This ad is not brand new, versions of it have circulated for a couple months now — but we know it’s about a private pre-IPO offering, so the price won’t have changed, and the ad is still hitting my inbox every day, so I’m going to take a look anyway.

What is it, you ask, as the cart precedes the horse? It’s a pitch from Teeka Tiwari for his Palm Beach Ventures newsletter (currently “discounted” to $2,295/yr), which recommends “pre-IPO” investments — essentially, that means he recommends the little companies who are trying to raise money from individual investors on crowdvesting platforms or through Reg. A offerings.

These are inherently extremely high risk, since there is typically no liquidity in those kinds of shares — once you buy, there’s no guarantee that you’ll ever be able to sell. They are a bet on the possibility that these tiny companies will use their initial funding to build up to become meaningful enough that they can go public or be purchased by a larger company, hopefully at prices above where you invested, which may provide the hoped-for “exit” for early investors. The use of that word “exit” when talking about venture capital and startup investments is not accidental — until the company finds the exit, your equity, whether it’s worth anything or not, is trapped.

But they’re also the stuff of daydreams for small investors, so you can see the appeal… and why we keep taking the bait. Everyone dreams of being an early angel investor or initial backer of a company that goes on to be the next PayPal or the next Facebook. Deep in our hearts, we all want to be Peter Thiel or Vinod Khosla or Bill Gurley… and because of the dramatic opening-up of early-stage investing by the JOBS Act a few years ago, there are more and more openings for small investors who aren’t “accredited” to buy a piece of startups… and more and more companies cropping up to facilitate those investments. Of course, these don’t tend to be the startups that are the most obviously appealing and scalable ideas — those get snapped up by the heavy-spending venture capital firms who are flush with cash and try to jump on anything that has the potential to become large — but never say never.

Teeka has pitched a few of these companies over the years, most recently Brazil Potash back in October, and these are almost always teased as URGENT special offers that you have to sign up for right away, before the deal is closed — but that’s mostly just marketing (if there’s no rush, it’s easy to put off the arduous task of pulling out your credit card). It look as though Brazil Potash’s offering is still open for new investors, more than six months later, it’s hard and time-consuming to raise $50 million if you’re pitching investors $5,000 or $10,000 at a time, sometimes these Reg. A offerings take years to fill up — or fail to ever gain enough traction and don’t raise nearly enough money to capitalize the company’s plans.

So what’s being touted this time?

There’s no transcript for this particular presentation, so forgive me if I misquote slightly, but he’s pitching a company that’s building a “new type of oil facility” that can produce oil without any drilling or fracking, at a cost of only 65 cents per barrel… and with the potential, he says, of producing more than a billion barrels, more than enough to offset the embargoed supply from Russia.

He includes a very out-of-context quote from someone who sounds official…

“revolution…”
“the potential is enormous” — Joshua Baca, Vice President American Chemistry Council

And part of the big impetus here is that Teeka says this is the rare venture deal where you can get in with JP Morgan — he says “a big piece of this heartland company” has already been bought by JPM’s private investment bank, and on the same terms offered to you today. JP Morgan is apparently the largest outside shareholder now.

They also say this is Palm Beach Venture’s first ever clean energy deal. And there’s a photo of the project, and a very brief quote from the “legendary oilman” CEO of the company:

“… we’ve done our testing, we’ve engineered the science.”

So this is some kind of project that they say has “Zero carbon footprint” and allows them to synthesize “clean” oil without ever drilling.

That quote from Joshua Baca about “the potential is enormous” is not an academic assessment from a society of chemists, the ACC is a lobbying group. That quote was from his testimony to Congress that urged lawmakers to push for advanced recycling technologies instead of punishing the chemical companies who are members of the American Chemistry Council with a “polluter pays” law that punishes them for pollution. And, of course, those recyclers are also represented by the ACC —
And mostly, that’s about plastic recycling, and the very many companies who have tried to come up with new and better ways to recycle plastic, including, in some cases, turning it back into some kind of fuel.

There have been quite a few companies promising a better plastic recycling solution over the years, with the most prominent probably being PureCycle Technologies (PCT), which went public through a SPAC merger and is building its first polypropylene recycling plant. Renewlogy promised to turn plastic garbage into diesel fuel, and became the poster child for a Reuters story about the failures and overpromising of the plastics recycling companies. That’s been a super-challenging business, with nobody really able to get past the challenges of collecting, cleaning and sorting enough of the right kind of plastic to make it worth the cost.

