U.S. SECURITIES AND EXCHANGE COMMISSION

 

PART II – OFFERING CIRCULAR

 

An offering statement pursuant to Regulation A relating to these shares has been filed with the U.S. Securities and Exchange Commission (the “Commission”). Information contained in this preliminary Offering Circular is subject to completion or amendment. These shares may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This preliminary Offering Circular shall not constitute an offer to sell or a solicitation of an offer to buy or sell any of these shares in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the final Offering Circular or the offering statement in which such final Offering Circular was filed may be obtained.

 

PRELIMINARY OFFERING CIRCULAR DATED [•], 2023

 

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SKY QUARRY INC.

707 W. 700 S. Suite 101

Woods Cross, UT 84087

424-394-1090

www.skyquarry.com

 

Best Efforts Offering of up to 3,333,333 Shares of Common Stock

 

This is a public offering of securities of Sky Quarry Inc., a Delaware corporation (“we,” “us,” “our” or “our company”). We are offering up to 3,333,333 shares of common stock at an offering price of $6.00 per share (the “Offering Shares”) for aggregate maximum gross proceeds of $19,999,998. None of our existing shareholders, nor any of our officers, directors or affiliates are selling any securities in this Offering.

 

Reverse Stock Split 

The Company intends to seek shareholder approval, and all other necessary consents, to file a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware to effect a reverse stock split of its shares of common stock (the “Reverse Stock Split”) at a ratio of one-for-three (the “Split Ratio”), without changing the par value, rights, terms, conditions, and limitations of such shares of common stock, to be made effective on qualification of this Offering Circular by the Commission (the “Effective Split Date”). No fractional shares will be issued in connection with the Reverse Stock Split, and any of our stockholders that would be entitled to receive a fractional share as a result of the Reverse Stock Split will instead receive one additional share of our common stock in lieu of the fractional share. The reverse stock split will not in itself affect any stockholder’s ownership percentage of our common stock, except to the extent that any fractional share is rounded


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up to the nearest whole share. The number of shares of common stock subject to the exercise of outstanding options, warrants and convertible securities will also be reduced by the Split Ratio as of the Effective Split Date and their respective exercise prices will be increased by the Split Ratio. Neither the authorized shares of capital stock nor the par value per share of our common stock will be affected by the Reverse Stock Split.

 

All historical share and per share information cited in this Offering Circular has been retroactively adjusted to reflect the impact of this reverse stock split. Our historical financial statements remain unchanged and have not been adjusted to reflect the reverse stock split.

 

Our common stock is not currently listed or quoted on any exchange. We have applied to have our common stock listed on the Nasdaq Capital Market (which we sometimes refer to as Nasdaq) under the symbol “SKYQ”. If approved, we intend to list our common stock on the Nasdaq Capital Market following Nasdaq’s certification of our Form 8-A to be filed concurrently with qualification of this, or a post-qualification amendment to this, Offering Statement. However, the listing of our common stock on the Nasdaq Capital Market is not a condition of our proceeding with this Offering, and no assurance can be given that our application to list on Nasdaq will be approved or that an active trading market for our common stock will develop.

 

This is a Regulation A+ Tier 2 offering and there is no minimum number of Offering Shares that we must sell in order to conduct a closing in this Offering. The offering will commence within two calendar days after this Offering Circular has been qualified by the Commission. See “Plan of Distribution” on page 25.This offering will terminate at the earliest of: (1) the date on which the maximum offering amount has been sold, (2) the date which is one year after this Offering is qualified by the Commission, and (3) the date on which this Offering is earlier terminated by us in our sole discretion.

 

 

Price to

Public

 

Underwriting

Discount and

Commissions (1)

 

Proceeds to

Company (2)

Per Share

$

6.00

 

$

0.45

 

$

5.55

Total Maximum

$

19,999,998

 

$

1,500,000

 

$

18,499,998

 

(1)We have engaged Digital Offering, LLC (“Digital Offering”), a Commission registered broker/dealer and member of the Financial Industry Regulatory Authority (“FINRA”) to act as lead selling agent (the “Lead Selling Agent”) to offer the shares of our common stock, par value $0.0001 to prospective investors in this Offering on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be received by us in this Offering. In addition, the Selling Agent may engage one or more sub-agents or selected dealers to assist in its marketing efforts (we sometimes refer to Digital Offering and such sub-agents and/or dealers collectively as the “Selling Agents”). Digital Offering is not purchasing the shares of common stock offered by us and is not required to sell any specific number or dollar amount of shares in this Offering before a closing occurs. We will pay a cash commission of 7.5% to Digital Offering on sales of the shares of common stock in this Offering and issue warrants to Digital Offering (the “Agent Warrants”) to purchase that number of shares of common stock equal to 5.0% of the total number of shares sold in this Offering. The Agent Warrants will have an exercise price of $7.50 per share and will be exercisable commencing six months after the date of commencement of sales in this Offering (in compliance with FINRA Rule 5110(e)(1)) and will be exercisable until the fifth anniversary of the date of commencement of sales in the offering. The Agent Warrants will contain customary terms and conditions, including without limitation, provisions for cashless exercise. The Agent Warrants and the shares issuable upon the exercise of the Agent Warrants are being registered by means of this Offering Circular for the offering. See “Plan of Distribution” for details.  

 

(2)Does not include other expenses of the offering. See “Plan of Distribution” for a description of these expenses.  


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INVESTING IN THE COMMON STOCK OF SKY QUARRY, INC. IS SPECULATIVE AND INVOLVES SUBSTANTIAL RISKS. YOU SHOULD PURCHASE THESE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING ON PAGE 9 TO READ ABOUT THE MORE SIGNIFICANT RISKS YOU SHOULD CONSIDER BEFORE BUYING THE COMMON STOCK OF THE COMPANY.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL OF ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

GENERALLY, NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO WWW.INVESTOR.GOV.

 

This offering circular is following the disclosure format of Part I of SEC Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

In the event that we become a reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”), we intend to take advantage of the provisions that relate to “Emerging Growth Companies” under the JOBS Act of 2012 (the “JOBS Act”). See “Implications of Being an Emerging Growth Company.”

 

 

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Digital Offering, LLC

Sales of these securities will commence on approximately [•], 2023.


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TABLE OF CONTENTS

 

 

 

IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR

5

 

 

SUMMARY

6

 

 

THE OFFERING

9

 

 

RISK FACTORS

11

 

 

USE OF PROCEEDS

24

 

 

PLAN OF DISTRIBUTION

25

 

 

DETERMINATION OF OFFERING PRICE

35

 

 

DILUTION

36

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

38

 

 

BUSINESS

46

 

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

55

 

 

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

59

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

61

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

63

 

 

DESCRIPTION OF SECURITIES

66

 

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

69

 

 

PROPERTIES

69

 

 

LEGAL PROCEEDINGS

70

 

 

FINANCIAL STATEMENTS

71

 

You should rely only on the information contained in this Offering Circular. We have not authorized anyone to provide you with different information.

 

The information in this Offering Circular assumes that all of the Shares offered are sold.

 

Unless otherwise stated in this Offering Circular, “we,” “us,” “our,” “our company” or “Sky Quarry” refers to Sky Quarry Inc. and our predecessor operations.


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IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR

 

We are offering to sell, and seeking offers to buy, our securities only in jurisdictions where such offers and sales are permitted. Please carefully read the information in this Offering Circular and any accompanying Offering Circular supplements, which we refer to collectively as the “Offering Circular.” You should rely only on the information contained in this Offering Circular. We have not authorized anyone to provide you with any information other than the information contained in this Offering Circular. The information contained in this Offering Circular is accurate only as of its date or as of the respective dates of any documents or other information incorporated herein by reference, regardless of the time of its delivery or of any sale or delivery of our securities. Neither the delivery of this Offering Circular nor any sale or delivery of our securities shall, under any circumstances, imply that there has been no change in our affairs since the date of this Offering Circular. This Offering Circular will be updated to the extent required by the federal securities laws.

 

This Offering Circular is part of an Offering Statement that we filed with the Commission using a continuous offering process pursuant to Rule 251(d)(3)(i)(F) under the Securities Act of 1933 (the “Securities Act”). Periodically, we may provide an Offering Circular supplement that would add, update or change information contained in this Offering Circular. Any statement that we make in this Offering Circular will be modified or superseded by any inconsistent statement made by us in a subsequent Offering Circular supplement. The Offering Statement we filed with the Commission includes exhibits that provide more detailed descriptions of the matters discussed in this Offering Circular. You should read this Offering Circular and the related exhibits filed with the Commission and any Offering Circular supplement, together with additional information contained in our annual reports, semi-annual reports and other reports that we will file periodically with the Commission. The Offering Statement and all supplements and reports that we have filed or will file in the future can be read at the Commission website, www.sec.gov.

 

Unless otherwise indicated, data contained in this Offering Circular concerning our business are based on information from various public sources. Although we believe that these data are generally reliable, such information is inherently imprecise, and our estimates and expectations based on these data involve a number of assumptions and limitations. As a result, you are cautioned not to give undue weight to such data, estimates or expectations.

 

Forward-Looking Statements

 

This document contains forward-looking statements. All statements pertaining to our future financial and/or operating results, future events, or future developments may constitute forward-looking statements. The statements may be identified by words such as “expect,” “look forward to,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “project,” or words of similar meaning. Such statements are based on the current expectations and certain assumptions of our management, of which many are beyond control. These are subject to a number of risks, uncertainties, and factors, including but not limited to those described in disclosures. Should one or more of these risks or uncertainties materialize, or should underlying expectations not occur or assumptions prove incorrect, actual results, performance, or our achievements may (negatively or positively) vary materially from those described explicitly or implicitly in the relevant forward-looking statement. We neither intend, nor assume any obligation, to update or revise these forward-looking statements in light of developments which differ from those anticipated.


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SUMMARY

 

This summary highlights certain information appearing elsewhere in this Offering Circular. For a more complete understanding of this Offering, you should read the entire Offering Circular carefully, including the risk factors and the financial statements.

 

Overview

 

We are an oil production, refining, and 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 and production of oil from asphalt shingles is expected to reduce the dependence on landfills for the disposal 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 a modular asphalt shingle recycling facility (“ASR Facility”), which can be deployed in areas 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.”

 

We have three (3) wholly-owned subsidiaries: 2020 Resources, LLC, a Delaware limited liability company; 2020 Resources (Canada) Ltd., an Alberta, Canadian corporation; and Foreland Refining Corporation, a Texas corporation.

 

On September 16, 2020, we acquired 2020 Resources LLC. The assets of 2020 Resources include an oil sands remediation facility (referred to in this Offering Circular as 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 is 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.


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Corporate Information

 

Our principal executive offices are located at 707 W. 700 S. Suite 101, Woods Cross, UT 84087, telephone (424) 394-1090. Our principal website is www.skyquarry.com. Information provided on or accessible through our website, is not part of this Offering Circular and is included solely as an inactive textual reference.

