month ramp up timeline that we've discussed previously. Slide 8 is an explanatory slide. Every month, we post a construction monitoring report prepared by an independent engineer retained by Ironton bondholders to track the construction progress at Ironton. They independently report on all the critical aspects of the project, including cost and schedule, and in the end publish a date for final project performance test. The September report showed a delay to March 3, 2023. This delay was due to the headwinds that I just mentioned, the Ukraine, COVID, supply chain and water levels in Mississippi. However, we want to be very clear about when our project will begin generating first pellets. For the last several quarters, I have referenced pellets by the end of 2022. While this statement has shifted two to four weeks or into early January, it's still the same premise. The difference between first pellets in January and the final performance test in March is the operational commissioning phase for the plant. After mechanical completion, but before the performance test on March 3, we will be testing multiple feed sources at various conditions to validate unit operations. Once completed, we will perform our five-day 100% capacity test. During that time, we will be making pellets and selling those pellets to our offtake partners. Our initial commissioning plan outpaces our nine-month ramp and therefore, we remain confident that PureCycle will be operating at full capacity by the fourth quarter of 2023. Moving to Slide 9. During the third quarter, we continued Phase 1 engineering and construction activities at our first multiline facility in Augusta. However, due to tightening capital markets and expanding lead times of delivery equipment, we're now anticipating mechanical completion start-up and full commissioning in the second half of 2024, based on complete financing by year-end. We have also adjusted the timeline for start-up operations of our three East Coast facilities to align with the new Augusta Phase 1 construction schedule. Despite the temporary delay in our Augusta Phase 1 development timeline, we continue to work with the AEDA on our construction timing and with our partners to pursue all opportunities to improve equipment delivery timelines, manage construction cost, and improve construction efficiencies to complete this project in mid-24. On Slide 7, with respect to the core project fundamentals, I'm pleased to share with you that Augusta purification lines one and two have fully committed feedstock volumes at offtake capacity. Signed feedstock LOIs of 301 million pounds represents an excess supply of approximately 7.5% and offtake contracts for 289 million pounds per year, a 106 pound increase since our last update represents excess demand of around 11%. This once again represents the strength of our technology both in terms of feedstock conversion capability and superior final pellet quality. On Slide 11, as mentioned earlier, in the presentation, we entered into a definitive joint venture agreement with SK Geocentric for the development of the Purification Facility in Ulsan, South Korea. Construction is expected to commence in the third quarter of 2023 with startup operations expected to begin in the second quarter of 2025. This JV is an important first step in our global expansion strategy. As mentioned before, this project represents much more than just capacity. It represents a gateway to Asia, a strong technical partnership and trust in one another. We couldn't be more proud of this relationship with SK Geocentric. Additionally, we continue to work on the structure for an agreement with Mitsui and evaluate potential site selections for our purification facility in Japan. Progress continues on our European expansion plans. We have narrowed down our site selection options, are developing an engineering procurement plan, and have added to our operations team. We hope to have an announcement regarding the European site selection by our next corporate update call. Ironton is an important start for our company, but it's just the beginning. The PureCycle team is energized and focused on executing its global expansion strategy and taking advantage of the market leading technology to address the global challenge for plastic pollution. At this point, I will now turn it over to our CFO, Larry Somma, for the financial update.

