PureCycle’s (PCT) Failure To Launch
Introduction
The original management team and backers of PureCycle Technologies (PCT) have been obliterating shareholder capital since the early 2000s. They have taken six companies public, and shareholders have lost six times. Such a track record should preclude a seventh try, but a SPAC co-sponsored by Roth and Craig-Hallum infused PureCycle with $308 million in equity, in addition to the $730 million it had raised the year before. PureCycle then emerged in the public markets at a $2.8 billion valuation in 2021.
PureCycle’s mission is to commercialize a polypropylene recycling process developed by Proctor and Gamble and licensed to PureCycle for $2.5 million. The recycling problem is a hard problem to solve, what to do with the plastic that makes up Tic Tac and Starbucks cup lids, among many other things. PureCycle claims to have solved it.
Roughly speaking, this process involves taking recyclable plastic, melting it at high pressure and temperature, mixing it with butane (itself a very unstable gas and not exactly environmentally friendly), running it through a process, and then spitting out plastic pellets, which will work just as good as virgin plastic. PureCycle has signed 20 year run-off agreements for these pellets already. After $500 million in CAPEX and numerous delays, PCT finally declared it had begun commercial scale production at its Ironton, Ohio plant this June. However, the plant has been plagued with issues since.
Conversations with former employees revealed that they weren’t surprised, with one claiming that the plant was built “by a bunch of guys that build shopping malls and have no idea how to build a chemical processing plant,” and describing the state of the place when they showed up as “having backwards valves” and “pipes to nowhere.”
Its “closed-loop” process involves high levels of waste, the addition of virgin materials to a “100% recycled” product, and more toxic water and smog-forming air emissions than the production of “dirty” virgin pellets. The company’s own data even indicates that the Greenhouse Gas footprint of their product is essentially at par with traditional polypropylene production.
PureCycle didn’t tell anyone about the power outage for six weeks, during which insiders sold $13 million worth of stock and raised a $250 million convertible bond, while investors remained in the dark.
After a months long investigation, backed by interviews, regulatory filings, and visual evidence reveals that the facility has yet to start commercial scale production four months later. We have spoken with Ohio regulators that have contradicted company claims, and former employees that have exposed numerous issues. We believe PureCycle has mislead investors about the launch of its facility, or at the very least, will not come anywhere close to meeting production targets.
Even if PureCycle does succeed at achieving completion, it's a pyhrric victory, as the completion and operation triggers the final third of the locked-up shares to be released, making them available for sale.
We have shorted shares of PureCycle Technologies (PCT), please see our full disclosure at the bottom of this report.
Key Points:
Interviews with former employees describe the building of the plant as a “total shitshow” run by a construction company with little experience completing a major chemical plant. This former employee described “pipes to nowhere” and “valves installed backwards.” This was despite $550m in CAPEX, or roughly double what PureCycle predicted when it went public.
In September, PureCycle blamed a power outage from a month earlier for its inability to meet bond milestones, citing the loan’s Force Majeure provisions. The Loan Trustee contested this assessment, and our research shows that the “mechanical failures” cited in their Force Majeure claim were likely just the same process seal failures that had been present since April, according to former employees.
While PureCycle was dealing with startup issues, insiders sold over $13 million in shares, $250 million in convertible notes were priced and placed, and the company renegotiated loan terms with bondholders.
The Ironton Facility, which was “mechanically complete” in April, has yet to operate at commercial scale production at all, as confirmed by regulatory documents, interviews with state regulators, and permitting engineers. Yet, the Company regularly releases PR material showing the operation of equipment that is actually only run for the video or photo before being shut back down.
PureCycle’s proprietary process is neither unique or high tech, it merely involves using butane, a dangerous heavy natural gas at high pressures and temperatures to remove contaminants. Proctor & Gamble licenced this technology to PureCycle for a trivial amount.
The Contractor who constructed the facility currently has a $17 million mechanics lien against PureCycle, with the company only disclosing it in the 10-Q.
The environmental impact of PureCycle’s process is roughly equal to that of virgin Polyproplyene production, with a similar CO2 footprint and a higher footprint for wastewater cyanide and zinc discharges. Local smog precursor emissions for the process are higher than those for traditional Polypropylene production.
The Power Goes Out At PureCycle
If a plant goes down in Southern Ohio and no one knows about it, is the sale of $13 million worth of stock and a $250 million convertible bond placement cool?
PureCycle’s Launch Timeline:
April 25, 2023 - Mechanical completion of the process.
May 30, 2023 - Introduction of Solvent into the Process/startup.
June 20, 2023 - First Commercial Production of Pellets.
August, 7 2023 - A power outage causes the facility to be shut down.