 

Following this Offering, we intend to file a Form 8-A to become a fully reporting issuer under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

Definitions

 

In this document, we refer to the following terms:

 

“Asphalt” is a dark brown to black, highly viscous, hydrocarbon produced from petroleum distillation residue. This distillation can occur naturally, resulting in asphalt lakes, or occur in a petroleum refinery using crude oil.

 

“Asphalt Cement” means a bitumen-based liquid binder used in asphalt pavement.

 

“ASR Facility” refers to our asphalt shingle recycling facility currently under development. Our design contemplates a modular, scalable, purpose-built facility capable of remediating waste asphalt shingles and separation into their base components of bitumen / asphalt cement, shingle granules, sand aggregate, limestone and fiberglass.

 

“bbl” refers to barrels of oil.

 

“DOT” means the U.S. Federal Department of Transportation.

 

“Eagle Springs Refinery” refers to our heavy oil refinery located near Ely in eastern Nevada.

 

“ECOSolv” refers to our proprietary “environmentally clean oil” waterless solvent and process we intend to use in the separation of oil from oily sands and also during the asphalt shingle remediation process.

 

“HMA” refers to hot mix asphalt paving aggregate, a combination of crushed or screened gravel, asphalt cement, and  binding additives.

 

“JP Morgan” refers to JPMorgan Chase Funding Inc, a wholly owned subsidiary of JPMorgan Chase & Co.

 

“PR Spring Facility” refers to our oil sands remediation facility located in PR Spring in eastern Utah.

 

“WAS” means waste asphalt shingles recovered from construction and demolition waste (roof replacement), also known as “tear-offs” and from rejected manufactured shingles, also known as “manufacturer’s scrap”.

 

“WTI” refers to the New York Mercantile Exchange (NYMEX) West Texas Intermediate Crude Oil spot contract, an oil price benchmark that is central to global commodities trading, and is used to forecast energy input and commodity sale prices.

 

Implications of Being an Emerging Growth Company

 

As an issuer with less than $1 billion in total annual gross revenues during our last fiscal year, we will qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and this status will be significant if and when we become subject to the ongoing reporting  


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requirements of the Exchange Act upon filing a Form 8-A. An emerging growth company may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:

 

·will not be required to obtain an auditor attestation on our internal controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;  

·will not be required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”);  

·will not be required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes);  

·will be exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;  

·may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A; and  

·will be eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards.  

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards, and hereby elect to do so. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under Section 107 of the JOBS Act. 

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act, as amended, or such earlier time that we no longer meet the definition of an emerging growth company. Note that this Offering, while a public offering, is not a sale of common equity pursuant to a registration statement since the offering is conducted pursuant to an exemption from the registration requirements. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period. 

 

Certain of these reduced reporting requirements and exemptions are also available to us due to the fact that we may also qualify, once listed, as a “smaller reporting company” under the rules of the Commission. For instance, smaller reporting companies are not required to obtain an auditor attestation on their assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive Officer pay ratio disclosure; and may present only two years of audited financial statements.  

 

If we do not become a public reporting company under the Exchange Act for any reason, we will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. The ongoing reporting requirements under Regulation A are more relaxed than for “emerging growth companies” under the Exchange Act. The differences include, but are not limited to, being required to file only annual and semiannual reports, rather than annual and quarterly reports. Annual reports are due within 120 calendar days after the end of the issuer’s fiscal year, and semiannual reports are due within 90 calendar days after the end of the first six months of the issuer’s fiscal year. 


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THE OFFERING

 

Securities offered and price per share:

 

Up to 3,333,333 shares of common stock, at $6.00 per share (the “Offering Shares”).

 

 

 

Best efforts offering:

 

There is no minimum number of Offering Shares that we must sell in order to conduct a closing in this Offering. Our directors and officers shall be entitled to purchase Shares in the Offering.

 

 

 

Securities outstanding prior to this Offering:

 

·16,323,089 shares of common stock (1); 

·1 share of Series A Preferred Stock; 

·200,000 shares of Series B Preferred Stock 

 

 

 

Securities outstanding after this Offering:

 

·19,656,422 shares of common stock (1) (2) (3); 

 

 

 

 

Selling Agent

 

We have engaged Digital Offering to serve as our lead selling agent to assist in the placement of the Offering Shares in this Offering on a “best efforts” basis. In addition, Digital Offering may engage one or more sub-agents or selected dealers to assist in its marketing efforts. See “Plan of Distribution” for further details.

 

 

 

Use of proceeds:

 

See “Use of Proceeds” beginning on page 24.

 

 

 

Termination of the Offering:

 

This offering will terminate at the earliest of: (1) the date on which the maximum offering amount has been sold, (2) the date which is one year after this Offering is qualified by the Commission, and (3) the date on which this Offering is earlier terminated by us in our sole discretion.

 

 

 

Proposed listing of common stock:

 

Our common stock is not currently listed or quoted on any exchange. We have applied to have our common stock listed on the Nasdaq Capital Market under the symbol “SKYQ”. If approved, we intend to list our common stock on the Nasdaq Capital Market following Nasdaq’s certification of our Form 8-A to be filed concurrently with qualification of this, or a post-qualification amendment to this, Offering Statement. However, the listing of our common stock on the Nasdaq Capital Market is not a condition of our proceeding with this Offering, and no assurance can be given that our application to list on Nasdaq will be approved or that an active trading market for our common stock will develop.

 

 

 

Risk factors:

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning at page 9.

 

(1)As of December 19, 2023 we have 48,969,268 shares of common stock issued and outstanding. We estimate that upon qualification and following a reverse stock split of 1:3 we will have approximately 16,323,089 shares issued and outstanding. This does not reflect shares of common stock issuable upon exercise of warrants to purchase 5,599,079 shares, options to purchase 566,667 shares, 119,048 shares of common stock issuable upon the conversion of 200,000 shares of Series B Convertible Preferred Stock and 416,667 shares of common stock issuable upon the conversion of a secured promissory note. Assuming the full exercise and  


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conversion of the above, the shares of common stock outstanding before and after the Offering would be 16,323,089 and 27,338,836 shares, respectively.

 

(2)Assumes we raise sufficient capital to repurchase the one (1) share of Series A Preferred Stock and 2,249,880 shares of common stock from JP Morgan. See “Use of Proceeds”. 

 

(3)All of the outstanding shares of Series B Preferred Stock will automatically convert into shares of our common stock simultaneously with the completion of the Offering. 


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RISK FACTORS

 

Any investment in our common stock involves a high degree of risk. You should consider carefully the following information, together with the other information contained in this Offering Circular, before you decide to buy our common stock. If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected. In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.

 

We are providing services to an industry that is heavily regulated under federal law and the laws of most states. We face risks in developing our product candidates and services and eventually bringing them to market. We also face risks that our business model may become obsolete. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.

 

SUMMARY

 

·There is no guarantee that we will ever successfully develop the technology that is essential to our business.  

·We are a comparatively early-stage technology company that has incurred operating losses in the past and may never achieve or maintain profitability.  

·We operate in a highly competitive industry that is dominated by several very large, well-capitalized market leaders, and the size and resources of some of our competitors may allow them to compete more effectively than we can.  

·We rely on third parties to provide services essential to the success of our business. If the third parties we rely on to provide services necessary to our business become insolvent, it would be materially disruptive to our business, and we may incur high costs and time to secure alternative supply.  

·Substantially all of our assets are pledged as collateral to certain lenders.  

·We are controlled by our officers and directors and a small number of large shareholders.  

·In certain circumstances, investors will not have dissenters’ rights.  

·As of the date of this Offering Circular there was no market for our common stock.  

·Management determined that as of the issuance of the Company’s financial statements as of and for the year ended December 31, 2022, that there was substantial doubt about the Company’s ability to continue as a going concern. The independent registered public accounting firm’s opinion related to those financials statements is also modified to reflect a “going concern”.  

·Investors in this Offering may not be entitled to a jury trial with respect to claims arising under the Subscription Agreement, which could result in less favorable outcomes to the plaintiff(s) in any action under these agreements.  

 

RISKS RELATED TO OUR COMPANY

 

Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

 

We have sustained losses from operations of $1,481,445 and $1,436,491 for the years ended December 31, 2022 and 2021, respectively. Accordingly, we have concluded that substantial doubt exists regarding our ability to continue as a going concern. Our audited consolidated financial statements for the year ended December 31, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These consolidated


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financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis. In its report on our consolidated financial statements for the years ended December 31, 2022 and 2021, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations, which would have a material adverse effect on our operations.

 

Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

We may not raise enough capital in this Offering to begin generating revenue at our PR Spring Facility.

 

During the first and second quarters of 2024, we expect to begin generating revenues from the operations of our PR Spring Facility. However, we will need approximately $4,500,000 to complete the retrofit of the facility, and as a result may need to raise additional funds after this Offering for such purposes. Assuming we are able to raise additional capital sufficient to retrofit the PR Spring Facility within or after this Offering, we expect that a significant portion of our gross revenues for the year ended December 31, 2024 will be derived from sales of oil and recycled WAS byproducts from our PR Spring Facility. If we are unsuccessful in raising sufficient funds to complete the retrofit, our PR Spring operations and business plan may be curtailed or fail.

 

We have a limited operating history upon which you can evaluate our performance, have a history of losses and have only been operating the Eagle Springs Refinery since September 30, 2022. Accordingly, our prospects must be considered in light of the risks that any new company encounters.

 

We were incorporated under the laws of Delaware on June 4, 2019. We have generated limited revenues and have a history of losses. On September 30, 2022, we acquired the Eagle Springs Refinery, and have only had operational control of that facility for less than one year. The likelihood of our creation of a viable business must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the integration of a newly acquired operating business, the growth of our business from the PR Spring Facility, operation in a competitive industry, and the continued development of our technology and products. We anticipate that our operating expenses will increase for the near future, and there is no assurance that we will be profitable in the near future, if at all. You should consider our business, operations, and prospects in light of the risks, expenses, and challenges facing our company in its early stages.

 

Our future operating results will depend on many factors, including but not limited to:

 

·our ability to raise adequate working capital;  

·the success of the development of our facilities;  

·the level of our competition;  

·the WTI market; 


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·our ability to successfully integrate the acquisition of the Eagle Springs Refinery and operations; 

·our ability to attract and maintain key management and employees; and 

·our ability to efficiently develop and produce sufficient quantities of saleable products from waste asphalt shingles in a highly competitive and speculative environment while maintaining quality and controlling costs. 

 

We depend on several significant customers, and a loss of one or more significant customers could adversely affect our results of operations.

 

As of June 30, 2023, three customers accounted for 43%, 16% and 10%, respectively, of our accounts receivable balance. During the six-month period ended June 30, 2023, three of our customers represented 36%, 25% and 20% of our revenues.

 

These customers do not have any ongoing commitment to purchase our products. While additional customers continue to be sourced, customer concentration risk still exists. The loss of or a sustained decrease in demand by these customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations. In addition, should these large customers default in their obligations to pay, our results of operations and cash flows could be adversely affected.

 

We depend on several principal suppliers for the majority of our crude oil. A disruption in supply or a change in our relationship with any one of them could adversely affect our business, financial condition and results of operations.

