Sky Quarry Inc.: Form 10-Q for the period ended Mar 31, 2025

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission (the “SEC”) on April 21, 2025.

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Reverse Stock Split

We filed a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware on April 9, 2024 (the “Effective Split Date”) to effect a one-for-three (1-for-3) (the “Split Ratio”) reverse stock split of our shares of common stock (the “Reverse Stock Split”), without changing the par value, rights, terms, conditions, and limitations of such shares of common stock. No fractional shares were issued in connection with the Reverse Stock Split, and any of our stockholders that were entitled to receive a fractional share as a result of the Reverse Stock Split instead received one additional share of our common stock in lieu of the fractional share. The Reverse Stock Split did not in itself affect any stockholder’s ownership percentage of our common stock, except to the extent that any fractional share was rounded up to the nearest whole share. The number of shares of common stock subject to the exercise of outstanding options, warrants and convertible securities was also reduced by the Split Ratio as of the Effective Split Date and their respective exercise prices were increased by the Split Ratio. Neither the authorized shares of capital stock nor the par value per share of our common stock was affected by the Reverse Stock Split.

All historical share and per-share amounts reflected throughout the consolidated financial statements have been adjusted to reflect the Reverse Stock Split.

Overview

We are an oil production, refining, and a development-stage environmental remediation company formed to deploy technologies to facilitate the recycling of waste asphalt shingles and remediation of oil-saturated sands and soils. The recycling of asphalt shingles is expected to reduce the dependence on landfills for the removal of waste and to also reduce dependence on foreign and domestic virgin crude oil extraction for industrial uses.

We have developed a process for separating oil from oily sands and other oil-bearing solids utilizing a proprietary solvent which we refer to as our ECOSolv technology or the ECOSolv process. The solvent is used in a closed-loop distillation and evaporation circuit which results in over 99% of the solvent being recoverable for continuous reuse and requires no water. The solvent has demonstrated oil separation rates of over 95% in bench testing using samples of both mined crushed ore and ground asphalt shingles.

We intend to retrofit the PR Spring Facility, located in southeast Utah (as defined below) to recycle waste asphalt shingles using our ECOSolv technology, to produce and sell oil as well as asphalt paving aggregate mined from our bitumen deposit.

We also plan to develop modular asphalt shingle recycling facilities (the “ASR Facility”) which can be deployed in cities with high concentrations of waste asphalt shingles and near asphalt shingle manufacturing centers.

Corporate History

We were incorporated in Delaware on June 4, 2019, as “Recoteq, Inc.” On April 22, 2020, we changed our name to “Sky Quarry Inc.” Sky Quarry is a holding company and has no operations. The purpose of the holding company is to maintain ownership over our subsidiaries, create management efficiencies and establish an organizational structure to facilitate the potential acquisition of other businesses within or complementary to our industry.

On September 16, 2020, we acquired 2020 Resources LLC. The assets of 2020 Resources include an oil sands remediation facility (the “PR Spring facility”) and a 100% interest in asphalt bitumen leases covering approximately 5,930 acres in the PR Spring region in Utah. On September 16, 2020, we also acquired 2020 Resources (Canada) Ltd, an entity which is currently inactive.

On September 30, 2022, we acquired Foreland Refining Corporation, which is engaged in the refining of heavy crude oil into diesel and other petroleum products (naphtha, vacuum gas oil, and paving asphalt liquids) at its Eagle Springs Refinery located near Ely, Nevada. The acquisition of Foreland was immediately accretive to our revenues and cash flow and provides a strong base for growth. We believe the acquisition is a strategic fit and will form an important role in the future enabling us to vertically integrate the production and refining of oil from waste materials to energy in a sustainable and efficient manner.