Thank you, Dustin. Before I discuss our current liquidity and third quarter balance sheet, I want to provide a brief update on our financing process. What should be a surprise to nobody? It has been a very challenging market to raise debt capital since our last update three months ago. Despite the market, we are encouraged by the meaningful interest and positive feedback we have received during our investor interactions. At this stage, we have a number of options that are being evaluated that give us confidence in our ability to raise the necessary capital to fund Phase 1 of our multi-line development in Augusta and three East Coast PreP facilities, which will help bridge us to delivering Ironton revenue and operating profitability. Nevertheless, we are working diligently to not only raise the funds by year-end, but to do it in a way where we have financial flexibility and optionality with regards to our post revenue future. So, now let's go to Slide 12. We ended the quarter with just over $416 million in total available liquidity. During the quarter, we continue to make significant investments in our Ironton, Augusta, and PreP facilities, the majority of which came from unrestricted assets. Cash and debt securities available for sale decreased from June by 134.8 million. We transferred 95.8 million into an Augusta Construction Escrow account and drew 27.4 million for pre-engineering and long lead equipment purchases. Augusta Purification and PreP investments accounted for 14 million of third quarter investments. Our corporate and pre-operational employee expenses were $7.6 million during the third quarter. We also used 5.4 million of cash during the quarter for normal corporate operations such as insurance, professional fees, and various other expenses. Now, let me comment on the cash invested in the Ironton plant, as we are nearing mechanical completion. Previously, we had disclosed that we expected the project to be $55 million to $65 million over the initial budget. At this time, we are anticipate it will require an additional $8 million to $10 million to finish the project resulted in an expected final budget of $315 million to $317 million. These additional project expenses are funded from our unrestricted cash and we spent about 5.2 million this quarter. Additionally, for the bond agreement, we are required to maintain a certain level of reserves, so we transferred 6.8 million from unrestricted cash to other required reserves. We also made payments of 41.2 million, directly from our project fund for construction progress payments. Now, let's turn to Slide 13. As we approached commercial scale operations, we wanted to share how we have enhanced our business strategy to not only grow, but to stabilize the profitability of our operations. With the introduction of feedstock plus offtake contracts, PureCycle operating profitability is stronger and more stable relative to Pre-SPAC forecasts, regardless of the economic environment for business cycle. This combined with our PreP strategy provides greater economic and feedstock certainty. Additionally, our vertically integrated operations is designed to provide feedstock volume security at a time when the feed ecosystem is developing. It is also important to point out that low feed cost environments weed-out competition and sortation investment, but PureCycle is protected from this due to our purification expected to enjoy higher profits in that scenario. This should translate to a more stable PureCycle operating business plan. Let's turn to our final slide, Slide 14. This quarter, we continue to build operational momentum in a number of key areas. Ironton is on track for mechanical completion and pellet production in the first quarter of 2023. We had strong growth in offtake contracts with Augusta offtake now oversubscribed. Ironton PreP facility is beginning to process feedstock. Augusta feedstock supply for lines 1 and 2 had 107% needed for nameplate capacity. We executed a JVA with SK geo centric. We have financing options with a plan to fund the Augusta project by year-end. We announced the first fully sustainable PP concentrate developed with Milliken & Company. We ended the third quarter with $416 million in total cash and investments. We look forward to updating the market with respect to upcoming milestones achieved in completing our flagship Ironton facility and the Augusta financing process, as soon as we are able. As Dustin noted, we also believe that we will be able to discuss the European site as soon as we are able. Thank you for joining us on the call today and we'll now open the call to questions.

[Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer. Your line is open.

Good morning. Thanks for taking the question. Maybe we could start with the commentary around the supplier feedstock and offtaker that development, think to the extent that you could give us further detail. One is it possible to mention how much offtake you need to basically backfill here? Two, is it fair to assume that that may actually have more attractive contracting terms now that you transition at feedstock plus? And three, kind of similar question on the feedstock side. How much feedstock do you need to supplement to basically make up for this development?

Yes. Thanks a lot, Noah. Good to talk to you again. Yes, from, let's say, quantum of how much feedstock and how much offtake is included in that contract? I believe the feedstock is 40 million pounds per year and the offtake is around 15 million pounds per year. And then regarding the terms, if you recall back when these projects was first put together, it was really built before the market had started to develop around the recycle feedstock streams. I mean, number five wasn't even traded very well back when these contracts were put together. And so, since then in some regards the contracts have become a bit stale. And so on the feedstock side, we will be referencing back to a number five bale price, which is different than the original contract. And then on the offtake side, we will be linking it to a feedstock plus mechanism that we've discussed previously. And so, from our perspective, what this does is helps to create quite a bit of stability to the overall economics for Ironton and really updates the Ironton economics to more current market conditions. We've done a really good job over the last year and a half, two years of building the momentum for both Augusta lines 1 and 2. And so, the discussions that we've had across a market both on feedstock and on offtake. They've helped us grow our understanding of the overall ecosystem and prepare opportunities to pull that in. So, for us, it was pivoting to a new feedstock supplier and a new offtaker, but we didn't have to go very far because we could look inside of our current, let's say relationship base to pull on that to close those contracts.

Right. That makes sense and thanks. And what can you share about – if possible for the reason for the division there? Anything to do with commercial applicability or technical specs? I do see in the Q that you received some further positive news on the FDA LNO. So, I assume it's not that. What could you help us understand about that development?

Yes. I mean, it's hard for us to jump in the shoes of our counterparty to understand where they were. We were having quite a few conversations about restructuring the deal to make it more current with the market. And for whatever reason, they've chosen to go a different direction. For us, it's fine. I mean, we have options and we have the ability bring more stability in to the overall project by doing this. So, we're – I don't want to really speculate on why they've made the decisions that they have.

Okay. That's helpful. And then just in terms of actually getting Ironton up and running, so it sounds like you're basically waiting for some extruders that's kind of the critical path and there are some delays in delivery of those. Is that solely due to just with freight logistics and things of that nature? I mean, are the [indiscernible] equipment finished and just in transport or are they still to be made?

Noah, are you there?

Yes, I'm here. Can you hear me?

Okay. Well, look, yes. We can hear you now. It looks like we just got the Hurricane business, because our Wi-Fi dropped, but we had a backup phone here. So, let me go ahead and finish and probably pass it to you for another question. Look, I don't want to jump into why, they've chosen to go a different direction, but we're okay with it and we're confident that we'll be able to replace it without any impact in the business.

