Sky Quarry Inc.

Previous wording

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 1-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on May 7, 2024.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

As a result of our financial condition, we have included in our condensed consolidated financial statements as of September 30, 2024 and December 31, 2023, and for the three and nine months ended September 30, 2024 and 2023, 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, 2023 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 September 30, 2024, we have incurred accumulated net losses of $19,764,072. 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.

Current wording

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.

Previous wording

Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

Current wording

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

Previous wording

This section includes a summary of our historical results of operations, followed by detailed comparisons of our results for the nine months ended September 30, 2024 and 2023, respectively. We have derived this data from our unaudited interim condensed consolidated financial statements included in this Quarterly Report.

Current wording

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.

Previous wording

We had net sales of $4,846,795 and $19,174,369 for the three and nine months ended September 30, 2024, compared to $14,397,648 and $39,140,246 for the three and nine months ended September 30, 2023. Our cost of goods sold for the three and nine months ended September 30, 2024 were $4,532,565 and $18,409,703, compared to $11,647,135 and $33,406,211 for the three and nine months ended September 30, 2023. The significant decrease in our sales were the direct result of a combination of reduction in WTI pricing and refurbishment of the Foreland refinery. WTI pricing fell from $87 per barrel on April 5, 2024, to $67 per barrel on September 10, 2024, which corresponded with reduced pricing in the end products. The refurbishment at Foreland refinery occurred over the period of May to July 15, 2024, covering an overhaul of the primary and secondary boilers, and completion of 24 work packages. This significant project, conducted once every decade, not only aims to enhance air quality and water recycling but also establishes the foundation for increased operational efficiency and the potential to raise production levels moving forward. During the nine months ended September 30, 2024 the Company incurred one-time cost of goods sold items related to maintaining the refinery during its refurbishment. These expenses totaling approximately $770,915, were necessary to ensure continued operations and safety while refurbishments were underway. These costs are non-recurring and are not expected to impact future periods.

Current wording

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.

Previous wording

Our operating expenses were $1,499,381 and $4,446,685 for the three and nine months ended September 30, 2024, compared to $1,433,634 and $3,821,476 for the three and nine months ended September 30, 2023. Our operating expenses consisted of General and Administrative, Share-Based Payment, Depreciation and Amortization, and Foreign Exchange.

Current wording

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.

Previous wording

Our net income (loss) was ($4,445,206) and ($10,524,493) for the three and nine months ended September 30, 2024, compared to ($597,527) and $450,476 for the three and nine months ended September 30, 2023.

Current wording

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.

Previous wording

Our net sales, costs of good sold, gross profit, operating expenses, other income (expense) and net income (loss) for the three and nine months ended September 30, 2024 and 2023 were as follows:

Current wording

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:

Previous wording

We had net sales of $4,846,795 and $19,174,369 for the three and nine months ended September 30, 2024, compared to $14,397,648 and $39,140,246 for the three and nine months ended September 30, 2023, a decrease of ($9,550,853), and ($19,965,877), respectively. The decline in net sales for each period present compared to the prior period was primarily due to a combination of reduction in WTI pricing and refurbishment of the Foreland refinery. WTI pricing fell from $87 per barrel on April 5, 2024, to $67 per barrel on September 10, 2024, which corresponded with reduced pricing in the end products. The refurbishment at Foreland refinery occurred over the period of May to July 15, 2024, covering an overhaul of the primary and secondary boilers, and completion of 24 work packages. This significant project, conducted once every decade, not only aims to enhance air quality and water recycling but also establishes the foundation for increased operational efficiency and the potential to raise production levels moving forward. We expect strong growth as our refinery asset improvements increase production, and our direct consumer sales and marketing efforts continue to perform.

Current wording

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.

Previous wording

Cost of goods sold as a percentage of net sales was 94% and 96% for the three and nine months ended September 30, 2024, compared to 81% and 85% for the three and nine months ended September 30, 2023. The expenses related to non-recurring items represented 4% of costs of goods sold. The increased cost as a percentage of revenues for the third quarter was due to the reduction in operating production volumes as the refinery ramps up post refurbishment activities.

Current wording

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.

Previous wording

Our general and administrative expenses were $1,205,032 and $3,322,846 for the three and nine months ended September 30, 2024, compared to $1,173,593 and $3,195,049 for the three and nine months ended September 30, 2023, an increase of $31,439, and $127,797, respectively. In the nine months ended September 30, 2024, general and administrative expenses consisted mainly of executive compensation of $1,157,697, professional fees of $920,378, insurance of $479,600, lease and utilities of $200,090, bank charges of $136,477, travel expenses of $158,748, automobile of $79,544, licenses of $36,068 and other of $154,245. In the three months ended September 30, 2024, general and administrative expenses consisted mainly of executive compensation of $474,457, professional fees of $382,688, insurance of $150,516, lease and utilities $113,590, bank charges of $11,840, travel of $27,252, automobile of $24,510, licenses of $13,384 and other expense of $6,795. In the nine months ended September 30, 2023, general and administrative expenses consisted mainly of executive compensation of $1,838,402, professional fees of $858,656, rent of $146,699, travel expenses of $134,175, insurance of $133,237, licenses of $51,073, and bank charges of $9,488. In the nine months ended September 30, 2024, increase over the nine months ended September 30, 2023 is due to realizing a full 9 months of rent expense. Additionally, some of the incremental costs of the Company’s RegA Offering and listing on the Nasdaq Capital Market increased our professional, consulting and marketing expenses in the current periods.