Our Financial Condition and Going Concern Issues

As a result of our financial condition, we have included in our condensed consolidated financial statements as of March 31, 2025 and December 31, 2024, and for the three months ended March 31, 2025 and 2024, a note indicating that there is significant doubt about the Company’s ability to continue as a going concern. The opinion on the December 31, 2024 audited financial statements from our independent registered public accounting firm for those statements also includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. From inception (June 4, 2019) through March 31, 2025, we have incurred accumulated net losses of $27,301,783. To address our going concern, we aim to increase revenues by securing greater volumes of crude oil for our Foreland refinery, which should enhance our contribution margin. Additionally, we are pursuing opportunities to reduce debt service through refinancing or repayment of existing obligations, establish strategic partnerships, and raise capital through equity or debt offerings, or a combination of these actions. Given our current revenue and cash usage levels, we have pressing working capital needs that necessitate raising funds through equity or debt issuance, coupled with efforts to boost revenue and control operating expenses. However, there is no guarantee that we will be able to raise sufficient capital, grow revenues, and generate the cash flow needed to meet our operating expenses and capital requirements effectively.

Special Notes Regarding Smaller Reporting Company Status

We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.

Results of Operations for the Three Months Ended March 31, 2025 and 2024

Introduction

This section includes a summary of our historical results of operations, followed by detailed comparisons of our results for the three months ended March 31, 2025 and 2024, respectively. We have derived this data from our unaudited interim condensed consolidated financial statements included in this Quarterly Report.

We had net sales of $6,332,967 for the three months ended March 31, 2025, compared to $10,952,330 for the three months ended March 31, 2024. Our cost of goods sold for the three months ended March 31, 2025 were $7,059,059, compared to $10,382,881 for the three months ended March 31, 2024. The significant decrease in our sales were the direct result of the company’s challenges associated with regaining supply streams disrupted in May and June 2024 as a result of the Foreland Refinery outage, disruption and refurbishment in 2024. Additionally, WTI pricing fell from $87 per barrel on April 5, 2024, to $71 per barrel on March 31, 2025, which corresponded with reduced pricing in the end products.

Our operating expenses were $1,937,485 for the three months ended March 31, 2025, compared to $1,609,356 for the three months ended March 31, 2024. Our operating expenses consisted of General and Administrative, non-cash charges associated with Share-Based Payments, Depreciation and Amortization, and Foreign Exchange.

Our net income (loss) was ($3,333,694) for the three months ended March 31, 2025, compared to ($2,462,545) for the three months ended March 31, 2024.

Net Sales and Net Income (Loss)

Our net sales, costs of good sold, gross profit, operating expenses, other income (expense) and net income (loss) for the three months ended March 31, 2025 and 2024, were as follows:

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Net Sales

We had net sales of $6,332,967 for the three months ended March 31, 2025, compared to $10,952,330 for the three months ended March 31, 2024, a decrease of $4,619,363. The decline in net sales for the first quarter 2025 present compared to the prior period was primarily due to the company’s challenges associated with regaining supply volumes previously disrupted in May and June 2024 as a result of the Foreland Refinery outage, disruption and refurbishment in 2024. Additionally, WTI pricing fell from $87 per barrel on April 5, 2024, to $71 per barrel on March 31, 2025, which corresponded with reduced pricing in the end products.

Cost of Goods Sold

Our cost of goods sold for the three months ended March 31, 2025 was $7,059,059 compared to $10,382,881 for the three months March 31, 2024, a decrease of $3,323,822. Gross profit for the three months ended March 31, 2025 was a negative $726,092, compared to $569,449 for the three months ended March 31, 2024, a decrease of $1,295,541 for the comparative period. The decline in cost of sales for the first quarter 2025 presented compared to the prior periods was primarily due to the decline in net sales described above and the contribution margin covering more fixed costs within cost of goods sold.

Cost of goods sold as a percentage of net sales was 112% for the three months ended March 31, 2025, compared to 95% for the three months ended March 31, 2024. The increased cost as a percentage of revenues was due to the company continuing to regain supply streams as a result of the refurbishment of the Foreland refinery in 2024, the reduction in WTI pricing and the net change on inventory revaluation of $1,065,846.