Okay, great. Thanks. I hope everyone there is safe. Yes, then my follow-up question was really around getting Ironton up and running. It sounded like the critical path here is some extruder equipment. So, are there, sort of delays there really just around, sort of freight and delivery, are the pieces of equipment made and now they're going to be shipped or something?

Yes, I mean, yes, to be very specific, Noah, we have equipment that is being built in Germany. And if you look at the COVID outbreak statistics for Germany, what happened in early October is that there was a spike And that spike in early October, it really impacted the overall supply chain for finishing that one piece of equipment. And so that delayed things. Pretty substantially actually, but we've worked with our partner to pull that schedule in, but that is still the critical path. That's really what we're trying to say with the slide that has the boxes drawn around the different pieces of the plant. The plant looks like a plant, the plant is coming together. Most of the plant is in commissioning, but there is basically one piece of equipment that will be critical path. And as that comes in and we get it piped up and commissioned, then we'll start up the rest of the plan. So, it's nothing more to see there than that. That's the full story.

Super helpful. I'll pass it on to others.

Okay. Thanks, Noah.

One moment for our next question. Our next question comes from Hassan Ahmed with Alembic Global.

Good morning, guys. I was just wondering, you obviously gave us details around, sort of the ramp up time. Nine months seems a bit long to me, right? Looking at sort of how commissioning happens other facilities and the like and a ramp up thereafter. Why – and I completely appreciate the fact that it's the first facility and things may, sort of be a little unpredictable. But again, I mean, why are you guys forecasting a nine month ramp up?

Well, look, thanks a lot for the question, Hassan. Let me speak to the process for commissioning to start. When we become mechanically complete and we let's say start – starting up the plants, we have several different feedstocks that we're going to test at the beginning. We'll actually start with a virgin type material to test flow through the plant. And then we'll start with – we'll move to a feedstock number one, and then a feedstock number two. And our final commissioning tests will be done with a blended feedstock 1 and 2. And that takes us to the March third timeline. And as we run through feedstock 1 and feedstock 2, we'll actually be commissioning at like 50% rates and then 100% rates and then feedstock to 50% rates and 100% rates. And so that really tries to describe the dark blue bars on that graph, because there's lots of different components of the operation that we need to road test to make sure that it's going to work properly. And as you indicated, we're sure there are going to be some hiccups, there are going to be some trips and we'll have to work through those to get going again. The nine month ramp is very honestly an original assumption made in the Pre-SPAC Ironton project days that we've held on to, okay. The reality is that we know it will take some time to ramp up supply to our customers so they can integrate it into their application base. We also know it's going to take some times to ramp up the feedstock supply to the plant. That's not to say it's not there. It's just to say that to get the trucks moving and get them routine and to get the operation reliable, it's going to take time. And so when we talk about the nine month ramp, we've really referenced three items. We referenced the technical startup to work through all of those details to make sure it works properly. And then we also referenced the feedstock supply chain and the offtake supply chain. So, your question is insightful because effectively what we're saying is that in March, holding the schedule that we indicated today, we will be running the plant at 100% rate for five days. We have the opportunity to outperform the nine-month ramp. So, even when we talk about the two to four-week delay and the Ironton mechanical completion that's due to the stuff in Germany, quite frankly, we still have the opportunity to outperform from a volume of material perspective and therefore revenue and therefore EBITDA. We have an opportunity to outperform the nine-month ramp, but we're just holding the nine-month ramp because that's what we've said at the beginning and until we prove otherwise we'll stick to that.

Understood. Very helpful. And just in terms of feedstock, obviously, lots of noise around the inflationary environment that we're going through and the like, affecting all aspects. So, as you guys are out there sourcing and contracting, sort of feedstock for your future projects, what sort of price or contracts are you, sort of settling nowadays?

So, what's happened since the Ironton project three or four years ago is that the number 5 bale price market is now available, okay? It's an actively traded number. It's available for people to reference. And so many of the contracts that we reference are tied to that. As a result of that and we pivot that with the offtake agreements at our feedstock plus, so we effectively hedge the risk of feedstock up and down, okay. However, remember, our technology can do with feed, what others cannot do with feed, okay. So, in many cases, the feed that cannot be sold into the number 5 bale market is sold at a discount to number 5. It's sold at a discount to number 5, okay. And so, that gives us a differential opportunity to buy below market for some of the LOIs we have in the Augusta project.

Understood. Thank you so much.

Thanks, Hassan.

One moment for our next question. Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

Hi, Dustin. Hi, Larry.

Hi Eric.