So that’s a roundabout way of getting to the company we’re being teased about today by Tiwari — it’s a recycling company. This time, though, the recycling is much different — and, frankly, quite a bit simpler. They’re talking about recycling those asphalt shingles that get torn off your house when the roof is replaced, turning them back into usable asphalt… and maybe even into oil, to a limited degree. The pitch here is for a private fundraising round by a company called Sky Quarry.

The photo of their initial project site, which is actually a small and very remote oil sands refinery in Utah that they plan to use to demonstrate the technology, even matches Teeka’s photo from the presentation, and they have a pretty good pitch about the value of reusing the bitumen in asphalt shingles (the refinery they bought is the former property of US Oil Sands, which never was able to make its oil project feasible, and went bankrupt several years ago). And yes, J.P. Morgan does own roughly 20% of the outstanding equity of the company.

I wouldn’t be much of a judge as to whether or not he’s a “legendary oilman”, but the founder and CEO, David Sealock, has raised a bunch of money for several different energy companies over the years, with the examples he gives in his bio indicating that he did a good job finding profitable “exits” for investors in those companies. His cofounder, Marcus Laun, is also an investing guy, an advisor to smaller companies who also seems focused on “exits,” so if you read between the lines they’re probably trying to build something they can sell. Before this, Sealock was most recently CEO of Petroteq, another hopeful oil sands operation in Utah.

There’s a “hard sell” presentation for Sky Harbour on the Equifund investing site that’s managing the offering, if you want the optimistic rundown of the opportunity. I expect that’s where Teeka Tiwari got most of his information.

The spiel is relatively appealing, though I confess that I have no knowledge of the construction trash business or how asphalt shingles are dealt with by companies right now — I assume they mostly just get trucked to landfills in the same dumpster as all the other job site debris. The pitch is that they will receive a fee from the haulers who dump off the shingles for recycling (instead of paying to dump them in a landfill), that this fee will cover most of the processing cost of the material (about $25/ton) using their proprietary ECOSolv process, and therefore all the asphalt or other bitumen products they can sell from the processing, including some oil, will be bottom-line profits for Sky Quarry. The Q&A with Sky Quarry’s investor relations folks at Equifund (click here and scroll down for that) indicates that they’re currently negotiating contracts that include a tipping fee of $45/ton, so perhaps the economics will improve in the future.

Is that a feasible business? It’s presented as nice, clean math, and roofers have to pay someone to take their debris so there’s at least some logic to it, but I confess to having no idea whether it works on a large enough scale. I would imagine that the largest challenge would be collection and sorting and efficiency, the same kinds of challenges that bedevil most recyling operations. Shingles are heavy, and I bet they’re rarely separated very well, or collected in one central place, unless local rules require that, and recycling anything heavy always has to be at least somewhat local — it seems very unlikely that any model would cover the cost of shipping used shingles any long distance to a processing plant unless that is somehow heavily subsidized. So you’d need a lot of these modular “recycling” plants in every region where you want to collect shingles, and you also need to convince the roofers to bring you shingles and efficiently sift out the nails and other trash that comes with a roof removal. The company says some landfills have already begun sorting waste asphalt shingles, so there may be a ready resources to use in scaling up, though what the cost of that might be, who knows (unlike a roofer, I assume a landfill isn’t going to pay Sky Quarry to take them).

Sky Quarry’s one location now is extremely remote, in the Uinta Basin of northeastern Utah, where the failed oil sands project was — so it may be a bargain that they bought this refinery at less than the replacement cost, but it doesn’t seem like it’s in the place where you’d want to put a recycling plant if you were starting from scratch. It looks like they’re about 100 miles from Arches National Park, and about a two-hour drive on mountain roads from Grand Junction, Colorado, which seems to be the closest population center (~60,000 people or so). There seem to be a couple landfills within 150 miles, but I have no idea what the local business might be like — they seem convinced that the addition of a new Uinta Basin Railway, which can connect to larger lines going through Salt Lake City, will make transportation to the refinery much more cost effective, though from what I can tell that still leaves ~100 miles of challenging road to the rail spur (the railway got final approval for construction this year, presumably it will take at least a couple years to build it).