General and Administrative

Our general and administrative expenses were $1,935,457 for the three months ended March 31, 2025, compared to $1,607,884 for the three months ended March 31, 2024, an increase of $327,573. In the three months ended March 31, 2025, general and administrative expenses consisted mainly of professional fees of $964,516, executive compensation of $633,630, insurance of $162,775, travel of $68,710, lease and utilities of $57,404, other of $23,720, bank charges of $18,217, licenses of $5,422, and automobile of $1,063. In the three months ended March 31, 2024, general and administrative expenses consisted mainly of executive compensation of $575,532, professional fees of $502,346, insurance of $172,316, bank charges of $110,145, other of $129,238, travel of $62,883, lease and utilities $28,951, automobile of $23,999, and licenses of $2,474. In the three months ended March 31, 2025, increase over the three months ended March 31, 2024, is due increase in business development and advertising and marketing activities.

Other Income (Expense)

Other expense was $670,117 for the three months ended March 31, 2025, compared to $1,422,638 for the three months ended March 31, 2024, a decrease of $752,521. In the three months ended March 31, 2025, other income (expense) consisted of interest expense, net of interest income $901,561, loss on extinguishment of debt $56,660, offset by gain on warrant valuation $274,980, gain on sale of assets $5,647 and other income $7,477. In the three months ended March 31, 2024, other income (expense) consisted of interest expense, net of interest income of $1,308,445, loss on extinguishment of debt of $108,887 and loss on other expense of $5,306. The warrant liability is revalued at each reporting date based on changes in the underlying factors influencing the fair value of the warrants, such as the Company’s stock price, volatility, and other market conditions. The Company’s management believes that the non-cash gain recognized in the current period from the remeasurement of warrant liabilities is not reflective of ongoing operating performance. As this item did not occur in the prior-year quarter, it should be evaluated separately when comparing financial results across periods. During the period, the Company incurred significant interest expense related to its term debt. This interest expense is primarily due to the high financing costs associated with the term notes, which were utilized to support ongoing working capital needs and operational expenses. These notes terms, characterized by higher interest rates relative to traditional debt instruments, have resulted in a notable impact on our financial performance for the quarter. This increase in interest expense reflects the financial obligations of maintaining liquidity and funding operations, particularly during a phase of substantial investment in refinery refurbishment and related activities. The Company continues to evaluate its capital structure to optimize costs and enhance financial stability, considering refinancing options and alternative capital sources where feasible.

Net Income (Loss)

Net loss was $3,333,694 or a loss of $0.16 per share, for the three months ended March 31, 2025, respectively compared to net loss of $2,462,545 or $0.15 per share, for the three months ended March 31, 2024.

Our net loss compared to the previous periods net loss was primarily driven by reduced net sales as a result of the reduction in sales as the company continues to regain supply streams.

Liquidity and Capital Resources

Introduction

We had negative operating cash flows for the three months ended March 31, 2025. Our cash on hand as of March 31, 2025, was $213,000. While we had negative net cash from operations for the three months ended March 31, 2025, our monthly cash flow burn rate for the three months ended March 31, 2025, was $654,408. In connection with the Foreland Refinery acquisition and PR Spring facility retrofit program, we believe we will continue to have material capital expenditures and face long term cash needs. While we anticipate that these needs will be satisfied through the issuance of our debt and/or equity securities until such time as our cash flows from operations will satisfy our cash needs we cannot provide any assurances of such.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2025 and December 31, 2024, respectively, are as follows:

Our cash decreased by $172,116 as of March 31, 2025, as compared to December 31, 2024. Our total current assets decreased by $281,408 primarily because of a decrease in inventory of $1,045,857, offset by increases in accounts receivable of $634,262 and prepaid expenses of $302,303.