Good morning. So, maybe just on Augusta, can you just talk about I mean obviously you're confident in the financing outlook the ability to get something done by the end of the year, but maybe just talk about the conversations you've been having with AEDA. Are they constructive here? And I mean what – is there any leeway in that end of year. I mean, if you were not able to hit that just given challenges in bond markets right now, just curious how that would – how things might play out in that scenario?

Yes. Look, I think that we've had very constructive discussions with the AEDA. I mean, they've been a really strong partner with us all the way through. I mean, look, they're in a position just like us where we are working hard to get the Augusta project going and they're very excited to have us come into the park to go. Having said that, they want to see the project move. And while we've spent quite a bit of money on this project already, the reality is that in the field in Augusta because most of its modular, most of its weighting on equipment deliveries, they haven't seen anything out there yet, okay. So, we are working with them to explain the timeline and the options that we have available to finance the facility. With respect to the impact, I mean, like the real impact is, if we are not able to get financing by the end of the year, then the AEDA could pull the land and allocate it to someone else, but the reality is, that they recognize how difficult the financing market is for all projects in the market today. And there's probably not a long line of people that are lining up to take that facility. So, while there is some risk that the land discussions could get more complicated at the beginning of the year, I think the practical matter is that that's going to be mitigated consistent with the capital markets that we see. So, that's how it answers.

Yes. Hey, Eric. I'll add one other thing. We have met, Dustin and I face to face with the AEDA. It's a pretty large group of people. There are two people on that committee that are former or current bankers. So they get it. I think as Dustin alluded, there's as much concern on their side that we may walk from them because all of the investment we've made, which is north of 100 million is in modular design, we've not done anything on the site yet. And so, look, we don't know where it's going to come out. We referenced the fact that we have optionality to raise capital. So, that's a very good thing. But most important is that we'll talk to them and meet them face to face and continue to work through the discussions to make sure that we're both comfortable with the position that we're each in.

Got it. It's helpful.

Yes, it's also probably important to note that we haven't spent significant capital for the land. I mean, this is effectively a lease back to us. So, it's not like we've spent millions of dollars to procure the land to hold it for us. This is a partnership where we will lease back the land from them for a period of time and then buy it back from them after several years down the road. So, there's not a big CapEx risk out there on the Augusta land.

Got you. Okay. Perfect. Well then maybe just turning to Ironton. So, it sounds like high confidence in being able to replace the offtake there and actually can make a case that it would be to your benefit, but just want to confirm, I mean, is this, kind of ring fenced? I mean, want to confirm, does this do anything trigger any ability of bondholders to call the bonds? I mean anything like that? Or is this really, it's kind of a one-off, it's ring fenced and you think you can replace it?

Well, so, I mean there's a technical answer and then there's a realistic answer. I mean, the technical answer is it could trigger several items with the trustee and the bondholders, but the reality is it's not to their benefit for that to happen and we're in discussions with them. The other technical piece is that we've had discussions with the bondholders and fixing this or replacing this contract is really a transactional item at this moment, okay. We have two contracts, one for feedstock and one for offtake that will replace the counterparty that is leaving. and that is in process now with the trustees and with the bondholders for replacement. And we're just waiting for some of the administrative and technical details to work through the system. Most of this likely would have been resolved by now, but actually the bondholders have engaged a new legal firm and they're getting up to speed with the whole system. And so, we're caught a little bit now and a bit of a time, kind of bubble where we have to wait for them to get to speed before we can solve it. But from a ring fence perspective, we're pretty happy with the replacements that we have in play for this contract. We think it's going to add a lot of stability to the business.

Eric, I wanted to also add a couple of things. As Dustin mentioned, we had a call with the bondholders when this took place because we wanted to address it. The feedback from the bondholders and in aggregate was, hey, when can we get out see the site. You guys haven't invited us out in a long time. So, look, there is no event of default here, if there is a cure period, we're working on it, as Dustin said, we have contracts and we've invited the bondholders, it's going to be a site tour end of November for any of the bondholders that want to come, including the individual that expressed high level of interest. So, it's really – it's an event, but one that we're very comfortable with and one that we are certain or feel highly confident that this will be behind us in the next few weeks, because as Dustin said, we've got contracts that replace. And remember, as we built the Ironton project and also as we're building the Augusta project, we're oversubscribed on feed and offtake for both, okay. So, this isn't a zero sum game. We've got some float in the overall feedstock and offtake agreements for both facilities. And so, the risk of losing one counterparty, quite frankly, is not a concern for us. Yes. And I have one more point to add that I didn't before. If you put yourself into the shoes of the bondholders I said, they want to see the site. This is a highly, highly collateralized position that they're in. There's no way even in the worst case scenario that these guys would really want to take the asset because the best operator is us and we've got the cure to the issue to replace the situation we have.

Right. And the cure that potentially is quite near term.

No, it's very near-term. We are in final negotiations for the two contracts. It's just a matter of transactionally working it through.

