10-K/A: Sky Quarry Amends 10-K, Adds Goodwill Impairment Risk

Sky Quarry Inc. filed an Amendment No. 3 to its 2024 Annual Report on Form 10-K, primarily to include a new risk factor concerning potential goodwill impairment, while reporting significant financial losses and ongoing liquidity challenges.

Summary

• Sky Quarry Inc. filed an Amendment No. 3 to its Annual Report on Form 10-K for the year ended December 31, 2024, to add a new risk factor regarding potential goodwill impairment.
• The company reported a net loss of $14,728,511 for the year ended December 31, 2024, a significant increase from $4,436,472 in 2023.
• Net sales decreased by 53.9% to $23,364,188 in 2024 from $50,731,889 in 2023, primarily due to refinery shutdowns for repairs and refurbishment, and lower WTI crude oil pricing.
• The company experienced a gross loss of $1,395,342 in 2024, compared to a gross profit of $2,340,165 in 2023.
• Operating expenses, particularly general and administrative expenses, increased by 65.3% to $6,121,955 in 2024.
• Negative cash flows from operations totaled $7,491,578 in 2024, and the company has an accumulated deficit of $23,968,089 as of December 31, 2024.
• The company has outstanding debt of approximately $5,959,952 that is currently past due, with reduced payments being made to certain lenders (LendSpark and Libertas Funding LLC).
• Management believes future revenue growth will be driven by purchasing more crude oil for the refinery and completing the PR Spring Facility retrofit in fiscal 2025.
• The ECOSolv technology, central to the company's waste asphalt shingle recycling and oil sands extraction, has not yet been used on a commercial scale.
• The company plans to establish at least five modular ASR (Asphalt Shingle Recycling) facilities over the next five years, with projected revenues of $5-$12 million per facility.
• As of December 31, 2024, the company had 26 full-time employees and 3 part-time employees and/or contractors.

Sentiment

Score: 2

Explanation: The company faces severe financial distress, evidenced by a substantial increase in net losses, negative gross profit, significant negative operating cash flows, and a large accumulated deficit. The 'going concern' warning from auditors and the past-due debt obligations highlight critical liquidity and solvency issues. While there are long-term strategic plans and promising technology, the immediate financial performance and operational challenges are overwhelmingly negative.

Positives

• The ECOSolv technology has demonstrated oil separation rates of over 95% in bench testing for both mined crushed ore and ground asphalt shingles, with over 99% solvent recovery.
• The company holds patents for hydrocarbon removal from particulate solids in Canada (expiry 2032) and the U.S. (expiry 2032 and 2035).
• The Eagle Springs Refinery has a nameplate production capacity of 4,500 barrels per day, offering significant potential for increased production once supply constraints are addressed.
• Management has identified competitive strengths including diversified revenue streams, potential for long-term contracts, and rapid scalability of operations, with tipping fees ranging from $45 to $150 per ton for waste asphalt shingles.
• The company's ASR Facility design is modular and scalable, capable of remediating waste asphalt shingles into multiple valuable base components.
• The company successfully completed an offering of 1,118,005 shares of common stock on October 9, 2024, generating gross proceeds of $6,708,030, providing capital for debt payments and operations.

Negatives

• The company incurred a net loss of $14,728,511 for the year ended December 31, 2024, a 232% increase from the $4,436,472 net loss in 2023.
• Net sales decreased significantly by 53.9% to $23,364,188 in 2024 from $50,731,889 in 2023, primarily due to refinery shutdowns and lower WTI pricing.
• A gross loss of $1,395,342 was reported in 2024, a substantial decline from a gross profit of $2,340,165 in 2023.
• Operating cash flows were negative $7,491,578 in 2024, indicating the company is burning cash.
• The company has an accumulated deficit of $23,968,089 as of December 31, 2024, and its recurring losses raise substantial doubt about its ability to continue as a going concern.
• Approximately $5,959,952 of outstanding debt is currently past due, and the company is making reduced payments to certain lenders, which constitutes a breach of agreements and could lead to foreclosure on assets.
• The ECOSolv technology, while promising in bench tests, has never been used on a commercial scale, posing a significant risk to the asphalt shingle recycling business plan.
• The company has no proven oil reserves at the PR Spring Facility, and there is no established market or supply agreements for the anticipated recycled products from waste asphalt shingles.
• Customer concentration risk exists, with three customers accounting for 35%, 23%, and 22% of total net sales in 2024, and no ongoing commitment to purchase products.
• Supplier concentration risk exists, with three vendors accounting for 20%, 13%, and 11% of crude oil and petroleum fuel operational inputs in 2024.