Our total assets decreased by $2,356,630 due to the changes in current assets as well as decreases in restricted cash of $2,130,946, property, plant and equipment of $217,536, and right-of-use assets of $24,129, offset by an increase in oil and gas properties of $297,389.

Our current liabilities as of March 31, 2025 as compared to December 31, 2024, decreased by $390,134 and our total liabilities decreased by $437,578, both primarily as a result of an increase in lines of credit of $1,067,400, current portion of operating lease of $43,353, offset by decreases in accounts payable and accrued expenses of $812,705, current maturities of notes payable of $413,707, warrant liability of $274,980, and operating lease liability of $43,353, and finance lease liability of $506.

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

Cash Requirements

Our cash on hand as of March 31, 2025, was $213,000. The Company will continue to require additional cash to meet ongoing operational and capital needs. Despite the company’s efforts to increase production capacity at the refinery, as well as ongoing maintenance and refurbishment activities, and the high interest payments, we are not yet generating sufficient cash flow to cover operational costs. The need for cash is driven by both ongoing operating expenses, and costs of indebtedness. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our equity securities, or a combination thereof, until such time as improvements to our cash flows from operations will satisfy our cash flow needs. Management remains committed to securing the necessary resources to ensure the company can meet its financial obligations and continue executing its long-term objectives.

Sources and Uses of Cash

Operating Activities

Our net cash used in operating activities for the three months ended March 31, 2025, were $1,963,224, as compared to cash used of $1,224,548 for the three months ended March 31, 2024. Our net cash used in operating activities for the three months ended March 31, 2025, consisted of a net loss of $3,333,694, increase in working capital of $483,631, less share based compensation of $78,880, depreciation and amortization of $242,004, amortization of debt issuance costs of $765,793, amortization of right-of-use asset of $24,129, loss on extinguishment of debt of $56,660, and gain on revaluation of warrant liability of $274,980, and gain on sale of assets of $5,647. Our net cash used in operating activities for the three months ended March 31, 2024, consisted of a net loss of $2,462,545, decrease in working capital of $493,779, less share-based compensation of $270,176, depreciation and amortization of $164,534, amortization of debt issuance costs of $1,166,227, amortization of right-of-use asset of $21,952, and loss on extinguishment of debt of $108,887.

Investing Activities

Our cash flow used in investing activities for the three months ended March 31, 2025 and 2024, was $316,210 and $427,666, respectively, a decrease of $111,456. Our investing activities during the three months ended March 31, 2025, consisted of a net increase from proceeds of sale of assets of $14,060, payments for exploration and evaluation assets of $297,389, and payments for property, plant and equipment of $44,174. Our investing activities during the three months ended March 31, 2024, consisted of payments for exploration and evaluation assets of $144,963, and payments for property, plant and equipment of $282,702.

Financing Activities

Our net cash provided by (used in) financing activities for the three months ended March 31, 2025 and 2024, was $(24,050) and $1,707,755, respectively, a decrease of $1,731,805. Our cash flows from financing activities during the three months ended March 31, 2025, consisted of proceeds of lines of credit of $5,339,736, proceeds from notes payable of $143,237, offset by payments on lines of credit of $4,272,336, payments on notes payable of $1,231,214, and payments of financing lease of $3,473. Our cash flows from financing activities during the three months ended March 31, 2024, consisted of proceeds of lines of credit of $10,641,448, proceeds from notes payable of $9,820,288, and issuance of preferred stock of $197,500, and issuance of common stock of $19,492, offset by payments on lines of credit of $11,638,704, payments on notes payable of $5,300,608, debt discount on note payable of $1,970,936, payments on financing lease of $19,851 and preferred stock offering costs of $40,874.

Evaluation of Disclosure Controls and Procedures

Management conducted an evaluation, under the supervision and participation of our principal executive officer and principal financial officer at of March 31, 2025, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2025, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures as of March 31, 2025, were not effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2025, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures provide our management with reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.