10-Q: Sky Quarry Inc. Reports Q3 2024 Results: Revenue Declines Amid Refinery Refurbishment and WTI Price Drop

Sky Quarry Inc. experienced a significant decrease in revenue during the third quarter of 2024 due to refinery refurbishment and a drop in WTI crude oil prices, resulting in a net loss.

Summary

• Sky Quarry Inc. reported a net loss of $4.4 million for the three months ended September 30, 2024, and a net loss of $10.5 million for the nine months ended September 30, 2024.
• Net sales decreased to $4.8 million for the quarter and $19.1 million for the nine-month period, compared to $14.4 million and $39.1 million respectively in the same periods of 2023.
• The decline in sales was attributed to a combination of lower WTI crude oil prices and a major refurbishment at the Foreland refinery, which took place from May to July 2024.
• The company incurred one-time costs of approximately $770,915 related to maintaining the refinery during the refurbishment.
• Operating expenses totaled $1.5 million for the quarter and $4.4 million for the nine-month period.
• The company's cash position decreased to $292,920 as of September 30, 2024, from $326,822 at the end of 2023.
• The company has an accumulated deficit of $19.7 million as of September 30, 2024.
• The company raised $3.2 million in debt and $3.3 million in equity during the nine months ended September 30, 2024.
• The company issued warrants valued at $1.9 million as part of a debt modification, which was recorded as a loss on debt modification.

Sentiment

Score: 3

Explanation: The document presents a concerning financial picture with significant losses, decreased revenue, and a weakened cash position. The company's need for additional capital and the going concern uncertainty further contribute to a negative sentiment.

Positives

• The Foreland refinery refurbishment, completed in July 2024, is expected to enhance air quality, water recycling, and operational efficiency, potentially increasing production levels.
• The company successfully raised $3.2 million in debt and $3.3 million in equity during the nine months ended September 30, 2024.
• The company is actively monitoring growth and operating expenses, and is working to refinance current debt with longer-term debt to reduce monthly debt service obligations.

Negatives

• The company experienced a significant decrease in revenue due to lower WTI crude oil prices and the Foreland refinery refurbishment.
• The company's cash position has decreased, and it has an accumulated deficit of $19.7 million.
• The company had negative cash flows from operations of $4.6 million during the nine months ended September 30, 2024.
• The company recorded a $1.9 million loss on the issuance of warrants.
• The company's disclosure controls and procedures were deemed not effective as of September 30, 2024.

Risks

• The company has material uncertainties related to its ability to continue as a going concern.
• The company needs to raise additional capital to fund future expenditures, retire maturing debt, and potentially make acquisitions.
• There is no assurance that the company will be successful in raising sufficient capital or refinancing its debt.
• The company's ability to utilize net operating loss or other tax attributes may be limited if there is an ownership change.
• The company's disclosure controls and procedures were not effective, which could lead to inaccurate financial reporting.

Future Outlook

The company expects strong growth as refinery asset improvements increase production, and direct consumer sales and marketing efforts continue to perform. The company is also pursuing opportunities to reduce debt service through refinancing or repayment of existing obligations, establish strategic partnerships, and raise capital through equity or debt offerings.

Management Comments

• Management believes that the implementation of its plans will allow the Company to continue as a going concern.
• Management remains committed to securing the necessary resources to ensure the company can meet its financial obligations and continue executing its long-term objectives.

Industry Context

The company operates in the oil production, refining, and environmental remediation sectors, which are subject to fluctuations in commodity prices and regulatory changes. The company's focus on recycling waste asphalt shingles and remediating oil-saturated soils aligns with growing environmental concerns and the need for sustainable practices.

Comparison to Industry Standards

• Sky Quarry's revenue decline in Q3 2024 is significant compared to the previous year, primarily due to the refinery refurbishment and WTI price drop. Companies like Marathon Petroleum (MPC) and Valero Energy (VLO), which are large-scale refiners, typically experience less volatility in their quarterly revenues due to their diversified operations and larger scale.
• The one-time costs of $770,915 related to maintaining the refinery during refurbishment are not typical for established refiners. These costs are more common for smaller companies undergoing significant upgrades or maintenance.
• The company's high interest expenses due to term debt are a concern. Larger companies like ExxonMobil (XOM) and Chevron (CVX) have access to lower-cost financing options due to their strong credit ratings.
• The company's negative cash flow from operations of $4.6 million for the nine months ended September 30, 2024, is a significant concern. Companies with strong cash flow from operations, such as Phillips 66 (PSX), are better positioned to weather market fluctuations and fund their operations.
• The company's need to raise additional capital through debt or equity is a common challenge for smaller companies in the energy sector. Larger companies typically have more diverse funding sources and stronger balance sheets.

Related Party Transactions

• On September 16, 2020, the Company issued a promissory note to JPMorgan, in the amount of $450,000. Portions of the note were converted from time to time into Shares until paid in full. JPMorgan is a related party as a significant shareholder holding directly and indirectly, as of September 30, 2024, 2,249,882 common shares (12.89%), 25,000 common share purchase warrants, and 1 preferred share of the Company.
• For the three and nine months ended September 30, 2024, the Company paid sitting and committee fees of $45,000 and $112,750, respectively, to members of the board of directors.

Stakeholder Impact

• Shareholders are negatively impacted by the company's net losses and decreased share value.
• Employees may be concerned about the company's financial stability and potential job security.
• Customers may be affected by potential disruptions in the company's operations due to financial constraints.
• Suppliers may face increased risk of non-payment due to the company's financial difficulties.
• Creditors face increased risk of default due to the company's high debt levels and negative cash flow.

Next Steps

• The company plans to closely monitor its growth and operating expenses.
• The company intends to refinance its current debt with longer-term debt with amortization schedules that decrease monthly debt service obligations.
• The company will continue to seek additional capital through debt or equity offerings.
• The company will continue to execute its long-term objectives.

Key Dates

Keywords

oil production, refining, environmental remediation, asphalt shingles, ECOSolv technology, mineral leases, Foreland refinery, debt financing, equity financing, going concern