 

As of June 30, 2023, three vendors accounted for 23%, 20% and 19%, respectively, of our supply of crude oil and other petroleum fuel operational inputs. A change of vendors, a disruption in supply or a significant change in pricing with any of these suppliers could have a material adverse effect on our business, financial condition and results of operations.

 

Our future success is dependent on the continued service of our management team.

 

Our future success is dependent, in a large part, on retaining the services of our current management team. Our executive officers possess a unique and comprehensive knowledge of our industry, our technology and related matters that are vital to our success within the industry. The knowledge, leadership and technical expertise of these individuals would be difficult to replace and the loss of one or more of our officers could have a material adverse effect on our operating and financial performance, including our ability to develop and execute our long-term business strategy. We do not maintain a key person life insurance policy on any of the members of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of our directors or officers. Notwithstanding the above, none of our officers have any experience in recycling waste asphalt shingles.

 

Certain corporate actions need the consent of one of our principal shareholders.

 

JP Morgan owns approximately 13% of our outstanding shares of common stock. We have an agreement with JP Morgan which prohibits certain corporate actions without the consent of JP Morgan. If we do not raise sufficient funds in this Offering to redeem JP Morgan’s shares of common stock and Series A Preferred Stock, JP Morgan will continue to have control over certain corporate actions, which could adversely affect our ability to manage and operate our business.


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Part of our asset base is currently pledged as collateral to one or more lenders.

 

We have entered into financing arrangements with lenders that contain covenants that could limit our ability to engage in specified types of transactions. These covenants may limit our ability to, among other things, consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets.

 

A breach of any of the covenants with our lenders could result in a default under the terms of certain financings in which the lender could elect to declare all amounts outstanding thereunder to be immediately due and payable. If the current secured financial obligations are repaid, we may need to pledge all of our assets as collateral to secure additional financing in the future.

 

Acquisition opportunities may present themselves that in hindsight did not achieve the positive results anticipated by our management.

 

From time to time, acquisition opportunities may become available to us. Those opportunities may involve the acquisition of specific assets, such as intellectual property or inventory, or may involve the assumption of the business operations of another entity. Our goal with any future acquisition is that any acquisition should be able to contribute neutral to positive EBITDA to us after integration. To effect these acquisitions, we will likely be required to obtain lender financing or issue additional shares of stock in exchange for the shares of the target entity. If the performance of the acquired assets or entity does not produce positive results for us, the terms of the acquisition, whether it is interest rate on debt, or additional dilution of stockholders, may prove detrimental to our financial results or the performance of your particular shares.

 

Environmental and regulatory compliance may impose substantial costs on us.

 

Our operations are or will be subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or to pay damages regardless of fault. Environmental laws also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.

 

Our activities are or will be subject to extensive laws and regulations governing our remediation, and recycling activities, as well as those governing exports, taxes, labor standards, occupational health, waste disposal, land use, protection and remediation of the environment, protection of endangered and protected species, operational safety, toxic substances and other matters. Generally, our activities and operations may be subject to risks and liabilities associated with pollution of the environment and disposal of any waste products. Compliance with these laws and regulations may impose substantial costs on us and may subject us to potential liabilities. In addition, should there be changes to existing laws or regulations, our competitive position within the industry may be adversely affected, as many industry players may have greater resources than we do.

 

We may be exposed to third party liability and environmental liability in the operation of our business.

 

Our operations could result in liability for personal injuries, property damage, discharge of hazardous materials, remediation and clean-up costs and other environmental damage. We could be liable for environmental damages caused by previous owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, and the payment of such liabilities could have a material adverse effect on our financial condition and results of operations. The release of harmful substances in the environment or other environmental damages caused by our activities could result in us losing our operating and environmental permits or inhibit us from obtaining new permits or renewing existing permits. We currently have a limited amount of insurance and at such time as we commence operations we expect to be able to obtain and maintain additional insurance coverage for our operations, including limited coverage


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for sudden environmental damages. Accordingly, we could incur substantial costs to comply with environmental laws and regulations which could affect our ability to operate as planned.

 

We rely on technology to conduct our business, and our technology could become ineffective or obsolete.

 

We rely on technology, including proprietary techniques, processes, and intellectual property, as well as closely-held economic models, to develop our plans and estimates and to guide our development, processing, and production activities. We will be required to continually enhance and update our technologies in order to maintain their efficacy and to avoid obsolescence. As such, our business may carry with it a greater degree of technological risk than other projects that employ commercially proven technologies. If major process design changes are required, the costs of doing so may be substantial and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired. Further, even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than if we were technology more efficient.

 

RISKS RELATED TO ASPHALT SHINGLE RECYCLING

 

The nature of our WAS recycling operations may involve various risks.

 

Our anticipated operations in asphalt shingle recycling and reclamation involves many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. Furthermore, the marketability of any products produced from waste asphalt shingles will be affected by numerous factors beyond our control. These factors include, but are not limited to, price fluctuations, proximity and capacity of processing equipment, equipment and labor availability and government regulations (including, without limitation, regulations relating to prices, taxes, royalties, allowable production, importing and exporting of base components of asphalt cement, shingle granules, sand aggregate, limestone and fiberglass, land use and environmental protection). The extent of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital.

 

Our ECOSolv Technology May Not Work as Expected.

 

The recovery of oil from our bitumen deposit and the process of recycling WAS is dependent on the viability of our proprietary technology, which we refer to as the ECOSolv process. However, the ECOSolv technology has never been used on a commercial scale. If the ECOSolv technology does not perform as expected, our WAS business plan is likely to fail.

 

The viability of our asphalt shingle recycling and reclamation business plan, business operations, and future operating results and financial condition are and will be exposed to fluctuating prices for our end-products.

 

Prices for asphalt cement, shingle granules, sand aggregate, limestone and fiberglass, and their related products are affected by supply and demand, which can fluctuate significantly. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability or conflicts, and economic conditions. Price fluctuations can have a material effect on our ability to raise capital and fund our activities, our potential future earnings, and our financial condition.

 

Because of the speculative nature of asphalt shingle recycling, there is a risk that our business may not succeed.

 

We cannot provide investors with any assurance that we will be able to obtain a requisite amount of feed stock or asphalt shingles necessary for the success of our asphalt shingle recycling and reclamation


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operations, which may force us to abandon or curtail our business plan related to asphalt shingle recycling and reclamation and, as a result, any investment in us may become materially adversely effected.

 

The price for asphalt cement, shingle granules, sand aggregate, limestone and/or fiberglass is subject to a variety of factors that are beyond our control.

 

These factors include:

 

·consumer and/or industrial demand;  

·supply of asphalt shingles;  

·domestic governmental regulations and taxes;  

·the price and availability of solvent materials and feedstocks;  

·adverse weather conditions;  

·worldwide economic conditions.  

 

The market for asphalt cement, shingle granules, sand aggregate, limestone and/or fiberglass may be highly competitive, and intensely competitive pressures could force us to abandon or curtail our business plan related to asphalt shingle recycling and reclamation.

 

The market for asphalt cement, shingle granules, sand aggregate, limestone and/or fiberglass products may be highly competitive, and we can only expect competition to intensify in the future. Numerous well-established companies are focusing significant resources on similar recycling and remediation activities and may be competing with us for opportunities. Competitors include larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own marketing operations, which may give them a competitive advantage. Actual or potential competitors may be strengthened through the acquisition of additional assets and interests. As a result, there can be no assurance that we will be able to compete successfully or that competitive pressures will not adversely affect our business, results of operations and financial condition. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.

 

Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.

 

In the future, we may become responsible for costs associated with abandoning and reclaiming facilities which we use for recycling of asphalt shingles. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.” The use of funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.

 

We may have difficulty marketing or distributing the asphalt cement, shingle granules, sand aggregate, limestone and/or fiberglass we may produce, which could harm our financial condition.

 

In order to sell the finished asphalt cement, shingle granules, sand aggregate, limestone and fiberglass that we are able to produce from the asphalt shingle recycling process, if any, we must be able to make economically viable arrangements for the storage, transportation and distribution of these products to the market. We will rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate.


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Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of our products and in turn diminish our financial condition or ability to maintain our operations.

 

We do not yet have a market for the anticipated recycled products that we expect to generate from our PR Spring Facility.

 

There can be no assurance that a market will develop for the recycled products that we intend to produce. We do not have any sales or supply agreements with any company for the byproducts of waste asphalt shingles.

 

Our shingle remediation activities will be dependent upon having an available supply of waste asphalt shingles from waste haulers, shingle manufacturers or other third parties.

 

As of the date of this Offering Circular we do not have any supply agreements with landfills and/or private waste haulers to supply us with waste asphalt shingles, which if we are unable to acquire, will adversely affect our business operations and financial results.

 

RISKS RELATED TO OIL SANDS EXPLORATION

 

We do not have any proven oil reserves.

 

As of the date of this Offering Circular our bitumen deposit did not have any proven oil reserves. If our oil sands do not contain economically recoverable heavy oil and bitumen, and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail our planned operations at PR Spring and, as a result, any investment in us may severely impaired or could become worthless.

 

The price of oil has historically been volatile.

 

Our future financial condition and results of operations will depend, in part, upon the price for oil. Oil prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations will be highly dependent on the prices that we receive for oil. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The price for oil is subject to a variety of additional factors that are beyond our control. These factors include:

 

·the level of consumer and industrial demand for oil;  

·the domestic and foreign supply of oil;  

·the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;  

·domestic governmental regulations and taxes;  

·adverse weather conditions;  

·market uncertainty due to political conditions in oil and gas producing regions; and  

·worldwide economic conditions.  

 

These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil price movements with any certainty. In a low oil price environment oil sands exploration and development may not be economically or financially viable or profitable. Prolonged periods of low oil prices, or rising costs, could result in our mining and processing operations being delayed or cancelled.

 

Furthermore, our ability to sell oil will be affected by numerous factors beyond our control. These factors include, but are not limited to, proximity and capacity of refineries and pipelines and processing equipment, equipment and labor availability and government regulations (including, without limitation,


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regulations relating to taxes, royalties, importing and exporting of oil, and land use and environmental protection). Weather conditions or natural disasters or labor disputes may impair the distribution of oil and in turn diminish our financial condition and our ability to maintain our operations.

 

Oil sands development involves many risks.

 

The oil sands development business involves a variety of operating hazards and risks such as explosions, fires, spills, pollution, release of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available to us and/or force us to expend substantial monies in connection with litigation or settlements.

 

Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.

 

In the future, we may become responsible for costs associated with abandoning and reclaiming wells and facilities which we use for processing of oil sands. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning”. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.

 

RISKS RELATED TO OIL REFINING AND FUELS PRODUCTION

 

Volatility in crude oil and wholesale diesel prices affect our business, financial condition and results of operations.