Okay. That is great color. Thank you.

One moment for our next question. Our next question comes from Gerry Sweeney with ROTH. Your line is open.

Good morning. Dustin and Larry, thanks for taking my call.

Thanks, Gerry. Just a question on the project financing side, obviously, you're coming down. I mean, it sounds as though you're trying to target this by the end of the year, but are you still going for the original amount or is there some options for maybe doing a smaller facility and you get Ironton up and running and then obviously it significantly de-risks the project and maybe go for a tranche to just curious if anything has changed on that front?

Yes. I mean, it's a great question. This process has been ongoing. We talked about it a quarter ago. So, this isn't that, hey, we need to start over. It's we need to finish it. I referenced the fact that we have optionality. In the event we don't raise what we originally thought, Could we pivot absolutely. And that's why we have many options. Dustin and I probably have no less than five to seven scenarios that also have scenarios under each of them. So yes, we're landscaping everything – canvassing the landscape to see what all those options are. And you bring up a great point, right? Because some of this hinges on the AEDA and the discussion that we'll have with them, we know for fact that once we get to the other side of Ironton and there's pellet production, that we will have access to not only a deeper set of capital, but a cheaper set of capital. So, we want to make the best decisions too. So, our discussions with the AEDA are constructive and we're going to do the best thing we can for total cost of capital to be able to maintain financial flexibility and optionality.

Could you just take an option out on the land with the AEDA and pay a little bit money per se with the land option? It just to extend it. Is that also an option?

Yes, I think those are all part of the detailed discussions with the AEDA. The reality is, we've got a couple of meetings with them over the next month and a half to help illustrate to them what we're doing, how we're managing it to give them confidence that we've got the scenarios and the options that we've described. And so, I think, look, I think these types of discussions are definitely on the table.

Got it. There's options, there's a confidence that you'll be able to you get some middle ground at some point in the near future is what you're saying potentially.

Yes. And let's also be clear like the AEDA [land] [ph] is not oversubscribed. There's a wide swath of area out there. When you fly over it, there's basically one facility, kind of to the north of us, and another one that's coming pending finance to the south of us, but that's track one of many tracks in Augusta. So, we have pretty high confidence that, A, there's enough land available to do what we need to do, and also that we'll be able to work something out with them to extend this and keep moving forward. There's been no doubt that the AEDA is extremely excited to have us in their park. And so, this is just a timing item that we have to work through with them to get to the other side.

Got it, got it. This one maybe a little bit more for Larry, but you went through the cash position, restricted cash, I think 215 million to unrestricted. I've gotten a little bit of questions on how much is – that 215 million, how much is earmarked for either, you know, Ironton I know that we'll say [$75 million] [ph] expansion, some of – not expansion, but increased cost. Some of that I think comes later in the project, if not, in the next couple of months? And how much is earmarked for different events and over the next say 12 months and how much other excess cash do you have to run the business, etcetera?

Yes, I mean, it's a great question. And you're absolutely right. When we talk about the overruns in Ironton, those do need to come out of unrestricted cash, which comes out of the 215. So, of course, that's the first thing that we earmarked against that. We have done a really, really good job to look at our forward commitments to ensure that we can run-in the worst case scenario, as long as we can. So, we have a number of strategic initiatives going on. They are hinged to our ability to be able to raise the capital with respect to Augusta. And because of that, we're not committing to things that put us in a position that we don't have capital. Because the most important thing for us is to have the longest runway to run the business that give us maximum flexibility to do the right things, meaning maintain a flexible and as close as we can to optimal capital structure. It's being pre-revenues difficult, having technology risk because we don't have commercial scale is difficult, but I referenced in my remarks, the thing that's been overwhelming to Dustin and I is, sure, we don't have as many commitments as we wanted right now for the financing we were trying to raise, but look at the market, we're not unique, not even close. Nobody in our position is able to raise capital. What's overwhelming to us is the inordinate amount of people that love what we're trying to do, okay. And it's no secret. We talk to upwards of 100 different investors during this process. And one thing was common in all of those investors, just about every single one of them brought it to their investment committee because they did the underwriting, they did the business evaluation and they wanted to be part of this. When it goes to investment committee, out of their hands and unfortunately in this environment, those committees are pretty tough and it only takes one person on that committee to say no. And we know that for fact because the feedback we got was everybody on the investment committee approved it for one person. So, we don't look at this as we're doing anything wrong. We look at it as the environment, and trying to maintain maximum flexibility so that we can create the right capital structure for this organization for the long run.

Got it. I appreciate it. I'll jump back in line. Thanks.

One moment for our next question. Our next question comes from Brian Butler with Stifel. Your line is open.

Great. Can you guys hear me?

Yes, we got you loud and clear. Thanks.