So that’s the big picture. The market they’re trying to address, once they get their test refinery operating and can prove it up at scale, and try to expand to more geographic areas, is waste asphalt shingles — basically, the waste created by companies that make shingles (easy to collect, if you’re near the factory) and the old shingles that are torn off of roofs before a new roof is installed (harder to collect). Apparently that’s a pretty big part of the construction and demolition waste stream, and a lot of it ends up in landfills — from the Equityfund site:

“At the time of publishing, between 1 and 2 million tons of WAS are diverted each year from landfills….

“However, historical data shows between 10 – 13 million tons are piling up in landfills each year!

“And the cost to landfill these millions of tons of WAS (called the “tipping fee”) can range from the mid $40/ton to as high as $120/ton – or a national average of ~$90/ton…

“Some states have outright disposal bans and/or mandatory recycling ordinances for shingles. This means shingles must be shipped out of state to a qualified recycling center at additional cost.

“However, Sky Quarry has committed to underpricing the current market prices of tipping fees to make it an obviously better choice than the status quo.”

When I spent a few minutes looking into this, surprisingly enough, I learned that there’s actually quite a lot of shingle recycling going on already — here in New England there are some folks who specifically focus on recycling roofing materials, and I assume that is mostly going into hot mix asphalt, though I don’t know how prevalent local laws mandating shingle recycling might be. And of the list of a half dozen local shingle recycling locations that I found at ShingleRecycling.org led mostly to companies or services that no longer exist, so perhaps there’s some challenge to this particular business model.

Road asphalt is the easiest and most practical use for recycling shingles, and we use asphalt everywhere, there are hot mix asphalt plants in every region (again, it’s not the kind of thing you can ship long distances), so it ought to be simple — grind up the shingles, add them to hot asphalt plants, and it provides a slightly improved asphalt (a little more resilient, I guess because of the other ingredients in shingles — fiberglass or cellulose fibers and ceramic granules). That technology does not seem to be at all proprietary or unique, but the belief at Sky Quarry seems to be that they’ve developed a better, cleaner or more efficient way of processing this waste stream… and that they can also move beyond asphalt, using their refinery solution to turn some of those shingles back into bitumen or heavy oil, hopefully providing some low-cost fuel that they can sell for a larger profit.

The scale seems unlikely to be very large from any one shingle-recycling refinery. The math they provide indicates that recycled shingles can replace about 25% of the oil required in making hot asphalt, which averages out to one ton of recycled shingles replacing roughly 1.5 barrels of oil, but when it comes to actually refining the shingles further and using it for some source other than asphalt, using Sky Quarry’s “patented solution” and solvents (that’s what they call ECOSolv), I guess that would have to be proven out over time — they have, after all, not really done this outside of a lab environment, and they just bought that Utah refinery (with, incidentally, a small oil sands resource attached to it, should that ever be something they want to try to produce), about 18 months ago.

The idea is that Sky Quarry will build recycling facilities around the country, using their modular design, maybe at landfills or refinery locations, starting in the southern U.S. — they think they can build these for $8 million each, and run so efficiently that they will cover their construction costs within 18 months. I have no reason to doubt that, but it does sound like the kind of assertion that’s begging to be tested by a real-world environment.

They say their 3-5 year plan is to build out up to ten of these facilities, and they project roughly 30% net income margins immediately, which would mean they’d be profitable this year, making those projections look quite exciting as revenue goes from $10 million this year to $86 million in 2026. That number currently exists only in the Q&A section of the Equifund offering, as far as I can tell, it looks like the SEC made them take it out of last year’s investor pitch deck — a reminder that real offerings get a lot more scrutiny, even Reg. A offerings like this, than the SPAC mergers we all got so used to (almost all SPAC mergers of recent years were entirely dependent on five-year revenue projections to justify their valuations, but IPO filings generally can’t include financial projections).

The company had 32.7 million shares outstanding before launching this Reg A financing last September (it will either go for a year, or until they sell 15 million units… or until they change either of those terms), and if they are able to sell all 15 million units of the financing they will have 47.8 million shares outstanding, along with 15 million warrants, so that’s a market cap of something in the neighborhood of $60 million, not counting the potential warrant dilution.