 

Wholesale diesel prices are directly related to, and fluctuate with, the price of crude oil. Volatility in the price of crude oil, and subsequently wholesale fuel prices, is caused by many factors, including general political, regulatory and economic conditions, acts of war, terrorism or armed conflict, instability in oil producing regions, particularly in the Middle East and South America, refinery capacity and the value of U.S. dollars relative to other foreign currencies, particularly those of oil producing nations. In addition, the supply of fuel and our wholesale purchase costs could be adversely affected in the event of a shortage or oversupply of product, which could result from, among other things, the Russian invasion of Ukraine and the sanctions imposed on Russia and other countries, interruptions of fuel production at oil refineries, new supply sources, and sustained increases or decreases in global demand for diesel fuels. Significant increases and volatility in wholesale fuel prices could result in lower gross profit, as an increase in the retail price of motor fuel could impact consumer demand for diesel and could result in lower wholesale fuel gross profit dollars. As the market prices of crude oil, and, correspondingly, the market prices of wholesale fuels, experience significant and rapid fluctuations, we attempt to pass along wholesale price changes to our customers; however, we are not always able to do so immediately. The timing of any related increase or decrease in sales prices is affected by competitive conditions in our market areas. As such, our revenues and gross profit can increase or decrease significantly and rapidly over short periods of time and potentially adversely impact our business, financial condition, and results of operations. The volatility in crude oil and wholesale fuel costs and sales prices makes it extremely difficult to forecast future gross profits or predict the effect that future wholesale costs and sales price fluctuations will have on our operating results and financial condition.

 


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A significant decrease in demand for diesel and gasoline, including increased consumer preference for alternative fuels or improvements in fuel efficiency, in the areas we serve would materially affect our revenues and profitability.

 

The Energy Information Administration of the U.S. Department of Energy projects that U.S. motor gasoline consumption will decline at an average rate of 1.1% per year between 2012 and 2040 as improvements in fuel efficiency are expected to outpace increases in miles driven. A significant decrease in demand for these products in the areas we serve could significantly reduce our revenues. Our revenues are dependent on various trends, such as trends in consumer disposable income, the trucking industry, and travel in our market areas, and these trends can change. Regulatory action, including government-imposed fuel efficiency standards, may also affect demand for these fuels. Because certain of our operating costs and expenses are fixed and do not vary with the volumes of products we distribute, our costs and expenses might not decrease notably or at all should we experience such a reduction. As a result, we may experience declines in our profit margin if our fuel distribution volumes decrease.

 

Any technological advancements, regulatory changes or changes in consumer preferences causing a significant shift toward alternative products could reduce demand for the conventional petroleum-based fuels we currently produce. Additionally, a shift toward electric, hydrogen, natural gas or other alternative-power vehicles could fundamentally change our customers’ shopping habits or lead to new forms of fueling destinations or new competitive pressures.

 

New technologies have been developed and governmental mandates have been implemented to improve fuel efficiency, which may result in decreased demand for petroleum-based fuel. For example, in December 2021, the Biden Administration announced revised GHG emissions standards for light-duty vehicle fleets for Model Years 2023-2026, which some manufacturers may meet by increasing fuel efficiency or increasing the prevalence of zero-emissions vehicles in their fleets. The Biden Administration has also set a goal for federal vehicle acquisitions to be 100% zero-emissions vehicles by 2035, which may further influence the composition of vehicle fleets. Any of these outcomes could result in a reduction in demand from our wholesale customers, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

 

The industries in which we operate are subject to seasonal trends, which may cause our operating costs to fluctuate, affecting our cash flow.

 

We typically experience more demand for diesel in the late spring and summer months than during the fall and winter. Travel, farming, recreation and construction are typically higher in these months in the market areas in which we operate, increasing the demand for fuel that we sell and distribute. Therefore, our revenues and cash flows are typically higher in the second and third quarters of our fiscal year. As a result, our results from operations may vary widely from period to period, affecting our cash flow.

 

Our operations are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities that could exceed current expectations.

 

Our operations are subject to stringent and complex federal, state and local laws and regulations governing the release, disposal or discharge of materials into the environment, health and safety aspects of our operations, or otherwise relating to environmental protection.

 

There is inherent risk of incurring significant environmental costs and liabilities in the performance of our operations due to our handling of petroleum hydrocarbons and other hazardous substances and wastes, as a result of air emissions related to our operations. Spills or other releases of regulated substances, including such spills and releases that occur in the future, could expose us to material losses, expenditures and liabilities under applicable environmental laws and regulations. Under certain of such laws and regulations, we could be held strictly liable for the removal or remediation of previously released hazardous materials or property contamination, regardless of whether we were responsible for the release or


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contamination and even if our operations met previous standards in the industry at the time they were conducted. In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that could expose us to material losses. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage if an environmental claim is made against us. Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the trucking industry could continue, resulting in increased costs of doing business and consequently affecting profitability. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our industry in general in addition to our own results of operations, competitive position or financial condition. To the extent laws are enacted or other governmental action is taken that restricts development or imposes more stringent and costly operating, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected.

 

A climate-related decrease in demand for crude oil could negatively affect our business.

 

Supply and demand for crude oil is dependent upon a variety of factors, many of which are beyond our control. These factors include, among others, the potential adoption of new government regulations, including those related to fuel conservation measures and climate change regulations, technological advances in fuel economy and energy generation devices. For example, legislative, regulatory or executive actions intended to reduce emissions of GHGs could increase the cost of consuming crude oil, thereby potentially causing a reduction in the demand for this product. A broader transition to alternative fuels or energy sources, whether resulting from potential new government regulation, carbon taxes or consumer preferences could result in decreased demand for products like crude oil. Any decrease in demand could consequently reduce demand for our services and could have a negative effect on our business.

 

Our business operations may be materially adversely affected by negative impacts to the global economy, capital markets, or other geopolitical conditions resulting from economic uncertainty, armed conflicts, acts of terrorism, political unrest or health epidemics.

 

During the last several years, the global supply and demand for crude oil has experienced periodic downturns and sustained volatility, impacted by such factors as the COVID-19 pandemic and recovery, Russia’s invasion of Ukraine and the related sanctions imposed on Russia, the ongoing conflict in Israel and the Gaza Strip and the ensuing conflict in the Middle East, the global response to such conflicts, supply chain constraints and rising interest rates and costs of capital. Furthermore, the United States experienced a significant inflationary environment in 2022 that, along with international geopolitical risks, has contributed to concerns of a potential recession in 2023 that has caused oil and gas prices to retreat from their earlier highs in 2022 and has created further volatility. In 2023, OPEC announced production cuts to reduce the global oil supply. The actions of OPEC with respect to oil production levels and announcements of potential changes in such levels, including agreement on and compliance with production cuts, may result in further volatility in commodity prices and the oil industry in general.

 

Our business, financial condition and results of operations could be materially and adversely affected by further negative impact on the global economy and capital markets resulting from these global economic conditions, particularly if such conditions are prolonged or worsen. Any such disruptions may also magnify the impact of other risks described in this Offering Circular.


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RISKS RELATED TO OUR COMMON STOCK

 

Investors in this Offering may not be entitled to a jury trial with respect to certain claims which could result in less favorable outcomes to the plaintiff(s) in any action against us.

 

Investors in this Offering will be bound by the Subscription Agreement, which includes a provision under which investors waive the right to a jury trial of any claim they may have against us arising out of or relating to these agreements. By signing this agreement, the investor warrants that the investor has reviewed this waiver with his or her legal counsel, and knowingly and voluntarily waives the investor’s jury trial rights following consultation with the investor’s legal counsel.

 

If we oppose a jury trial demand based on any waiver, a court will determine whether the waiver would be enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal laws. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the Federal securities laws has not been finally adjudicated by a Federal court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of Delaware and in the Court of Chancery in the State of Delaware, which governs the Subscription Agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party knowingly, intelligently, and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the Subscription Agreement. You should consult legal counsel regarding the jury waiver provision before signing the Subscription Agreement.

 

If you bring a claim against us in connection with matters arising under the Subscription Agreement, including claims under Federal securities laws, you may not be entitled to a jury trial with respect to those claims, which may have the effect of limiting and discouraging lawsuits against us. If a lawsuit is brought against us it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in such an action.

 

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the Subscription Agreement with a jury trial. No condition, stipulation, or provision of the Subscription Agreement serves as a waiver by an investor, of compliance with any provision of the federal securities laws and the rules and regulations promulgated under those laws.

 

In addition, when the shares are transferred, the transferee is required to agree to all the same conditions, obligations and restrictions applicable to the shares or to the transferor with regard to ownership of the shares that were in effect immediately prior to the transfer of the Shares, including but not limited to the Subscription Agreement.

 

Claims of U.S. civil liabilities may not be enforceable against our management.

 

Certain members of our Board of Directors and senior management are residents of Canada, and many of the assets of such persons are located outside of the United States. As a result, it may not be possible to serve process on such persons in the United States or to enforce judgments obtained in U.S. courts against them based on civil liability provisions of the securities laws of the United States.

 

The United States and Canada do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in Canada. In addition, uncertainty exists as to whether Canadian courts would entertain original actions brought in the United States against our Canadian directors or senior management predicated upon the securities laws of the


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United States or any state in the United States. Any final and conclusive monetary judgment for a definite sum obtained against us in U.S. courts would be treated by the courts of Canada as a cause of action in itself and sued upon as a debt at common law so that no retrial of the issues would be necessary, provided that certain requirements are met. Whether these requirements are met in respect of a judgment based upon the civil liability provisions of the U.S. securities laws, including whether the award of monetary damages under such laws would constitute a penalty, is an issue for the court making such decision. If a Canadian court gives judgment for the sum payable under a U.S. judgment, the Canadian judgment will be enforceable by methods generally available for this purpose. These methods generally permit the Canadian court discretion to prescribe the manner of enforcement.

 

As a result, U.S. investors may not be able to enforce any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws, against our officers or directors who are residents of Canada.

 

We may issue shares of preferred stock that would have a liquidation preference to our common stock.

 

Our articles of incorporation currently authorize the issuance of 25,000,000 shares of our preferred stock, of which there is one share of Series A Preferred Stock authorized, issued and outstanding and 4,800,000 shares of Series B Convertible Preferred Stock have been authorized, of which 200,000 shares are issued and outstanding as of December 19, 2023.  Only the shares of Series B Preferred Stock have liquidation rights, which have preference over our shares of common stock in connection with the liquidation of our company. Upon our liquidation or winding up, the holders of the Series B Convertible Preferred Stock shall be entitled to receive $2.50 per share, plus all accrued and unpaid dividends, prior to the distribution to common stockholders, if any. In addition to the shares of Series A and Series B Preferred Stock that have previously been authorized for issuance by our board of directors, the board has the power to issue shares without shareholder approval, and such shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. Other than the Series B Convertible Preferred Stock, we presently have no commitments or contracts to issue any shares of preferred stock. Authorized and unissued preferred stock could delay, discourage, hinder or preclude an unsolicited acquisition of our company, could make it less likely that shareholders receive a premium for their shares as a result of any such attempt, and could adversely affect the market prices of, and the voting and other rights, of the holders of outstanding shares of our common stock.

 

As of the date of this Offering Circular there was no market for our common stock.