Great. Thanks. I guess the first one on the cost, you kind of talk about where Ironton is going to come in. Maybe if you can give some color with that, getting an approach in completion, what you think Augusta now kind of the first two lines or the first line is going to cost? And also, I guess to follow that would be what gives you confidence is that a six month delay at this point is the right and that it's not maybe longer and it's really [end of 2024] [ph].

Yes, it's a good question. So, when we look at the Augusta project, the thing that's so exciting about Augusta is it gives us the capability to really scale into a cluster complex to where we can put multiple lines. I think we've referenced this before, but on the first 150 acres of that project, we can put eight individual lines and that gives us an incredible amount of business flexibility in terms of sorting feedstock and doing different things. So, that project is exciting because it's going to have scale. What comes with plant number one is, a utility plant that's more expensive for line one than it will be for line two. Roads, sewers, and infrastructure that's more expensive for line one than it is for line two. And so, we expect to see cost curve of this project to decrease substantially even with line two, okay? In addition to that, the Augusta project is not just purification. It's also an infrastructure build on the PreP side, okay. The reality is that there is lots of feed in the market and people are doing more and more sorting of that feed, but maybe not enough to support our growth. And so, the eastern seaboard PreP facility that we talk about building is really a collection and sortation facility to feed Augusta and we can grow into that over time. So, the infrastructure build plus the initial PreP facility build raises the cost per pound for the project on line one. In terms of dollars per pound of polypropylene produced on the CapEx side, I think that when we get into a runway post the first set of operations, when we just get into building a new line when we have new feed coming to us. I think we're still in the $1.50 to $2 per pound CapEx range for those lines. And then the infrastructure build with PreP and the other online one will raise that up a bit higher, okay. And so, I'm not really in a position yet to discuss, let's say, the cost of the infrastructure for Augusta at this point. A lot of that depends on how we ultimately finance and some options that we have with that, but we're actively pursuing opportunities to reduce line one on the infrastructure side and also looking at how we can reduce the CapEx for pound going forward.

Okay, great. And then on just the delay, the six months, is that – what's kind of behind that and again, gives you the confidence that that's the right kind of timeline delay? I mean, I'm guessing that's mostly, I mean tied to the financing, but is there anything else that's pushing that back or could push it back further?

Well, we are seeing some let's say, lead time issues with some piece of equipment, but remember, the majority of the long lead – well, I would say all of the first long lead equipment, okay. So, the longest lead equipment of this facility, it's purchased. That's referenced in the original upfront capital that we talked about for the Augusta project. It's purchased, it's in the pipeline. And so, the schedule risk from that tranche of equipment is pretty mitigated. The next tranche of lead items is what we're working on now and quite frankly we're just waiting to place the orders for that until we get the financing fully in place.

I mean, I think Dustin mentioned in his remarks or part of it is, but for a [long pole] [ph] in the tent for building this planned to the central utilities. We are working with a firm to do the central utility construction for us. So, we can't build our plant faster than the central utilities going in and the central utilities timeline is anywhere from 15 to kind 18, 19 months.

Okay. Good. And then on the financing, can you maybe just give a little update on, I guess, where financing in the debt market kind of stands versus, kind of original expectations on your cost of debt?

Well, we can, but we can't. We know it's going to be more expensive than we originally set out. If you look at the 10-year treasury, it's trading anywhere between, I guess, today, it's down about 20 basis points because of the inflation print, which is good, it’s at sub-4. When we started this process, the 10-year treasury was close to 2-ish. So, I can tell you that you got a 200 basis point increase in the cost from when we started our discussion, but one of the things that I've mentioned is the optionality and flexibility. So, while we know it's going to cost more, because of the market itself and because of the investors that we're talking to. The most important thing for us is optionality, and making sure that we don't put ourselves in a position where the cost is going to be prohibitive for a long period of time. Now, we're also lucky because as you understand our business model, we're highly profitable at the operating EBITDA margin line and because of that you can absorb more debt and be able to continue to have excess cash flow beyond that. So that gives us a lot of flexibility in our thinking as well. [Multiple Speakers] – others in this market can't do. So, our business model allows us to make decisions today that others could not.

All right. One last one if I could. On the supply issue with the [SG&A] [ph], is there any recourse for you guys for PureCycle to go back to them and as they terminate this contract, I guess, against those agreements?

Yes. Look, I appreciate the question. We're keenly aware of it, but I'm going to dodge the question and just keep that for later. We'd rather have the legal discussions stay in the legal sphere. But as we've noted, look, we disagree with the approach. We don't believe that we did anything wrong in this process, but we're going to let others solve that for us.

Okay, great. Thank you very much for taking the questions.

Yes, Brian, I was just going to say, the most important thing is our physician with the bond trustee and their counsel. And as Dustin alluded to, instead of fighting to complain that they did something wrong, we did something wrong. Look, all we're going to do is replace them and that's the quickest and best thing to do and it puts our new contracts at market, which is very helpful to us.

