10-Q: Sky Quarry Q2 Loss Widens Amid Supply Disruptions

Sky Quarry Inc. reported a widened net loss for the second quarter of 2025, driven by decreased sales volumes and ongoing operational challenges at its refinery, raising significant doubt about its ability to continue as a going concern.

Summary

• Net sales for the six months ended June 30, 2025, decreased by 24% to $10,874,439 from $14,327,574 in the prior year.
• Gross margin turned negative, reporting a loss of $843,060 for the six months ended June 30, 2025, compared to a positive gross margin of $83,860 in the same period last year.
• Operating expenses increased by 38% to $3,559,466 for the six months ended June 30, 2025, up from $2,582,207 in the prior year.
• Net loss for the six months ended June 30, 2025, was $5,542,344, an improvement from the $6,025,023 net loss in the prior year, primarily due to reduced interest expense.
• The company reported an accumulated deficit of $29,510,433 as of June 30, 2025, and negative cash flows from operations of $729,401 for the six months ended June 30, 2025.
• Production was limited in late June 2025 due to crude supplier disruptions and maintenance delays, with production expected to resume in August 2025.
• The company entered into a purchase agreement with Varie Asset Management LLC for up to $8.125 million in common stock and issued a $1 million secured promissory note to KF Business Ventures, LP, after the reporting period.

Sentiment

Score: 2

Explanation: The company faces severe financial distress, evidenced by a significant accumulated deficit, negative gross margins, and ongoing operational losses. While there's an improvement in net loss and operating cash flow compared to the prior year, and new capital commitments have been secured, the explicit 'going concern' doubt and 'not effective' disclosure controls indicate high risk and instability. The reliance on external financing for basic operations and maturing debt, coupled with production delays, paints a very challenging picture.

Positives

• Net loss for the six months ended June 30, 2025, decreased to $5,542,344 from $6,025,023 in the prior year, primarily due to a significant reduction in interest expense.
• Net cash used in operating activities improved significantly, decreasing to $729,401 for the six months ended June 30, 2025, from $2,602,375 in the prior year.
• Gross margin for the three months ended June 30, 2025, improved to a negative $116,968 from a negative $485,589 in the prior year.
• The company secured new financing commitments post-period, including a purchase agreement for up to $8.125 million in common stock with Varie Asset Management LLC and a $1 million secured promissory note from KF Business Ventures, LP.

Negatives

• Net sales for the six months ended June 30, 2025, decreased by 24% to $10,874,439, primarily due to supply disruptions and lower WTI crude oil pricing.
• Gross margin for the six months ended June 30, 2025, turned negative at $843,060, compared to a positive gross margin of $83,860 in the prior year.
• Operating expenses increased by 38% to $3,559,466 for the six months ended June 30, 2025, driven by higher executive compensation and professional fees related to public company costs.
• The company reported an accumulated deficit of $29,510,433 as of June 30, 2025, indicating significant historical losses.
• Cash on hand decreased to $173,795 as of June 30, 2025, from $385,116 at December 31, 2024.
• The company has past due debt obligations totaling $4,247,187 to Libertas Funding LLC and $1,027,637 to LendSpark.
• Disclosure controls and procedures were deemed "not effective" as of June 30, 2025.

Risks

• Significant doubt about the ability to continue as a going concern due to accumulated deficit and insufficient operating cash flows.
• Dependence on raising additional capital through debt, equity, or warrant exercises to fund future expenditures and retire maturing debt obligations, with no assurance of success.
• Operational disruptions and delays, such as crude supplier disruptions and maintenance issues at the Foreland Refinery, impacting production and sales volumes.
• Fluctuations in WTI crude oil pricing directly impacting product pricing and profitability.
• High interest expenses associated with term debt, reflecting high financing costs for liquidity and operations.
• Potential limitations on the utilization of net operating loss carryforwards if an ownership change occurs under Section 382 of the Internal Revenue Code.
• Inherent uncertainties in legal proceedings, which could have a material adverse effect on financial condition or results of operations.
• Limitations on the effectiveness of internal controls due to human error, resource constraints, and potential circumvention.