 

If you want to sell your shares of common stock in the future, you may not be able to find a buyer. Although we have applied for listing of our common stock on a national stock exchange there are several requirements that we may or may not be able to satisfy in a timely manner. Even if we obtain that listing, we do not know the extent to which investor interest will lead to the development and maintenance of a liquid trading market. In addition, should a market develop for our common stock in the future, some brokerage firms will not accept the deposit of microcap securities or the fees charged to deposit your securities with a broker may be high. You should assume that you may not be able to liquidate your investment for some time should a public market develop for our common stock.

 

Disclosure requirements pertaining to penny stocks may reduce the level of trading activity for our common stock if and when it is publicly traded.

 

Trades of our common stock, should a market ever develop, may be subject to Rule 15g-9 of the Commission, which rule imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale. The Commission also has rules


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that regulate broker/dealer practices in connection with transactions in “penny stocks”. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/ dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

There is no minimum amount required to be raised in this Offering.

 

We may not have enough funds to sustain our business until it becomes profitable, as we may not accurately anticipate how quickly we may use the funds that are raised in the Offering and whether such funds are sufficient to bring our business to profitability. If we fail to raise sufficient capital from this Offering, we intend to seek additional financing either through the sale of equity or loans from third parties. However, there can be no assurance that we will be able to obtain any additional capital.

 

We expect to raise additional capital through equity and/or debt offerings to support our working capital requirements and operating losses.

 

To fund future growth and development, we will likely need to raise additional funds in the future by offering shares of our common stock and/or other classes of equity, or debt that convert into shares of common stock, any of which offerings would dilute the ownership percentage of investors in this Offering. See “Dilution.” In order to issue sufficient shares in this regard, we may be required to amend our certificate of incorporation to increase our authorized capital stock, which would require us to obtain the consent of a majority of our shareholders. Furthermore, if we raise capital through debt, the holders of our debt would have priority over holders of common stock, and we may be required to accept terms that restrict its ability to incur more debt. We cannot assure you that the necessary funds will be available on a timely basis, on favorable terms, or at all, or that such funds, if raised, would be sufficient. The level and timing of future expenditures will depend on a number of factors, many of which are outside our control. If we are not able to obtain additional capital on acceptable terms, or at all, we may be forced to curtail or abandon our growth plans, which could adversely impact us, our business, development, financial condition, operating results or prospects.

 

Any valuation at this stage is difficult to assess.

 

The valuation for this Offering was established by us. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially early-stage companies, is challenging to assess, and you may risk overpaying for your investment.

 

If we cannot raise sufficient funds, we may not succeed.

 

We are offering common shares in this Offering on a best-efforts basis and may not sell all of the common shares we are offering. Even if the maximum amount is raised, we are likely to need additional funds in the future to grow. The technology and products we are developing are highly sophisticated, and we may also encounter technical challenges that require more capital than anticipated by the management team to overcome. If we cannot raise those funds for whatever reason, including reasons relating to us or to the broader economy, we may not survive. If we raise a substantially lesser amount than the maximum raise, we will have to find other sources of funding for some of the plans outlined in “Use of Proceeds”.


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USE OF PROCEEDS

 

The gross proceeds to us from the sale of the Offering Shares will be $19,999,998 if the entire offering is sold. The following table sets forth a breakdown of our estimated use of our gross proceeds as we currently expect to use them, assuming the sale of, respectively, 25%, 50%, 75% and 100% of the Offering Shares.  

 

 

 

Assumed Percentage of Shares Sold

 

 

 

 

25%

 

50%

 

75%

 

100%

Gross Proceeds

 

$5,000,000 

 

$10,000,000 

 

$15,000,000 

 

$19,999,998 

Selling agent commissions

 

375,000 

 

750,000 

 

1,125,000 

 

1,500,000 

Other Offering expenses

 

374,500 

 

554,500 

 

734,500 

 

914,500 

Net proceeds

 

$4,250,500 

 

$8,695,500 

 

$13,140,500 

 

$17,585,498 

 

 

 

 

 

 

 

 

 

Repayment of Debt

 

$2,500,000 

 

$3,500,000 

 

$3,500,000 

 

$3,500,000 

Redeem JP Morgan Capital Stock

 

1,750,500 

 

3,625,000 

 

3,625,000 

 

3,625,000 

Retrofit of PR Spring Facility

 

- 

 

1,570,500 

 

4,500,000 

 

4,500,000 

ASR Facility

 

- 

 

- 

 

- 

 

5,000,000 

Working capital

 

- 

 

- 

 

1,515,500 

 

960,498 

Total use of net proceeds

 

$4,250,500 

 

$8,695,500 

 

$13,140,500 

 

$17,585,498 

 

Assuming completion of the sale of the entire Offering, we expect to realize approximately $17,585,498 in net proceeds after the payment of approximately $2,414,500 in anticipated Selling Agent commissions and other Offering expenses related to this Offering. We anticipate that we will utilize the net proceeds of this Offering in the following order or priority: the repayment of indebtedness, redemption of the Series A Preferred Stock and common stock from JP Morgan (together, “JPM Capital Stock”), completing the retrofit of the PR Spring Facility, completion of the design and construction of one or more ASR facilities, and for working capital and general corporate purposes.

 

Exact application of the net proceeds and timing of use will vary depending upon numerous factors, including market and competitive issues. Due to the number and variability of factors that may affect our use of the net proceeds, our management team retains significant discretion over the actual application of the net proceeds. Accordingly, there can be no assurance that the actual application will not vary substantially from our current expectations.

 

Pending the use of net proceeds for the above purposes, we intend to invest the funds in short-term, interest-bearing obligations of the United States government or commercial bank money market accounts.


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PLAN OF DISTRIBUTION

 

The Company is offering up to 3,333,333 shares of common stock on a “best efforts” basis at a price of $6.00 per share. The minimum subscription is $600, or 100 shares of common stock.

 

The Company intends to market the shares in this Offering both through online and offline means. Online marketing may take the form of contacting potential investors through electronic media and posting our Offering Circular or “testing the waters” materials on an online investment platform. This Offering Circular will be furnished to prospective investors via download 24 hours per day, 7 days per week on the Company’s website (www.skyquarry.com) on a landing page that relates to the Offering.

 

The Offering will terminate at the earliest of the date at which the maximum Offering amount has been sold, one year from the date upon which the Commission qualifies the Offering Statement of which this Offering Circular forms a part and the date at which the Offering is earlier terminated by the Company, in its sole discretion.

 

The Company intends to complete one closing in this Offering. After the closing, funds tendered by investors will be available to the Company.

 

Engagement Agreement with Digital Offering

 

We are currently party to an engagement agreement dated May 9, 2023 with Digital Offering LLC (“Digital Offering” or the “Lead Selling Agent”). Digital Offering has agreed to act as our lead managing selling agent for the Offering. Digital Offering has made no commitment to purchase all or any part of the shares of common stock being offered but has agreed to use its best efforts to sell such shares in the Offering. As such, Digital Offering is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. Digital Offering is under no obligation to purchase any of the shares of common stock or arrange for the sale of any specific number or dollar amount of shares of common stock. The term of the engagement agreement began on May 9, 2023 and will continue until the earlier to occur of: (a) the date that either party gives the other at least ten (10) days written notice of the termination of the engagement agreement, which termination may occur with or without cause, (b) March 31, 2024, and (c) the date that the Offering is consummated (such applicable date, the “Termination Date”). The engagement agreement provides that Digital Offering may engage other Financial Industry Regulatory Authority (“FINRA”) member broker-dealers that are registered with the Commission to participate as soliciting dealers for this Offering. We refer to these other broker-dealers as soliciting dealers or members of the selling group. Upon engagement of any such soliciting dealer, Digital Offering will be permitted to re-allow all or part of its fees and expense allowance as described below. Such soliciting dealer will also be entitled to receive the benefits of our engagement agreement with Digital Offering, including the indemnification rights arising under the engagement agreement upon their execution of a soliciting dealer agreement with Digital Offering that confirms that such soliciting dealer is so entitled. As of the date hereof, we have been advised that Digital Offering has retained Cambria Capital LLC, DealMaker Securities LLC, and R.F. Lafferty & Co Inc. to participate in this Offering as soliciting dealers. We will not be responsible for paying any placement agency fees, commissions or expense reimbursements to any soliciting dealers retained by Digital Offering. None of the soliciting dealers is purchasing any of the shares of common stock in this Offering or is required to sell any specific number or dollar amount of shares of common stock but will instead arrange for the sale of shares of common stock to investors on a “best efforts” basis, meaning that they need only use their best efforts to sell the shares of common stock. In addition to the engagement agreement, we plan to enter into a definitive selling agency agreement with Digital Offering prior to the commencement of the Offering.

 


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Offering Expenses

 

We are responsible for all offering fees and expenses, including the following: (i) fees and disbursements of our legal counsel, accountants, and other professionals we engage; (ii) fees and expenses incurred in the production of offering documents, including design, printing, photograph, and written material procurement costs; (iii) all filing fees, including those charged by FINRA; (iv) all of the legal fees related to FINRA clearance; and (v) costs relating to background checks of the Company’s officers and directors (in the specific invoiced amount of $950, which amount has already been paid by us and will not be exceeded). We have also agreed to reimburse Digital Offering for up to $100,000 in legal expenses, $25,000 of which we have already paid and which will be reimbursed to us to the extent not actually incurred, in compliance with FINRA Rule 5110(g)(4)(a).

 

Reimbursable Expenses in the Event of Termination

 

In the event the Offering does not close, or the selling agency agreement is terminated for any reason, we have agreed to reimburse Digital Offering for its legal fees not to exceed $100,000.

 

Other Expenses of the Offering

 

The Lead Selling Agent has engaged DealMaker Securities LLC as a soliciting dealer to assist in the placement of our shares of common stock in those states where it is registered to undertake such activities, including soliciting potential investors on a best efforts basis.

 

In addition, we have retained DealMaker Reach LLC (“Reach”) for marketing and advisory services. Reach, an affiliate of DealMaker Securities, LLC, will consult and advise on the design and messaging on creative assets, website design and implementation, paid media and email campaigns, advise on optimizing our campaign page to track investor progress, and advise on strategic planning, implementation, and execution of our capital raise marketing budget. We have agreed to pay Reach a monthly fee of $[●] in cash up to a maximum of $[●]. We have also paid Reach a $[●] launch fee. To the extent services under this agreement are commenced in advance of a FINRA no objection letter being received by us, such amounts shall be considered an advance against accountable expenses anticipated to be incurred, and fully refunded to extent not actually incurred, in compliance with FINRA Rule 5110(g)(4)(a). A maximum of [$●] or three months of account management fees are payable prior to a no objection letter being received.

 

Selling Agents’ Commission

 

We have agreed that the definitive selling agency agreement will provide for us to pay a commission of 7.5% of the gross proceeds received by us in the Offering, which shall be allocated by Digital Offering to members of the selling group and soliciting dealers in its sole discretion (we sometimes refer to Digital Offering and such members and dealers collectively as the “Selling Agents”).