The Equifund page indicates that they have $16.8 million “committed” to the deal already, so if that’s true and doesn’t include their previous capital raises, it’s possible they’re closing in on completing the offering, since the initial plan would raise $18.75 million. Each investment unit includes one share, at $1.25, and, as a sweetener, one warrant to buy another share for $2.50 within the next three years (not sure when the expiration date is for the warrants, presumably the three years clock starts after the full deal is closed, but it could be for the initial launch of the equity raise campaign last September).

That money is earmarked primarily for retrofitting their existing refinery and designing and building the prototype facility for asphalt shingle recycling, with another $2 million or so in startup costs and operating expenses, so even if they raise the full amount of cash they want they’ll likely run through it very quickly and be almost immediately dependent on the net income from this not-yet-built facility to fund any further expansion… which means, my inner skeptic tells me, that they’ll very likely be raising more money within a year or so, there’s not a lot of wiggle room in those estimates.

Equifund also includes a “third party” forecast and valuation analysis from Equidam valuation, which seems sufficiently optimistic and spreadsheet-generated that I would be tempted to ignore it completely.

Teeka also notes, to keep the enthusiasm high for pre-IPO investing, that the “Private market is booming, completely disconnected from the public markets” — with new unicorns created every single day, even with the stock market collapsing earlier this year.

That’s not true across the board, as I’m sure you’re aware — there are always appealing companies and projects that attract investent, but private companies are under some pressure these days as well.

Not-yet-public unicorns and private companies are not spending their cash in quite the same willy-nilly fashion these days, they’re getting a little fear — and that’s because private growth companies are sponges for capital, they need money, and money is getting tighter up and down the scale as the “guarantee” of a big IPO that makes everyone rich and repays all those venture investors has receded into the distance as the stock market has fallen. There’s a good Businessweek story on that just today called “Tech’s High-Flying startup Scene Gets a Crushing Reality Check,” in case you want to help yourself in resetting that “startups are what make you rich” thinking (the quote I like: “Companies don’t die because the product doesn’t work. They die because they run out of money.”)

It looks like Sky Quarry is closing in on raising enough capital to do their initial work in retrofitting their Utah refinery and getting it ready to accept waste asphalt shingles for recycling, so there’s some hope… but I confess that my skepticism about their ability to build this into a scalable and growing business that could reasonably expect to go public and grow meaningfully in value is fairly high. I suspect that investors here are really betting on this management team’s ability to quickly prove up the technology and sell it to someone bigger… building it into a really viable business, and particularly moving beyond this one refinery, may well take a lot more capital and patience.

And, of course, the final reminder: Investing in Reg A offerings and these kinds of pre-IPO deals is extremely high risk and illiquid — these kinds of startups are often aggressive in making the case for you to buy shares, but there is generally no way to sell your shares, unless things work out very well and the company is able to go public someday and get listed on an exchange. Companies raising funds in these situations might speculate, without precision, that they think they can go public in a year, or two years, or attract a buyer sooner than that, but at best they’re guessing, too, and there is nothing to stop them from sitting on your capital for much longer — or, of course, from spending all the money, failing to raise more capital, and quietly dying, as most companies do.

I don’t know the fate of Sky Quarry, of course, and I wish them the best of luck in their endeavors, I love the hopeful promises of recycling companies… but there’s a big difference between a mistake you can sell and a mistake you can’t sell. Always be doubly cautious with illiquid and private investments — a reasonable person knows to never risk anything on an equity investment that they can’t afford to lose… but with a private and illiquid investment, that’s more than just a small-print disclosure. It might even be the most likely outcome.

Don’t let me be too much of a wet blanket, though, if you delight in speculation. Take the risks you fancy, dream the daydreams that you wish, and believe in the managers who you think can really pull it off, or in the businesses that make sense to you — but always size those high-risk investments with that 100% loss in mind. Personally, if my typical investment in a stock was $25,000, for example, I’d limit a private Reg. A investment to about $500… unless I knew the management team well and was intimately involved in the operation, with as much of an understanding of the project as the Board of Directors. I try to think of these kinds of investments the way I would about investing in my dry cleaner, or a local gas station or restaurant — you might be stuck with the business, so you better like the people and be ready for patience.

Your opinion might vary, of course, that’s what makes a market — and with your money, you get to make the call. Interested in buying into Sky Quarry’s plan? See holes in the project that you think we should be aware of? Let us know with a comment below. Thanks for reading!