Current wording

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.

Previous wording

Other expense was $3,260,108 and $6,842,474 for the three and nine months ended September 30, 2024, respectively, compared to $1,914,406 and $1,459,756 for the three and nine months ended September 30, 2023, respectively, an increase of $1,345,702, and $5,382,718, respectively. In the nine months ended September 30, 2024, other income (expense) consisted of interest expense, net of interest income $4,773,663, loss on issuance of warrants of $1,935,934, loss on extinguishment of debt $108,887, loss on sale of assets $25,075 and other income $1,085. In the three months ended September 30, 2024, other income (expense) consisted of interest expense, net of interest income of $1,320,115, loss on issuance of warrants of $1,935,934 and other expense of $4,059. During the quarter ended September 30, 2024 the Company recorded a one-time expense related to the initial measurement of its warrant liability, totaling $1,935,934. 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 this one-time loss related to the warrant liability measurement should be evaluated separately from ongoing operations when assessing the Company’s financial performance. 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.

Current wording

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.

Previous wording

Net loss was $4,445,260 and $10,524,493, or a loss of $0.25 and $0.59 per share, for the three and nine months ended September 30, 2024, respectively compared to net loss of $597,781 and net income of $466,646, or $0.04 and $0.03 per share, for the three and nine months ended September 30, 2023, respectively.

Current wording

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.

Previous wording

Our net loss compared to the previous periods net income was primarily driven by reduced net sales from refurbishment of the Foreland refinery during the period of May to July 2024, higher interest expense on increased term debt and the loss on issuance of private placement warrants.

Current wording

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.

Previous wording

We had negative operating cash flows for the three and nine months ended September 30, 2024. Our cash on hand as of September 30, 2024, was $292,290. While we had negative net cash from operations for the three and nine months ended September 30, 2024, our monthly cash flow burn rate for the nine months ended September 30, 2024 was $512,364. Although we have strong short-term cash flow, as we integrate our Foreland acquisition we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

Current wording

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.

Previous wording

Our cash decreased by $33,901 as of September 30, 2024 as compared to December 31, 2023. Our total current assets decreased by $1,593,916 primarily because of a decrease in accounts receivable of $1,988,215 offset by an increase of prepaid expenses of $179,439 and inventory of $248,762. Our total assets decreased by $1,827,929 due to the changes in current assets as well as an increase in property, plant and equipment of $594,876, oil and gas properties of $689,992 offset by a decrease in restricted cash $1,466,426 and operating right-of-use asset of $52,455.

Current wording

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.

Previous wording

Our current liabilities as of September 30, 2024 as compared to December 31, 2023 increased by $2,720,082 and our total liabilities increased by $2,638,344, both primarily as a result of an increase in current maturities of notes payable of $3,914,152, and warrant liability of $1,936,937, offset by decreases in accounts payable and accrued expenses of $1,784,476, current portion of operating lease of $12,971, lines of credit of $1,333,560, note payable of 43,316, and operating lease liability of $38,422.

Current wording

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.

Previous wording

Our cash on hand as of September 30, 2024 was $292,920. 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 debt payments, we are not yet generating sufficient cash flow to cover operational costs. The need for cash is driven by both regular operating expenses, and financial loan. 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 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.

Current wording

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.

Previous wording

Our net cash used in operating activities for the nine months ended September 30, 2024, were $4,616,746, as compared to cash generated of $2,529,554 at September 30, 2023. Our net cash used in operating activities for the nine months ended September 30, 2024 consisted of a net loss of $10,524,493, decrease in working capital of $270,380, less share based compensation of $534,572, depreciation and amortization of $589,267, amortization of debt issuance costs of $2,936,408, amortization of right-of-use asset of $52,455, loss on issuance of warrants of $1,936,937, loss on extinguishment of debt of $108,887 and loss on sale of assets of $25,075.

Current wording

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.

Previous wording

Our cash flow used in investing activities for the nine months ended September 30, 2024 and 2023 was $1,899,211 and $1,307,265, respectively, an increase of $591,945. Our investing activities in 2024 and 2023 consisted of a net increase from proceeds of sale of assets of $200,000, payments for exploration and evaluation assets of $117,547, and payments for property, plant and equipment of $274,398.

Current wording

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.

Previous wording

Our net cash provided by financing activities for the nine months ended [September 30, 2024 and 2023 was $5,023,763 and $2,779,347, respectively, a decrease of $2,244,416. Our cash flows from financing activities in 2024 consisted of proceeds of lines of credit of $33,556,317, proceeds from notes payable of $16,767,738, issuance of preferred stock of $308,000, exercise of warrants of $4,790,597, and issuance of common stock of $34,025, offset by payments on lines of credit of $34,889,877, payments on notes payable of $12,216,266, debt discount on notes payable of $1,565,277, preferred stock offering costs of $40,874, and common stock offering costs of $1,720,619. Our cash flows from financing activities in 2023 consisted of proceeds of lines of credit of $20,501,839, proceeds from notes payable of $2,935,860, and issuance of common stock of $28,741, offset by payments on lines of credit of $17,828,495, payments on notes payable of $41,854 and deb discount on note payable of $2,816,744.

Current wording

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.