 

The following table shows the total commissions payable to Digital Offering on a per-share basis in connection with this Offering, assuming a fully subscribed Offering.

 

 

 

Per Share

 

Public offering price

 

$

6.00

 

Digital Offering commission (7.5%)*

 

$

0.45

 

Proceeds, before expenses, to us, per share

 

$

5.55

 

 

*Assuming a fully subscribed offering, Digital Offering would receive total cash commissions of $1,500,000.

 


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Selling Agent’s Warrants

 

Upon the closing of the Offering, we have agreed to issue warrants, the Selling Agent’s Warrants, to the selling agent to purchase a number of our shares of common stock equal to 5.00% of the total number of our shares of common stock sold in the Offering. The Selling Agent’s Warrants will be exercisable commencing six months after the date of commencement of sales in this Offering (in compliance with FINRA Rule 5110(e)(1)) and will be exercisable until the fifth anniversary of the date of commencement of sales in the Offering. The exercise price for the Selling Agent’s Warrants will be the amount that is 125% greater than the public offering price, or $7.50 per share. The Selling Agent’s Warrants will not be redeemable. The Selling Agent’s Warrants will provide for cashless exercise in the event there is not a qualified offering statement covering the shares underlying the Selling Agent’s Warrants, and immediate “piggyback” registration rights, with a duration of seven years from the date of commencement of sales in the Offering (in compliance with FINRA Rule 5110(g)(8)(D)), with respect to the registration of the shares of common stock underlying the warrants. We have qualified the shares underlying the Selling Agent’s warrants in this Offering.

  

The Selling Agent’s Warrants and the shares of common stock underlying the Selling Agent’s Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The selling agent, or permitted assignees under such rule, may not exercise, sell, transfer, assign, pledge, or hypothecate the Selling Agent’s Warrants or the shares of common stock underlying the Selling Agent’s Warrants, nor will the selling agent or permitted assignees engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Selling Agent’s Warrants or the underlying shares for a period of 180 days from the date of commencement of sales in the Offering, except that they may be transferred, in whole or in part, by operation of law or by reason of our reorganization, or to any selling agent or selected dealer participating in the Offering and their officers, partners or registered representatives if the Selling Agent’s Warrants or the underlying shares of common stock so transferred remain subject to the foregoing lock-up restrictions for the remainder of the time period. The Selling Agent’s Warrants will provide for adjustment in the number and price of such warrants (and the class A common shares underlying such warrants) to prevent dilution in the event of a stock dividend, stock split or other reclassification of the class A common shares.

 

Lock-Up Agreements

 

Except as described below, we and our officers, directors, director nominees and 10% stockholders holding 3,941,489 shares of common stock (as adjusted for the reverse stock split) have agreed, or will agree, with Digital Offering, subject to certain exceptions, that, without the prior written consent of Digital Offering, we and they will not, directly or indirectly, during the period ending 6 months following the closing of this Offering, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the common stock or any securities convertible into or exchangeable or exercisable for the common stock, whether now owned or hereafter acquired by us or them or with respect to which we or they has or hereafter acquires the power of disposition; or enter into any swap or any other agreement or any transaction that transfers, in whole or in part, the economic consequence of ownership of the common stock, whether any such swap or transaction is to be settled by delivery of the common stock or other securities, in cash or otherwise.

 

The lock-up agreement does not apply, in our case, to securities issued pursuant to existing employee benefit plans or securities issued upon exercise of options. In the case of our officers, directors and director nominees, the restrictions described in the preceding paragraph do not apply to:

 

·transactions relating to shares of common stock acquired in open market transactions after the completion of this Offering; provided that, no filing by any party under Section 16(a) of the Exchange Act or other public announcement shall be required or shall be voluntarily made in connection with such transfer; 


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·exercises of stock options or equity awards granted pursuant to an equity incentive or other plan or warrants to purchase shares of common stock or other securities (including by cashless exercise to the extent permitted by the instruments representing such stock options or warrants so long as such cashless exercise is effected solely by the surrender of outstanding stock options or warrants to us and our cancellation of all or a portion thereof to pay the exercise price), provided that in any such case the securities issued upon exercise shall remain subject to the provisions of the agreement; 

 

·transfers of shares of common stock or other securities to us in connection with the vesting or exercise of any equity awards granted pursuant to an equity incentive or other plan and held by the undersigned to the extent, but only to the extent, as may be necessary to satisfy tax withholding obligations pursuant to our equity incentive or other plans; 

 

·pursuant to an order of a court or regulatory agency; 

 

·any transfer of shares of common stock or any security convertible into or exercisable or exchangeable for common stock that occurs by operation of law, such as pursuant to a qualified domestic relations order or in connection with a divorce settlement; 

 

·any distributions or transfers without consideration of shares of common stock or any security directly or indirectly convertible into or exercisable or exchangeable for common stock to limited partners, members, stockholders or affiliates of the undersigned, or to any partnership, corporation or limited liability company controlled by the undersigned or by a member of the immediate family of the party to the agreement; 

 

·any transfer made in connection with the sale or other bona fide transfer in a single transaction of all or substantially all of the undersigned’s capital stock, partnership interests, membership interests or other similar equity interests, as the case may be, or all or substantially all of the undersigned’s assets, in any such case not undertaken for the purpose of avoiding the restrictions imposed by the agreement; 

 

·the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act, for the transfer of shares of our common stock, provided that such plan does not provide for the transfer of our common stock during the lock-up period; 

 

·transfers to any investment fund or other entity controlled by, or under common control or management with, the party to the agreement; 

 

·transfers of shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock pursuant to a qualifying bona fide third-party tender 

 

·offer, merger, consolidation or other similar transaction made to all holders of our common stock. 

 

Exchange Listing

 

We have applied to Nasdaq to list shares of our common stock under the symbol “SKYQ” on the Nasdaq Capital Market. Our common stock will not commence trading on Nasdaq until each of the following conditions is met: (i) this Offering is terminated; (ii) we have filed a post-qualification amendment to the Offering Statement, which post-qualification amendment is qualified by the Commission; and (iii) we have filed a registration statement on Form 8-A, which Form 8-A has been declared effective by the Commission. Pursuant to applicable rules under Regulation A, the Form 8-A will


II-28 


not become effective until the Commission qualifies the post-qualification amendment. We intend to file the post-qualification amendment and request its qualification immediately prior to the termination of this Offering in order that the Form 8-A may become effective as soon as practicable. Even if we meet the minimum requirements for listing on Nasdaq, we may wait before terminating this Offering and commencing the trading of our common stock on Nasdaq in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of shares of our common stock and the commencement of exchange trading of our common stock on Nasdaq. No assurance can be given, however, that our application to list on Nasdaq will be approved or that an active trading market for our common stock will develop.

 

Indemnification

 

We have agreed to indemnify the Lead Selling Agent, its affiliates and controlling persons and members of the selling group against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to the payments the Lead Selling Agent, its affiliates and controlling persons as may be required to make in respect of these liabilities.

 

Our Relationship with the Lead Selling Agent

 

The Lead Selling Agent and its affiliates are engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The Lead Selling Agent and its affiliates may in the future perform various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.

 

In the ordinary course of their various business activities, Digital Offering and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the Company. Digital Offering and its affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

Investment Limitations if We Do Not Obtain a Listing on a National Securities Exchange

 

As set forth in Title IV of the JOBS Act, there would be no limit on how many shares an investor may purchase if this Offering results in a listing of our common stock on Nasdaq or other national securities exchange. However, our common stock may not be listed on Nasdaq upon the initial qualification of this Offering by the Commission. Additionally, we cannot provide any assurance that our application to list on Nasdaq will be approved.

 

For individuals who are not accredited investors, if we are not listed on Nasdaq, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth (please see under “— Procedures for Subscribing — How to Calculate Net Worth”). Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

Because this is a Tier 2, Regulation A offering, most investors in the case of trading on the over-the-counter markets must comply with the 10% limitation on investment in this Offering. The only investors in this Offering exempt from this limitation, if our common stock is not listed on Nasdaq, are “accredited investors” as defined under Rule 501 of Regulation D under the Securities Act (each, an “Accredited Investor”). If you meet one of the following tests you should qualify as an Accredited Investor:


II-29 


 

(i)  You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint income with your spouse in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same income level in the current year;

 

(ii)  You are a natural person and your individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time you purchase Shares (please see below under “— How to Calculate Net Worth”);

 

(iii)  You are an executive officer or general partner of the issuer or a director, executive officer or general partner of the general partner of the issuer;

 

(iv)  You are a holder in good standing of the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65), each as issued by FINRA;

 

(v)  You are a corporation, limited liability company, partnership or are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, a corporation or similar business trust or a partnership, not formed for the specific purpose of acquiring the shares of common stock, with total assets in excess of $5,000,000;

 

(vi)  You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer registered pursuant to Section 15 of the Exchange Act, an insurance company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940 (the “Investment Company Act”), or a business development company as defined in that act, any Small Business Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined in the Investment Advisers Act of 1940;

 

(vii)  You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited investor;

 

(viii)  You are a trust with total assets in excess of $5,000,000, your purchase of Shares is directed by a person who either alone or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, and you were not formed for the specific purpose of investing in the shares of common stock;

 

(ix)  You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000;

 

(x)  You are a Commission or state-registered investment adviser or a federally exempt reporting adviser;

 

(xi)  You are a Rural Business Investment Company as defined in section 384A of the Consolidated Farm and Rural Development Act;

 

(xii)  You are an entity not listed above that that owns “investments,” in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; or

 


II-30 


(xiii)  You are an Investor that certifies that (A) it is a “family office” as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (i) with at least $5 million in assets under management, (ii) not formed for the specific purpose of acquiring the securities offered and (iii) whose investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment or (B) that it is a “family client” as defined in Rule 202(a)(11)(G)-1, of a family office meeting the criteria specified above.

 

This offering will start on or after the date that the Offering is qualified by the Commission and will terminate on the earliest of the date at which the maximum offering amount has been sold, one year from the date upon which the Commission qualifies the Offering Statement of which this Offering Circular forms a part and the date at which the Offering is earlier terminated by the Company, in its sole discretion.

 

Procedures for Subscribing

 

Procedures for Subscribing through Cambria Capital’s My IPO Platform

 

Cambria Capital is a registered broker-dealer and member of FINRA and SIPC. Cambria Capital has been appointed by us and Digital Offering, as a soliciting dealer for this Offering. Cambria Capital operates the My IPO platform as a separate unincorporated business division.

 

In order to subscribe to purchase the shares of common stock through My IPO, a prospective investor must electronically complete and execute a subscription agreement and provide payment to the Wilmington Trust, N.A. escrow account (“Wilmington Trust Escrow Account”) or an account owned by the investor and held at the clearing firm of Cambria Capital. When submitting the subscription request through My IPO, a prospective investor is required to agree to various terms and conditions by checking boxes and to review and electronically sign any necessary documents. We will not accept any subscription agreements prior to the Commission’s qualification of this Offering.