Risks

• Recurring losses from operations raise substantial doubt regarding the ability to continue as a going concern.
• Outstanding debt is past due, and reduced payments to certain lenders could result in default and foreclosure on assets, materially impacting operations.
• Limited operating history and a history of losses, with the Eagle Springs Refinery only operating since September 30, 2022.
• Goodwill may be subject to impairment if strategic and financial objectives supporting its carrying value are not achieved, potentially leading to a non-cash impairment charge.
• Dependence on several significant customers; loss of one or more could adversely affect results of operations.
• Dependence on several principal suppliers for crude oil; disruption in supply or change in relationship could adversely affect business.
• Future success is dependent on the continued service of the management team, none of whom have experience in recycling waste asphalt shingles.
• Issuance of common stock as compensation could have an adverse effect on operating results and a dilutive effect on shareholders.
• Financing arrangements contain covenants that could limit the ability to engage in certain transactions, and a breach could lead to default and foreclosure.
• Acquisition opportunities may not achieve anticipated positive results, potentially proving detrimental to financial results or share performance.
• Environmental and regulatory compliance may impose substantial costs and liabilities.
• Exposure to third-party liability and environmental liability in business operations, including for personal injuries, property damage, and hazardous material discharge.
• Reliance on technology (ECOSolv process) that could become ineffective or obsolete, and has not been used on a commercial scale.
• Overall decline in the health of the economy and other factors impacting consumer spending may reduce demand for products.
• Exposure to the impact of rising inflation rates, which could negatively affect results of operations and ability to invest.
• Failure to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, or failure to remediate existing material weaknesses, could have a material adverse effect.
• If estimates or judgments relating to critical accounting policies prove to be incorrect, results of operations could be adversely affected.
• The nature of WAS recycling operations involves various risks, and the marketability of products will be affected by numerous factors beyond control.
• The ECOSolv technology may not work as expected on a commercial scale.
• The viability of asphalt shingle recycling and reclamation business plan is exposed to fluctuating prices for end-products.
• Inability to obtain a requisite amount of feedstock or asphalt shingles necessary for the success of recycling operations.
• The market for asphalt cement, shingle granules, sand aggregate, limestone, and/or fiberglass may be highly competitive.
• Decommissioning costs for recycling facilities are unknown and may be substantial, diverting resources.
• Difficulty marketing or distributing recycled products due to insufficient infrastructure or transportation.
• No market yet for anticipated recycled products from the PR Spring Facility, and no sales or supply agreements for byproducts.
• No proven oil reserves on bitumen leases at the PR Spring Facility; if oil sands do not contain economically recoverable heavy oil, operations may be abandoned.
• The price of oil has historically been volatile, impacting financial condition and results of operations.
• Oil sands development involves operating hazards and risks such as explosions, fires, spills, and pollution.
• Volatility in crude oil and wholesale diesel prices affects business, financial condition, and results of operations.
• Difficulties in operating a remote oil refinery, including risks of explosions, fire, equipment failure, and cybersecurity threats.
• A significant decrease in demand for diesel and gasoline, including increased consumer preference for alternative fuels or improvements in fuel efficiency, would materially affect revenues and profitability.
• Operations are subject to seasonal trends, causing operating costs and cash flow to fluctuate.
• Stringent environmental laws and regulations may expose the company to significant costs and liabilities.
• A climate-related decrease in demand for crude oil could negatively affect the business.
• Business operations may be materially adversely affected by negative impacts to the global economy, capital markets, or other geopolitical conditions.
• Inability to maintain a listing of common shares on Nasdaq.
• The market price of stock may be highly volatile, and investors could lose all or part of their investment.
• An active, liquid trading market for common stock may not be sustained.
• No cash dividends are expected for the foreseeable future, forcing investors to rely on stock sales for returns.
• If securities industry analysts do not publish research reports or publish unfavorable reports, the market price and trading volume could be negatively affected.
• Future issuances of common stock or convertible securities, or expiration of lock-up agreements, could cause the market price to decline and dilute holdings.
• Future issuances of debt securities (senior to common stock) or preferred stock (senior for dividends/liquidating distributions) may adversely affect return on common stock.
• Expectation to raise additional capital through equity and/or debt offerings, which could dilute ownership.
• If shares become subject to penny stock rules, it would become more difficult to trade shares.
• Ongoing public reporting requirements are less rigorous as an emerging growth company, potentially providing less information to stockholders.
• As a smaller reporting company, scaled disclosure requirements could make securities less attractive to investors.
• Claims of U.S. civil liabilities may not be enforceable against Canadian management.