August 22, 2023 - PCT places a $250 million convertible bond,
September 13, 2023 - Company management finally reports the ongoing and continuing outage to investors
In September, PureCycle announced that its factory had been shut down for a month due to a power outage. PureCycle’s update sent shares tumbling, down 30% over the next two days.
Through conversations with former employees, we learned the factory had been having issues with a mechanical failure in its process. According to several former employees, the part that failed in August and September was a mechanical seal on the facility candle filter that has been having issues since the factory was mechanically complete in April.
Due to the high pressures and temperatures present in the process train, this candle filter was perpetually unable to hold pressure.
So now it is almost mid-September, and the company still had not started its commercial recycling process, instead dealing with the fallout from the power going out on August 7. It was probably becoming clear that PureCycle would not meet the deadline from its municipal bond offering of 4.45 million pounds of monthly production by September 30.
We suspect that blaming a month-old power outage as the cause of multiple mechanical issues, the same issues they had been grappling with since day one, was the pretext PureCycle needed to declare a Force Majeure.
Or, as a former PureCycle employee told us: “So they're blaming it on the power but you know, an act of God came along and saved their ass is what happened.”
This excuse was presented to the Holders of the Southern Ohio Port Authority Revenue Bonds, and the company was granted a 90-day extension, as outlined in this October 25 8-k filing, with a new deadline of December 31. It should be noted, however, that the trustee was less than impressed, leading PureCycle to withdraw its Force Majeure claim:
Throughout the period, the Trustee has disputed the Force Majeure Notice and, pursuant to the proposed terms of the Second Limited Waiver (as defined below), the Force Majeure Notice will be expressly withdrawn.
The Bondholders also required, as part of modifying the waiver agreement, that PureCycle double its balance in the Trustee-controlled account by depositing another $50 million. This puts more stress on PureCycle’s balance sheet, which is already not in good shape.
A Flyover With Thermal Imaging Confirms Minimal Activity at the Production Site
Just one day after the power went out and issues began anew, PureCycle CEO Dustin Olson said that “Ironton is running and raising production rates every day.” After the disclosure of the outage, PureCycle said it “initiated restart procedures.” That’s a somewhat ambiguous statement that could mean a lot of things. It could mean “honey I did the dishes” to “I have begun to think about doing the dishes,” we decided to take a look for ourselves.
We commissioned a drone survey of the facility, completed on Monday, October 23, at approximately 1:00 PM. First things first, there is a factory there, and it looks like something that could cost $500 million.
Our survey showed some obvious signs of equipment operating. In particular, we were able to visualize, via thermal imaging, that the facility flare, which periodically manages excess waste gas, was lit, a heat signature of 386.8 C (726 F) at the flare tip is consistent with data from the manufacturer.
PureCycle’s Thermal Oxidizer, which is the primary method for emission control and is required to be used during chemical operations, tells a different story:
During our surveillance, the maximum temperature detected on a calibrated 0-500 C sensor was 63.5 C (146.2 F). At an ambient temperature of 26 C (78 F) and during full day sun, this value is more consistent with the up to 30 degree celsius temperature rise from solar irradiance on steel than required combustion temperatures inside the unit of 1400 degrees F (760 C).
While PCT represented that the facility initiated “restart procedures,” what we observed is more consistent with a factory that is currently in startup and/or testing mode.
Likewise, a thermal scan of the processing unit, which involves butane and molten plastic heated up to 200 degrees C shows thermal signatures of only 50 degrees C during a sunny day.
The company claims they produced recycled pellets in June. Ohio EPA records show otherwise.
On June 20, 2023 the local news featured a big event at PureCycle. CEO Dustin Olson spoke in the video: “What you see right here are the first pellets ever made off of a commercial-scale, ultra-pure recycling facility with PureCycle”
One could be forgiven for thinking that this was the beginning of the factory finally starting up. However, according to interviews with former employees, after the cameras stopped rolling, so did the equipment.
After completing the first pellets run in June, we effectively used July to work through a series of commissioning details.- PureCycle’s CEO on August Earnings Call
The pellets seen in the video were virgin oil-derived polypropylene pellets purchased by the company and processed through an extruder as part of initial equipment commissioning. There was no recycling involved, nor was there any commercial-scale process operating at the time. Four months later, in October, there is no indication the facility has yet to start commercial production at all.
We acquired PureCycle’s annual report, submitted to the Ohio EPA, via an open records request. The documentation reveals that during the twelve months ending June 30, 2023 that “no salable product has been produced during this PER (permitting evaluation reporting period).”
Further, records show that the final handling system, used to empty pellets from the processing unit, was only operated three days in this twelve-month period: May 9th, 10th, and 11th. The company reported that during these test days, only “polypropylene pellets (purchased for commissioning) were transferred as part of commissioning the final product handling system.”