 

Escrow Account

 

Except with respect to investors who are clients of DealMaker Securities LLC, or Other Broker-Dealers (as defined below) with clearing agreements in place, investors will be required to deposit their funds to the Wilmington Trust Escrow Account. The Company intends to complete one closing of this Offering. Any such funds that Wilmington Trust receives shall be held in escrow until the closing of the Offering or such other time as mutually agreed between the Company and Digital Offering, and then used to complete securities purchases, or returned if this Offering fails to close. All subscribers will be instructed by the Company or its agents to transfer funds by wire or ACH transfer directly to the escrow account established for this Offering.

 

Other Procedures for Subscribing

 

Cambria Capital clears through various clearing firms as do other broker-dealers who may participate in this Offering. We refer to such other broker-dealers that clear through their respective clearing firms and who may participate in this Offering as Other Broker-Dealers. Other Broker-Dealers with clearing agreements shall provide the Selling Agents with executed subscription agreements and delivery sheets from their customers and shall settle the transaction with the Selling Agents through DTC on closing. In the event that the Company does not qualify or list on Nasdaq, soliciting dealers who are unable to participate in an over-the-counter security may withdraw their subscriptions prior to closing.

 

Prospective investors investing through Cambria Capital or Other Broker-Dealers will acquire shares of our common stock through book-entry order by opening an account with Cambria Capital or an Other Broker-Dealer, or by utilizing an existing Cambria Capital account or account with an Other Broker-Dealer. In each such case, the account will be an account owned by the investor and held at the clearing


II-31 


firm of such Other Broker-Dealer, as the clearing firm for the exclusive benefit of such investor. The investor will also be required to complete and submit a subscription agreement. Subscriptions for shares common stock acquired through an account at Cambria Capital at https://www.new.myipo.com/offers/skyquarry, or an Other Broker-Dealer can be processed online at https://form.jotform.com/232974291779170 or provided directly by the Broker-Dealers. Subscriptions will be effective only upon our acceptance, and we reserve the right to reject any subscription in whole or in part.

 

Our transfer agent is Colonial Stock Transfer Company, Inc. Our transfer agent will record and maintain records of the shares of common stock issued of record by us, including shares issued of record to the Depositary Trust Corporation, which we refer to as the DTC, or its nominee, Cede & Co., for the benefit of broker-dealers, including the clearing firms. The clearing firm, as the clearing firm, will maintain the individual stockholder beneficial records for accounts at Cambria Capital or Other Broker-Dealers. All other investors that participate through the Wilmington Trust Escrow Account, shall have their shares held at Colonial Stock Transfer in digital book entry. Such shares may be transferred to the investor’s outside brokerage account by requesting their outside broker dealer to effect such transfer. Request for transfer may only be made by the outside broker dealer of the investor.

 

You may not subscribe to this Offering prior to the date this Offering is qualified by the Commission, which we will refer to as the qualification date. Before the qualification date, you may only make non-binding indications of your interest to purchase securities in the Offering. For any subscription agreements received after the qualification date, we have the right to review and accept or reject the subscription in whole or in part, for any reason or for no reason. If rejected, we will return all funds to the rejected investor within ten business days. If accepted, the funds will remain in the escrow account until we determine to have the closing of the Offering and the funds in escrow will then be transferred into our general account.

 

Non-U.S. investors may participate in this Offering by depositing their funds in the escrow account held at Wilmington Trust; any such funds that Wilmington Trust receives shall be held in escrow until the closing of this Offering or such other time as mutually agreed between the Company and the Selling Agents, and then used to complete securities purchases, or returned if this Offering fails to close.

 

DealMaker Securities LLC

 

Investors who invest through DealMaker Securities LLC may subscribe through invest.skyquarry.com by tendering funds by wire, credit, or debit card or ACH transfer to the escrow account to be set up at Enterprise Bank. Tendered funds will remain in escrow until the closing has occurred. Upon closing, funds tendered by investors will be made available to the Company for its use. The Company will not cover credit card fees on behalf of investors.

 

Procedures for subscribing directly through the Company’s website

 

The subscription procedure is summarized as follows:

 

1.   Go to invest.skyquarry.com website and click on the “Invest Now” button;

 

2.  Complete the online investment form;

 

3.  Deliver funds directly by wire, debit card, credit card or electronic funds transfer via ACH to the specified escrow account;

 

4.  Once funds or documentation are received an automated AML check will be performed to verify the identity and status of the investor;

 


II-32 


5.  Once AML is verified, investor will electronically receive, review, execute and deliver to us a Subscription Agreement. Investors will be required to complete a subscription agreement in order to invest. For so long as we are not listed on Nasdaq, the subscription agreement will include a representation by the investor to the effect that, if the investor is not an “accredited investor” as defined under securities law, the investor is investing an amount that does not exceed the greater of 10% of his or her annual income or 10% of your net worth (excluding the investor’s principal residence).

 

Right to Reject Subscriptions

 

After we receive your complete, executed subscription agreement (forms of which are attached to the Offering Statement, of which this Offering Circular forms a part, as Exhibits 4.1 and 4.2) and the funds required under the subscription agreement have been transferred to the Wilmington Trust Escrow Account or such other selected dealer designated escrow account, we have the right to review and accept or reject your subscription in whole or in part, for any reason or for no reason. We will return all monies from rejected subscriptions immediately to you, without interest or deduction.

 

Acceptance of Subscriptions

 

Upon our acceptance of a subscription agreement, we will countersign the subscription agreement and issue the shares of subscribed for common stock at closing. Once you submit the subscription agreement and it is accepted, you may not revoke or change your subscription or request your subscription funds. All accepted subscription agreements are irrevocable.

 

Under Rule 251 of Regulation A, unless a company’s offered securities are listed on a national securities exchange, non-accredited, non-natural person investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). As a result, for so long as our common stock is not listed on Nasdaq, non-accredited, natural person may only invest funds in our common stock which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

How to Calculate Net Worth

 

For the purposes of calculating your net worth, it is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the shares of common stock.

 

In order to purchase the shares of common stock and prior to the acceptance of any funds from an investor, for so long as our common stock is not listed on Nasdaq, an investor in our common stock will be required to represent, to the Company’s satisfaction, that he or she is either an accredited investor or is in compliance with the 10% of net worth or annual income limitation on investment in this Offering.

 

No Minimum Offering Amount

 

There is no minimum offering amount in this Offering and we may close on any funds that we receive. Potential investors should be aware that there can be no assurance that any other funds will be invested in this Offering other than their own funds.

 

No Selling Security holders

 


II-33 


No securities are being sold for the account of security holders; all net proceeds of this Offering will go to the Company.

 

Transfer Agent and Registrar

 

The Company has engaged Colonial Stock Transfer Company, Inc., a registered transfer agent with the Commission, who will serve as transfer agent to maintain stockholder information on a book-entry basis.


II-34 


 

DETERMINATION OF OFFERING PRICE

 

The initial public offering price has been determined by negotiation between us and Digital Offering. The principal factors considered in determining the initial public offering price include:

 

·the information set forth in this Offering Circular and otherwise available to Digital Offering; 

 

·our history and prospects and the history of and prospects for the industry in which we compete; 

 

·our past and present financial performance; 

 

·our prospects for future earnings and the present state of our development; 

 

·an assessment of our management; 

 

·the general condition of the securities markets at the time of this Offering; 

 

·the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and 

 

·other factors deemed relevant by Digital Offering and us. 

 

We intend to price the Offering prior to its qualification pursuant to Rule 253(b).

 

Accordingly, the Offering price may not be indicative of any amounts you might receive should you seek to sell your shares or should there be a liquidation of our company. In addition, such prices are not necessarily indicative of any prices at which our securities may trade, or any value that might be ascribed to our company after the completion of the Offering.


II-35 


 

DILUTION

 

We are registering for sale to new investors up to 3,333,333 shares at an assumed price of $6.00 per share. Our existing shareholders paid approximately $1.37 per share (as adjusted for the reverse stock split) for their shares. The shares for other existing shareholders may have been paid for in cash or were issued for assets contributed to us or services provided to us. The following table sets forth on a pro forma basis at June 30, 2023, the differences between existing stockholders and new investors with respect to the number of shares of common stock purchased from us (as adjusted for the reverse stock split), the total consideration paid to us, and the average price paid per share (assuming a proposed public offering price of $6.00 per share).

 

 

 

 

Shares
Purchased

 

 

Total
Consideration

 

Average Price Per Share

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

Existing Stockholders (1)

 

16,442,137

 

83.1%

$

22,473,613

 

52.9%

$

1.37

 

 

 

 

 

 

 

 

 

 

 

New Investors

 

3,333,333

 

16.9%

 

19,999,998

 

47.1%

 

6.00

 

 

 

 

 

 

 

 

 

 

 

Total (2)

 

19,775,470

 

100%

$

42,473,611

 

100%

$

2.14

 

1.Includes the 16,323,089 shares of common stock outstanding and 119,048 shares of common stock to be issued on the automatic conversion of the 200,000 shares of Series B Convertible Preferred Stock outstanding on closing of the Offering. 

2.Total does not include the redemption of 2,249,880 shares of common stock held by JP Morgan at closing. 

 

The difference between the public offering price per share of common stock and the net tangible book value per share of common stock after this Offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing the net tangible book value (total assets less intangible assets and total liabilities) by the number of outstanding shares of common stock. The dilution calculations we have set forth in this section reflect an offering price of $6.00 per share.

 

As of June 30, 2023, we had a net tangible book value of $14,563,390 or $0.89 (net book value of $17,772,393 less goodwill of $3,209,003) per share of issued and outstanding common stock. After giving effect to the sale of the shares proposed to be offered in the Offering of 3,333,333 shares, the adjusted net tangible book value is $32,148,887 or $1.64 per share (actual net tangible book value of $14,563,389 plus gross proceeds from the share issuance of $19,999,998 less projected offering expenses of $2,414,500). This represents an immediate increase in net tangible book value of $0.75 per share to existing shareholders and an immediate dilution of $4.36 per share to new investors. 

 

The following table illustrates such per share dilution: 

 

Proposed public offering price (per share)

 

 

$

6.00

 

Net tangible book value per share as of June 30, 2023

$

0.89

 

 

 

Increase in net tangible book value per share attributable to the proceeds of the maximum offering

$

0.75

 

 

Pro forma net tangible book value per share after the offering

 

 

$

1.64

 

 

 

 

 

Dilution to new investors

 

 

$

4.36

 


II-36 


The above illustration of dilution per share to investors participating in this Offering assumes no exercise of outstanding options or warrants or the conversion of any notes. The exercise of outstanding options or warrants or the conversion of notes having an exercise / conversion price less than the Offering price will increase dilution to new investors. In addition, we may choose to raise additional capital depending on market conditions, our capital requirements and strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.


II-37 


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with and is qualified in its entirety by and should be read together with our financial statements and the related notes thereto appearing elsewhere in this Offering Circular. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Forward-Looking Statements”. Actual results could differ materially from those projected in the forward-looking statements.