Future Outlook

Management aims to increase revenues by securing greater volumes of crude oil for the Foreland refinery to enhance contribution margin. The company plans to reduce debt service through refinancing or repayment of existing obligations, establish strategic partnerships, and raise additional capital through equity or debt offerings. Production is expected to resume in August 2025 following crude supplier disruptions and maintenance activities.

Management Comments

• The decline in net sales for the second quarter of 2025 compared to the prior period was primarily due to 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.
• WTI pricing fell from $87 per barrel on April 5, 2024, to $68 per barrel on June 30, 2025, which corresponded with reduced pricing in the end sales products.
• Beginning in late June 2025, production was limited due to crude supplier disruptions and delays in completing certain maintenance activities. Production is expected to resume in August 2025.
• 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.
• 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.
• 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

Sky Quarry operates in the oil production, refining, and environmental remediation sectors. The decline in WTI crude oil pricing from $87 to $68 per barrel during the period reflects broader market volatility in the energy sector, impacting the company's product pricing. The company's focus on recycling waste asphalt shingles and remediating oil-saturated soils positions it within the growing environmental services and circular economy trends, aiming to reduce landfill dependence and virgin crude oil extraction. However, operational challenges like refinery outages and supply disruptions are common risks in the refining industry, affecting profitability and cash flow.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various pending or threatened legal actions in the ordinary course of business.
• Management believes that current matters are not expected to have a material adverse effect on financial position or results of operations.

Related Party Transactions

• JPMorgan, a significant shareholder (10.17% as of June 30, 2025), holds consent rights on certain business transactions (e.g., material business changes, stock options/restricted stock grants, employment/compensation agreements, debt over $500,000, related party agreements, sale transactions, loans over $500,000, lawsuit settlements over $500,000, investments over $500,000).
• JPMorgan also has Board of Director observation rights and the right to receive quarterly and annual financial statements and certain inspection rights as long as it owns at least 10% of common stock.
• Non-employee directors received sitting and committee fees of $69,000 for the three months ended June 30, 2025, and $138,000 for the six months ended June 30, 2025.
• On May 22, 2025, 450,000 shares of restricted common stock were issued to non-employee directors under the 2020 Stock Plan, with an aggregate grant-date fair value of $432,990, vesting over twelve months.

Stakeholder Impact

• Shareholders: Face significant dilution risk from ongoing and planned equity capital raises, potential loss of investment due to going concern uncertainties, and volatility from operational challenges and financial performance.
• Employees: Potential impact from operational challenges and financial instability, though share-based compensation is noted.
• Customers: May experience disruptions in product supply due to refinery outages and crude supplier issues.
• Suppliers: Risk of delayed payments or renegotiated terms due to the company's liquidity challenges and past due debt.
• Creditors: Exposed to default risk given the company's past due debt obligations and reliance on new financing to meet existing liabilities.

Next Steps

• Secure greater volumes of crude oil for the Foreland refinery to increase revenues and enhance contribution margin.
• Refinance or repay current debt with longer-term debt to decrease monthly debt service obligations.
• Establish strategic partnerships.
• Raise additional capital through equity or debt offerings, or a combination thereof.
• Resume production in August 2025 following crude supplier disruptions and maintenance activities.
• File a registration statement with the SEC covering the resale of shares to Varie Asset Management LLC.
• Search for a permanent Chief Financial Officer.

Key Dates

Recommendation

The company faces severe financial challenges, including a substantial accumulated deficit, negative gross margins, and explicit 'going concern' doubt from management. While net loss and operating cash flow improved year-over-year, the company remains highly dependent on external capital raises to meet its obligations and fund operations. The disclosure of 'not effective' internal controls further exacerbates governance concerns. Recent capital raises, while necessary, indicate ongoing financial distress and will likely lead to significant shareholder dilution. Operational delays and past due debt obligations add to the high-risk profile, making the stock a strong sell for investors.

Keywords

Oil Refining, Environmental Remediation, Asphalt Recycling, Tar Sands, Crude Oil Production, SEC Filing, 10-Q, Financial Results, Going Concern, Capital Raise, Energy Sector, Waste Management, Utah, Nevada