As with the final product systems, through June 30, the raw materials handling equipment that generates feedstock for the recycling process, was “only in operation to commission the unit.”
This April 20 video on the company’s YouTube page, features CEO Dustin Olson excitedly giving a tour of the company’s raw material processing building during commissioning.
The company’s own regulatory filings show that in the April to June period following construction, this processing equipment was only briefly operated to commission it. This means that the YouTube video was shot and produced during commissioning in April, with the raw material processing facility being turned off for the entirety of May and June.
And yet, the company issued a press release on June 20, 2023 proclaiming that it had “successfully produced the first run of Ultra-Pure Recycled (UPR) resin from post-industrial recycled material at commercial scale.“
We interviewed a PureCycle employee who told us while various process units had been commissioned and tested, “they had not put recycled trash in at the beginning and then pulled pellets out of the end.” What they did, instead, was “process some virgin pellets through an extruder.” This is far from what PureCycle stated in the below tweet:
The pellets produced for the June video and tweeted out were simply not from a recycling process. Significant portions of the plant were not operating at the time. They were new, clean pellets melted and pushed through one part of the process (an extruder, the final shaping and forming equipment in plastic production), photographed and posted for the public to consume.
PureCycle Cashes Out
PureCycle’s media blitz following the announcement of initial “production” was a critical part of the company’s ability to continue to monetize its capital furnace.
These subsequent transactions occurred without the company disclosing its inability to actually produce recycled pellets:
1. PureCycle Finalized the Sale of Convertible Notes totaling $250 Million
Not letting a good opportunity go to waste, PureCycle raised $250 in private capital following the release of the Q2 10-Q. It should be noted that this fundraising event, finalized on August 24, occurred after the power outage but before the company disclosed it to investors in September.
2. PureCycle Insiders sold over $13 Million in shares following facility completion
Insiders have been busy dumping shares since the facility was deemed mechanically complete.
On May 12th, Former Director Timothy Glockner disposed of $5.1 million
On June 8th, Director John Scott and his wife, disposed of $7.46 million
On July 11th, CEO Dustin Olson disposed of $116,000
On July 27th, Director John Scott and his wife, disposed of $206,000
On August 4th, Former Director Timothy Glockner disposed of $216,613
On August 4th, CEO Dustin Olson disposed of $101,527
Insiders, including CEO Dustin Olson, dumped more than $13 million worth of shares onto the market during this time frame.
3. PureCycle Renegotiated Waiver Conditions with Southern Ohio Port Authority Bondholders on October 24
We already highlighted that the Trustee for this loan was seemingly less than impressed with PureCycle’s justification for claiming a Force Majeure on production quotas due September 30th. Because these negotiations were held in private, we do not know how much or little the Trustee or Bondholders are aware of PureCycle’s actual struggles with manufacturing, however, this relaxation on production deadline was well received by the market, with PureCycle shares up by 8% the following day.
PureCycle is being sued for $17 million by the Plant Design and Construction Contractor
Company management has blamed its EPC (Engineering, Procurement, and Construction) contractor for ongoing plant issues. An August lawsuit filed In Lawrence County, Ohio, shows that Denham-Blythe, the contractor who designed and constructed the plant, along with subcontractors and banks, have filed suit to force payment on a $17 million dollar mechanic’s lien placed on the PureCycle facility for non-payment of services rendered earlier this year, with PureCycle only disclosing these liens and lawsuit in a note in the most recent 10-Q.
A former employee interview revealed that at the time of mechanical completion in April, the process unit “had valves installed backwards. They had pipes that went to nothing, it was just bad.”
This is critically important. While we don’t think that PureCycle’s technology can work at scale, for it to even have a chance to the operating facility must first work.
The contractor Denham-Blythe primarily produces warehouses, commercial facilities and retail structures, although they have produced some light manufacturing facilities as well.But PureCycle’s process involves heavy-duty chemical manufacturing at scale. The equipment used must handle explosive and toxic gasses and liquids at high temperatures. As the PureCycle employee put it: “they hired somebody who built shopping malls. To build a chemical process facility.”
We contacted a sales employee with Denham-Blythe who told us that while they had experience in building a variety of commercial and industrial facilities, the PureCycle facility was the first in their portfolio that was a greenfield chemical facility of PureCycle’s size, hazard level, and complexity.