Great. Thank you.

One moment before next question. Our next question comes from Thomas Boyes with Cowen. Your line is open.

Appreciate it. Yes, most of my questions have been asked. I mean just a couple of one-offs. Around kind of that critical [passing item] [ph], is there two of them? Are they both executors? I know from reviewing some of the latest reports that there was a [knockout pot] [ph] that you guys are waiting on as well. I just wanted to make sure it's this in series or these are kind of two parallel critical process things?

Yes. I mean, there was a knockout pot that was a concern earlier in the project, but that's not the critical path on this project now. You can appreciate, I mean, there's multiple critical path lanes, right? You fix one and other one comes up, you're always working critical path. And so, the critical path at this point is the extruder coming out of Germany. And look, we're actively working it. At the end of the day, this plant is basically coming down to piping and some low voltage wiring that we have to finish to get it going. All the major equipment is in place except for the extruder. So, I think that that's really the last critical delivery that we're waiting on. But as soon as it's delivered, there is work that we have to do after it's delivered. And so, there's some carry on impacts, but all of that is built into the existing schedule.

Perfect. And then maybe just because of all the moving parts, could you talk maybe about the – just specifically the CapEx expectations that you might have for next year? Because I would imagine maybe they would be slightly lower before given the modified timeframe around some of the pre-cut facilities that are going to now better match, when Augusta will come on board, so does your views give [indiscernible] there?

Well, I mean, look, we have incredible interest to scale our technology, okay. We've got a joint venture agreement with SK that's definitive. And so, discussions about financing and CapEx spending will – we're already starting those discussions now and we'll build out formality in that process early next year and ultimately land on a CapEx plan. same thing for Europe. I mean we've got a really good plan brewing in Europe that will require a CapEx strategy as well. And so, look, we need to get through the Augusta initial set of financing, which will set the stage for the rest of what we want to do, but it's difficult to answer, let's say, what would the CapEx curve look like right now for the company until we have the Augusta financing in place, but rest assured that when this gets done, like the growth pipeline that we're talking about is real, okay? This is real. I mean with South Korea and with Europe, those are two real projects that are on deck and ready to go and we're building out the project now and we'll build out the CapEx forecast alongside that?

Yes, I'd also add. The single most important thing for us is to not let the desire to build a CapEx plan force us in a position that we're making commitments that precede our capital inflows, if you will. Sources and uses is the thing we think about every day. So, Dustin was exactly right. Once we get past the capital here, then we'll be able to give you a more definitive answer on what the capital will look like in 2023.

Got it. That makes perfect sense there. Another one is just, obviously, you could see progress on both the feedstock and offtakes for Augusta line one and two, in previous decks that you've had, you've highlighted some of the visibility that you have to additional feedstock and also to active customer discussions. I was just wondering if you had the opportunity to provide an update there?

I mean, the story hasn't changed on feedstock or offtake. On the feedstock side, we have a much lower energy footprint to a purifier product than other alternatives. So, from a variable cost perspective, we're advantaged. We have a much more fundamental process for cleaning the feedstock than what other processes do. And therefore, we can buy feed streams that other people can't touch and purify it, okay. On the flip side for offtake, I mean, brands are very interested in the product quality, okay. When you go to make a shampoo bottle, you have got to have consistency in the product. And so, everybody in the world wants to use sustainable products, but when they try to do that, let's say, the quality variability colors and odors in some cases, they move around. And that's very difficult for a converter to manage to go build the shampoo bottle the same way every single time. And so, our product because we remove the color, we remove the odor, because we do it at a lower cost point, it provides – quite frankly, it provides a product that's easier for the customers to deal with. On top of that, is our lifecycle analysis. We know that our lifecycle analysis is really good and quite frankly it's going to be even better at Augusta, okay. And so, brands care about that too. They want to know that the product that they're using is sustainable. That's the first check mark. They want to know that it's got a good carbon footprint because they're interested in that story for their brand as well. And then they want it to be easier for them with the converters. And quite frankly, this is where we win on the offtake side. We will provide a solution to the customers, that's just easier for them to deal with. They don't have to worry about it. It's easy to show the LCA is good. It's easy to show that it's sustainable and it's easy for them to deal with because we remove color and odor. And so, this is what – look, I mean, the Augusta project, obviously, we're a little bit delayed on the financing. It's going to come, we'll figure it out, and we'll get that project going. But at the end of the day, we've got an oversubscribed feedstock base and we have an oversubscribed offtake base and that should be turning heads because that will ultimately drive the economics of the site and also the growth for the platform and give the brands what they need to face the customers.