Future Outlook

Management anticipates future revenue growth driven by purchasing more crude oil to generate higher production volumes at the Eagle Springs Refinery. The company expects to complete the retrofit of the PR Spring Facility in fiscal 2025 to recycle waste asphalt shingles and produce oil and asphalt paving aggregate. The build-out of the first complete modular ASR Facility is also expected in fiscal 2025, with plans for five or more ASR facilities over the next five years, projecting revenues of $5-$12 million per facility. The company believes perceived recessionary risks will continue to impact results in 2025, potentially causing reduced travel and higher supply chain prices. Management intends to manage debt levels prudently, explore refinancing options, and enhance capital efficiency.

Management Comments

• Management believes purchasing more crude generating higher production volumes at the refinery will be a driver for anticipated future revenue growth.
• Management's plan to improve our cost of goods sold as a percentage of net sales includes growing more revenue by acquiring more crude oil to process at our refinery, decreasing transportation which is anticipated to enhance gross margin.
• Management's plan to improve gross profit by increasing revenues, lower fixed operational costs and higher efficiencies resulting from higher production volumes.
• Management plans to improve general and administrative expenses as a percentage of sales by increasing revenues, reduced repairs and maintenance and maintenance fuel one-time costs as a result of the 2024 refurbishment program.
• Management believes that this one-time loss related to the warrant liability measurement should be evaluated separately from ongoing operations when assessing our financial performance.
• Management continues to evaluate alternatives to optimize the capital structure and reduce reliance on higher-cost debt instruments moving forward.
• Management remains committed to securing the necessary resources to ensure that we can meet our financial obligations and continue executing our long-term objectives.
• Management performed a review and determined that, except as disclosed elsewhere herein, no material events occurred subsequent from December 31, 2024 through March 31, 2025, the date of presentation of these financial statements.

Industry Context

Sky Quarry operates in the oil production, refining, and environmental remediation sectors, specifically targeting waste asphalt shingle recycling and oil sands extraction. The waste asphalt shingle market is substantial, with 15.1 million tons generated annually, and over 96% ending up in landfills. There's a growing trend in using reclaimed asphalt pavement (RAP) and recycled asphalt shingle (RAS) in road infrastructure projects, driven by sustainability and cost-saving advantages. The U.S. residential and commercial roofing materials market was estimated at $15.72 billion in 2023, with a projected CAGR of 4.5% from 2024 to 2030. The oil sands market, while underdeveloped in the U.S., holds significant potential, especially with rising global demand for heavy crude oil. The asphalt paving sales market is driven by infrastructure development and maintenance, supported by federal and state investments like the $1.2 trillion bipartisan infrastructure package. Global oil production reached an all-time high of 96.4 million barrels per day in 2023, with U.S. production also setting records, indicating continued demand for refined products despite a projected decline in U.S. motor gasoline consumption due to fuel efficiency improvements and alternative fuels.

Comparison to Industry Standards

• The company's ECOSolv technology demonstrated oil separation rates of over 95% and solvent recovery of up to 99% in bench testing, which, if scaled commercially, could be highly competitive in efficiency for oil sands and waste asphalt shingle remediation.
• The company's target of collecting tipping fees from $45 to $150 per ton for waste asphalt shingles, with a processing cost of approximately $25 per ton, compares favorably to reported U.S. tipping fees ranging from $43 to $83 per ton in 2022-2023, and internal research suggesting fees as high as $145-$160 per ton in certain locations.
• The company's fully integrated process, capable of producing and refining, aims to offer a distinct advantage by streamlining every step from extraction to refining, ensuring greater efficiency and control over production compared to less integrated competitors.
• The company's plan to establish at least five ASR facilities over the next five years, with projected revenues of $5-$12 million per facility, indicates an aggressive growth strategy in the emerging waste asphalt shingle recycling sector, aiming to capitalize on tightened landfill diversion regulations.