PureCycle’s claims against Denham-Blythe are certainly troubling, with the company accusing the contactor of:
“insufficient and incomplete engineering drawings and packages, insufficient and unorganized material management, insufficient and inefficient contractor management, insufficient and rudimentary schedule management, incomplete and inefficient procurement procedures, and that the Company was required to undertake significant re-work at additional cost “
There are always two sides to any contractual dispute; however, the most generous assumption we could make, e.g. that what PureCycle is saying is substantially true, raises other troubling issues. What exactly did PureCycle spend $500 million on? Management seems to imply that they paid for a plant designed and constructed by an incapable firm. But they also want us to believe the plant is running and primed to deliver full nameplate capacity production within six months.
PureCycle’s “Secret Sauce” For Its Molecular Washing Machine Is A Bunch Of Butane
PureCycle’s recycling process, its “molecular washing machine,” is licensed from a Proctor and Gamble (P&G) patent. This process is presented by the company as highly complex, where contaminants, colorants, and odors are removed from waste plastics using a solvent, instead of traditional pyrolysis or mechanical separation techniques, and the resulting melted plastics are reformed into virgin pellets.
While the company makes numerous references to “solvent” in SEC filings and interviews, they oddly don’t make any references to what exactly this solvent is. Records show that the solvent isn’t an esoteric chemical or a trade secret. It’s just 100% butane, heated to hundreds of degrees and at high pressure.
Butane is refined from natural gas or crude at a downstream refining or processing facility. A heavy four-carbon hydrocarbon gas, Butane is significantly more dangerous than lighter natural gas fractions like methane and ethane. Butane, unlike these lighter gasses, is subject to EPA’s stringent Risk Management Program (RMP) rule, a complex regulatory scheme to protect public health specifically because of the elevated risk of catastrophic explosions.
The usage of butane is the single most critical part of PureCycle’s process and represents a significant operational and safety risk. A catastrophic release of process butane from an industrial facility provides an order of magnitude more risk; a methane or ethane release will quickly disperse into open atmosphere, but release of the heavier butane gas will slink along the ground and pool for minutes or longer until it finds a spark and causes a catastrophic incident.
We acquired, via a public records request, documents showing materials to be stored at the site, which includes schematics for two 60,000-gallon butane tanks.
Air permit application materials, also acquired via a public records request, confirm this. While the company redacted information in the application…
…the redactions are just editable shapes in the PDF.
Once the “redactions” are removed, we can see confirmation that the company admits that the “Solvent is nominally 100% butane.”
PureCycle Has Been Playing With Fire
An employee we interviewed told us the facility has been “nothing but safety issues” from day one. As previously mentioned, the large candle filter has repeatedly lost pressure as the unit is subjected to high operating pressures, which has resulted in regular butane leaks.
Additionally, we were told that several months after the supposed initial start-up, there was an over-pressure event that resulted in a “vapor explosion.” Consequently, an employee who ran away from the blast was injured by tripping and falling.
Perhaps even more troubling is that simple visual and leak detection tests appear to have been repeatedly missed in the months of May and June, as reported to the Ohio EPA in an annual compliance report. The lack of attention to detail in a facility that is one mishap away from a half-mile explosion is extremely concerning, especially given the amount of internal and external attention on the facility’s first production milestones.
There is significant doubt if volume production will EVER work
While we’ve established that PureCycle’s facility has remained effectively in prolonged “start-up” mode for six months and counting, the motivations aren’t just related to executives cashing out. PureCycle’s 2020 $250 million dollar bond issuance from the Southern Ohio Port Authority, a government-funded economic development entity, has minimum production requirements for PureCycle that are rapidly closing in, with potential failure sending the loan into default.
As previously discussed, PureCycle missed the First Limited Waiver date of September 30th, 2023, claiming a Force Majeure due to the power outage in August. The company withdrew the claim in October, and the Trustee and Bondholders agreed to extend the deadline to meet the initial production quota (4.45 million pound output over 30 days) until December 31st. Additionally, the company must meet full nameplate production (8.9 million pounds/month) by no later than April 30th of next year.
The evidence we’ve provided indicating that PureCycle has yet to run the entire production train continuously and the fact that the company is currently suing their EPC Contractor doesn’t bode well for the company to suddenly figure things out in the coming months.
Putting that aside, we cannot stress enough that PureCycle’s process is neither established nor proven. The Proctor & Gamble patent that was the basis for the company’s recycling method is based purely on lab results. The patent includes no technical explanation for or process modeling of scaling the recycling process from bench to industrial scale.
PureCycle’s process involves liquid, solid and gaseous phases at high temperatures and pressures, a nightmare concoction to manage for even the most senior process and design engineers. This kind of facility, dreamed up by a startup with no track record and designed and constructed by an EPC firm with limited experience in complex chemical manufacturing, is a recipe for disaster.
We think that investors are fooling themselves if they believe this management, with a track record of missed deadlines and budgets, will suddenly figure it out in time.
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