Yes, one other thing I'd add, Thomas. Dustin alluded to the European site. He didn't talk at all about the stuff that's going on behind the scenes with respect to building feedstock partnerships in Europe. It's really, really exciting. And again, we're not going to relay that today, but stay tuned on that because the partnerships we're building for Europe to be able to ensure that we have enough speed at economic goal values, etcetera, will really prove that we're doing something extremely unique.

Yes, let me tag onto that too. I think it's a great point by Larry. So, the reason we started this presentation with where are we now is just to remind everybody about the story, it's the same. Okay. It's the same story. We have a massive opportunity in the market from a value of our product. We have a differential aspect in the market with respect to what we can do with feedstock and the world needs it. And so, like all of the reasons that people have been excited about PureCycle in the past, they're still there. And quite frankly, we're getting a lot of traction with real partners across the globe, okay. So, you don't start talking about Europe until you start developing a feedstock plan. We've done that. You don't start talking to SK or get traction with SK until they value, recognize and understand and agree that the technology is sound and also have a feedstock and offtake plan. Okay. So, this concept of PureCycle in the market is real and real players in the market are taking note and they're lining up to partner with us for future growth. And so, look, we know we've got to get Ironton up and running. We're going to do that. We know that we've got to get Augusta financed, we're going to do that. But right behind all of those two temporal items, is a growth plan that is more than just PCT talking, it's partners that are lining up behind us to partner with us to develop something really special globally.

Got it. So, I think there's just an [indiscernible]. It just sounds like, looking last quarter of the 938 pounds of feedstock that we're in discussion gets bigger than that. We're of the 345 million pounds of early discussions for offtakes. It's bigger than that like everything has continued to accelerate. Is that a [indiscernible]?

Well, so let's go back to some fundamentals. Back in 2018, China was taking 10 billion pounds a year of feedstock into China from the world. And about half of that was coming from the U.S. And let's say, half of that was polypropylene. Okay. So, 2.5 billion to 3 billion of polypropylene was flowing to China. In 2018, they stopped it, it reversed and started going to landfills. So, there's a lot of volume out there even when you just look at the United States. The issue that we're solving with our infrastructure play as we got to go get it, we got to mine it out, we got to collect it, we got to bring it into the system so we can purify it. That same story is a copy paste model around the world. In Europe, there's a massive amount of plastic that goes to incineration that is called recycled. We can pull that out of incineration and we can purify that the better value proposition. In Asia, there's lots of feed in Asia. It's just not tapped yet and when people look at it, they say, okay, this is a great opportunity, but we want to do it with the right technology. When they look around the world for the technologies that seem to make the most sense in terms of LCA, value, consistency, quality, they come to peer cycle. And so, yes, I would agree with your point. Is it getting bigger? I think the answer is yes. As people learn more and more about what PureCycle is able to do, and as we demonstrate our capability to scale the technology, the floodgates are going to open for what we can do in the future. And so, yes, I think there's an enormous appetite for our product. There's an enormous volume of feed that's just out there ready for somebody to go get and purify, and I think that we're in a unique position to do it. And all of that becomes brighter for people, the closer we get to Ironton completion, Augusta financing, which is what we see in the market today.

Got it. Maybe just last one. For the just feedstock plus pricing, do you have a sense of, kind of what percentage of the committed offtake for lines one and two that covers, obviously, a couple of quarters ago you had a good scenario analysis and kind of the impact there?

Yes. In terms of Augusta lines one and two, it's approximately 80%. And it's also important to note, when it comes to Augusta, we are oversubscribed on offtake, but we are not over committed. Okay. We have min’s and max’s in the contract and the min is set at one level with the max at our option to the top level. Okay. So, we have a min of approximately 160 million to 170 million that we need to deliver on, and a max of around 300, 290, 300 something like that, okay. And so, what that's going to give us the flexibility to do is pivot our offtake to the customers that are ready for it and want it. Okay. And that are the most successful in developing applications that brands ultimately want. And so, we've got a lot of flexibility there in that piece. And like I said, the majority of it is at feedstock plus approximately 80%. It's also important to note that on the Ironton contract like we're flipping to a feedstock plus for the replacement. So, even in the Ironton contract situation, that reduces a substantial amount of risk to the overall Ironton project because now it's based on market pricing for number five bales, as well as feedstock plus pricing for the offtake.

Great. And I appreciate the insight. That was all the questions I had.

Thanks a lot.

I'm not showing any further questions at this time. I’ll turn the call back to Dustin for any closing remarks.

Yes. Look, I just want to say thanks to everybody for joining in on this call, but more importantly for being there with PureCycle along our path, okay. We are on the cusp of Ironton being complete and starting up this technology and that's been the discussion for the last six years. And so, we're almost there. So, hang with us a little longer, we'll get that plant up and running and we'll be able to show the world what PCT is really capable of. Thanks for joining and look forward to talking to you in the next couple of months.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.