Management Changes

Corporate Governance

Legal Proceedings

• Currently not aware of any legal proceedings or claims that are believed to have a material adverse effect on the business, financial condition, or operating results.

Related Party Transactions

• JPMorgan Chase Funding Inc. (JPM) is a related party, holding 2,249,882 common shares (12.89%), 25,000 common share purchase warrants, and 1 preferred share as of December 31, 2024.
• A governance agreement with JPM grants consent rights on certain business matters (e.g., material business changes, stock options, debt over $500,000, related party agreements, sales transactions, loans over $500,000, lawsuit settlements over $500,000, investments over $500,000), Board observation rights, and financial statement/inspection rights as long as JPM owns at least 10% of outstanding common stock.
• Paid sitting and committee fees of $157,750 to members of the board of directors for the year ended December 31, 2024.

Stakeholder Impact

• Shareholders: Face significant dilution risk from future equity raises and potential loss of investment due to recurring losses and going concern issues. The stock price is highly volatile, and there are no anticipated cash dividends.
• Employees: The company's ability to continue as a going concern and its financial instability could impact job security and future compensation.
• Customers: Customer concentration risk means the loss of a major customer could severely impact revenues. The company's operational issues (refinery shutdowns) could affect product supply.
• Suppliers: Supplier concentration risk means disruptions or changes in relationships with key crude oil suppliers could adversely affect operations. The company's past-due debt could impact supplier confidence.
• Creditors: Face risk of default on past-due debt, with some lenders already accepting reduced payments. Foreclosure proceedings are a possibility if debt issues are not resolved.
• Regulatory Authorities: The company is subject to stringent environmental and safety regulations, and non-compliance could lead to penalties or operational restrictions.

Next Steps

• Finish retrofitting the PR Spring Facility in fiscal 2025 to utilize ECOSolv technology for waste asphalt shingle recycling and bitumen production.
• Complete the build-out of the first modular Asphalt Shingle Recycling (ASR) Facility in fiscal 2025.
• Deploy and commission the first ASR Facility front-end module in the first half of 2025, and two more in the second half of 2025.
• Develop a modular asphalt shingle recycling facility design for deployment in areas with high concentrations of waste asphalt shingles.
• Construct and operate five or more ASR Facilities during the next five years, targeting markets like Virginia, Vermont, Alabama, Florida, Maryland, California, Oregon, and Washington State.
• Secure greater volumes of crude oil for the Foreland refinery to increase production and enhance contribution margin.
• Pursue opportunities to reduce debt service through refinancing or repayment of existing obligations.
• Establish strategic partnerships with waste management companies, roofing contractors, and asphalt shingle manufacturing plants.
• Continue to monitor the financial performance of reporting units and reassess goodwill as needed.
• Implement a remediation plan to address material weaknesses in internal control over financial reporting, including identifying appropriate internal and outsourced accounting resources and creating additional internal procedures for segregation of duties.

Key Dates

Recommendation

Sky Quarry Inc. presents an extremely high-risk investment profile. The company reported a staggering 232% increase in net loss for 2024, a 53.9% decline in net sales, and a shift from gross profit to gross loss. Critically, the auditors have issued a 'going concern' warning, indicating substantial doubt about the company's ability to continue operations. A significant portion of its debt is past due, leading to reduced payments and the risk of asset foreclosure by lenders. While the company has promising technology and strategic growth plans in emerging markets, these are in early development stages and have not yet proven commercial viability. The reliance on future capital raises, coupled with a highly volatile stock price and potential for significant dilution, makes the stock exceptionally speculative. The current financial health and operational challenges far outweigh any potential long-term upside, suggesting a strong sell recommendation for investors seeking to preserve capital.

Keywords

Waste Asphalt Shingle Recycling, Oil Refining, Environmental Remediation, ECOSolv Technology, Bitumen Extraction, SEC Filing, 10-K/A, Goodwill Impairment, Financial Losses, Going Concern, Liquidity, Debt Default, Crude Oil, Diesel, Liquid Asphalt, Naphtha, PR Spring Facility, Eagle Springs Refinery, ASR Facility, Sustainable Materials Management, Corporate Governance, Risk Factors, Nasdaq