 

Reverse Stock Split 

 

The Company intends to seek shareholder approval, and all other necessary consents, to file a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware to effect a reverse stock split of its shares of common stock (the “Reverse Stock Split”) at a ratio of one-for-three (the “Split Ratio”), without changing the par value, rights, terms, conditions, and limitations of such shares of common stock, to be made effective on qualification of this Offering Circular by the Commission (the “Effective Split Date”). No fractional shares will be issued in connection with the Reverse Stock Split, and any of our stockholders that would be entitled to receive a fractional share as a result of the Reverse Stock Split will instead receive one additional share of our common stock in lieu of the fractional share. The reverse stock split will not in itself affect any stockholder’s ownership percentage of our common stock, except to the extent that any fractional share is 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 will also be reduced by the Split Ratio as of the Effective Split Date and their respective exercise prices will be increased by the Split Ratio. Neither the authorized shares of capital stock nor the par value per share of our common stock will be affected by the Reverse Stock Split.

 

All historical share and per-share amounts reflected throughout the consolidated financial statements have not 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 a modular asphalt shingle recycling facility (“ASR Facility”), which can be deployed in cities with high concentrations of waste asphalt shingles and near asphalt shingle manufacturing centers.


II-38 


 

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 financial statements for the years ended December 31, 2022 and 2021 a note indicating that there is significant doubt about the Company’s ability to continue as a going concern. The opinion 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 the end of December 31, 2022, we have incurred accumulated net losses of $4,803,106. In order to continue as a going concern we must effectively balance many factors and generate more revenue so that we can fund our operations from our sales and revenues. If we are not able to do this, we may not be able to continue as an operating company. At our current revenue and burn rate, we have an immediate cash need, and thus we must raise capital by issuing debt or through the sale of our stock. However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

 

Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022

 

Introduction

 

This section includes a summary of our historical results of operations, followed by detailed comparisons of our results for the six months ended June 30, 2023 and 2022, respectively. We have derived this data from our unaudited interim consolidated financial statements included elsewhere in this Offering Circular. Our results of operations described below only include Foreland’s financial performance from the date of acquisition, September 30, 2022, and going forward. During the comparative six month period ended June 30, 2022, we had no revenues and our activities were focused on the retrofit of the PR Spring facility.

 

We had net sales of $12,418,517 and $24,759,951 for the three and six months ended June 30, 2023, respectively, as compared to no sales for the corresponding periods ended June 30, 2022. Our cost of goods sold was of $10,116,377 and $20,527,195 for the three and six months ended June 30, 2023, respectively, as compared to no cost of goods sold for the corresponding periods in ended June 30, 2022.


II-39 


 

Revenues and Net Operating Loss

 

 

Three Months

Ended

 

Three Months

Ended

 

Six Months

Ended

 

Six Months

Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2023

 

2022

 

2023

 

2022

 

 

 

 

 

 

 

 

 

Revenue

$

12,418,517 

$

$

24,759,951 

$

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

(10,116,377)

 

 

(20,527,195)

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

2,302,140 

 

 

4,232,757 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

2,040,561 

 

940,021 

 

3,185,404 

 

1,563,435 

Share based compensation

 

75,373 

 

 

223,316 

 

Depreciation and amortization

 

60,562 

 

 

151,405 

 

Total operating expenses

 

2,176,496 

 

940,021 

 

3,560,125 

 

1,563,435 

 

 

 

 

 

 

 

 

 

Profit (loss) from operations

 

125,644

 

(940,021)

 

672,632

 

(1,563,435)

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expenses, net of interest income

 

(283,991)

 

3,833 

 

(377,624)

 

(104,480)

Gain on sale of asset

 

 

 

550,000 

 

Total other income (expense)

 

-

 

-

 

172,376

 

(104,480)

Gain (loss) before income tax expense

 

(158,374)

 

(936,187)

 

845,008

 

(1,667,915)

Income tax expense

 

 

 

(2,324)

 

(3,723)

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(158,374)

$

(936,187)

$

842,684 

$

(1,671,638)

 

Net Sales

 

Sales from operating activities for the six months ended June 30, 2023 amounted to $24,759,951, solely from Foreland not present in the comparative period. There were no sales for the six months ended June 30, 2022 due to the retrofit of the PR Spring facility. The increase in sales from 2023, as compared to 2022, is solely attributed to our acquisition of Foreland.

 

Cost of Revenue

 

Cost of sales from operating activities for the six months ended June 30, 2023 amounted to $20,527,195, with gross margins of $4,232,757 and net profit from operations of $672,632. There were no cost of sales from operating activities for the six months ended June 30, 2022, due to the retrofit of the PR Spring facility. The increase in cost of sales and net profit from 2023 as compared to 2022 was primarily the result of our acquisition of Foreland.

 

General and Administrative

 

Operating expenses for the six months ended June 30, 2023 amounted to $3,560,125 and consisted of general and administrative (inclusive of internal fuel, professional fees, salaries and wages, repairs and maintenance, insurance, utilities, etc.) of $3,185,404, share based compensation of $223,316 and depreciation and amortization of $151,405. Operating expenses during the six months ended June 30, 2022 amounted to $1,563,435 and consisted of legal and professional fees, salaries, wages and travel, facility insurance and other overhead expenses, debt repayment and finance costs related to debt service. The


II-40 


increase in operating costs and expenses from 2023 as compared to 2022, was primarily the result of our acquisition of Foreland.

 

Other Income (Expense)

 

Other income and expenses for the six months ended June 30, 2023, consisted of gain on sale of asset of $550,000, interest expense of $377,624 and tax expense of $2,324, and for the six months ended June 30, 2022 consisted of interest expense of $104,480 and tax expense of $3,723.

 

Net Income (Loss)

 

Net income was $842,684 for the six months ended June 30, 2023 compared to a net loss of $1,671,638 as of June 30, 2022, an increase of $2,514,322.

 

Liquidity and Capital Resources

 

Introduction

 

We had negative operating cash flows for the three and six months ended June 30, 2023. Our cash on hand as of June 30, 2023, was $1,065,142. 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.

 

Our cash, current assets, total assets, current liabilities, and total liabilities as of June 30, 2023 and December 31, 2022, respectively, are as follows:

 

 

June 30,

 

December 31,

 

Increase/

 

2023

 

2022

 

(Decrease)

 

 

 

 

 

 

Cash

$

1,065,142

 

$

572,197

 

$

492,945

Total Current Assets

8,322,033

 

 

8,520,324

 

(198,291)

Total Assets

30,205,212

 

 

25,812,143

 

4,393,069

Total Current and Total Liabilities

12,432,820

 

 

9,435,471

 

2,997,349

 

Our cash increased by $492,945 as of June 30, 2023 as compared to December 31, 2022. Our total current assets decreased by $198,291 primarily because of a decrease in accounts receivable of $693,287 and inventory of $10,444 offset by an increase of prepaid expenses of $12,495. Our total assets increased by $4,393,069 due to an increase in property, plant and equipment of $524,991, oil and gas properties of $209,219 and restricted cash of $3,857,150.

 

Our current liabilities as of June 30, 2023 as compared to December 31, 2022 increased by $3,030,409 and our total liabilities increased by $2,997,349, both primarily as a result of a decrease in accounts payable and accrued expenses of $591,560, offset by net increases in notes payable of $3,588,909.

 

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 June 30, 2023 was $1,065,142. 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.


II-41 


 

Sources and Uses of Cash

 

Operating Activities

 

Our net cash used in operating activities for the six months ended June 30, 2023, were $1,178,846, as compared to $1,665,950 at June 30, 2022. Our net cash used in operating activities for the six months ended June 30, 2023 consisted of a net profit of $842,684, change in working capital of $2,673,669, less share based compensation of $223,316, depreciation and amortization of $151,405, amortization of debt issuance costs of $64,658, and factoring discount fee and interest of $212,760. Our net cash used in operating activities for the six months ended June 30, 2022 consisted of a net loss of $1,671,638, less change in working capital of $5,688.

 

Investing Activities

 

Our cash flow used in investing activities for the six months ended June 30, 2023 and 2022 was $(885,615) and $(1,514,583), respectively, a decrease of $628,968, or 42%. Our investing activities in 2023 and 2022 consisted of net change to property, plant and equipment.

 

Financing Activities

 

Our net cash provided by financing activities for the six months ended June 30, 2023 and 2022 was $6,305,349 and $11,589,879, respectively, a decrease of $5,284,530. Our cash flows from investing activities in 2023 consisted of proceeds from notes payable of $3,842,825, issuance of equity of $35,000, net proceeds of factoring agreements of $2,460,584, offset by payments on notes payable of $33,060. Our cash flows from investing activities in 2022 consisted of proceeds from issuance of equity of $12,724,175 offset by payments on notes payable of $1,134,296.

 

Results of Operations for the Years Ended December 31, 2022 and 2021

 

Introduction

 

We had net sales of $16,287,407 for the year ended December 31, 2022, as compared to $60,895 for the year ended December 31, 2021, an increase of $16,226,512, or over 26,600%. Our cost of goods sold was $12,631,272 for the year ended December 31, 2022, as compared to $627,938 for the year ended December 31, 2021, an increase of $12,003,334, or over 1,900%.

 


II-42 


 

Net Sales and Loss from Operations

 

Our net sales, costs of goods sold, gross profit (loss), operating expenses, loss from operations, and loss before income tax benefit for the years ended December 31, 2022 and 2021 were as follows:

 

 

 

Year Ended

December 31, 2022

 

Year Ended

December 31, 2021

 

Increase/

(Decrease)

 

 

 

 

 

 

 

Net sales

 

$

16,287,407

 

 

$

60,895

 

 

$

16,226,512

 

Cost of goods sold

 

 

12,631,272

 

 

 

627,938

 

 

 

12,003,334

 

Gross profit (loss)

 

 

3,656,135

 

 

 

(567,043)

 

 

 

4,223,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

4,763,317

 

 

 

869,448

 

 

 

3,893,869

 

Share based compensation

 

 

209,132

 

 

 

-

 

 

 

209,132

 

Depreciation and amortization

 

 

165,131

 

 

 

-

 

 

 

165,131

 

Total operating expenses

 

 

5,137,580

 

 

 

869,448

 

 

 

4,268,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,481,445)

 

 

 

(1,436,491)

 

 

 

44,954

 

Other expenses

 

 

2,304,899

 

 

 

209,466

 

 

 

2,095,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax benefit

 

$

(3,786,344)

 

 

$

(1,645,957)

 

 

$

2,140,387

 

 

Net Sales

 

We had net sales of $16,287,407 for the year ended December 31, 2022, as compared to $60,895 for the year ended December 31, 2021, an increase of $16,226,512, or over 26,600%. The increase in net sales was mainly due to our acquisition of Foreland.

 

Cost of Goods Sold

 

Our cost of goods sold was $12,631,272 for the year ended December 31, 2022, as compared to $627,938 for the year ended December 31, 2021, an increase of $12,003,334, or over 1,900%. Our cost of goods sold consisted of internal fuels, chemicals, labor, transportation and raw heavy and light crude oil.

 

Operating Expenses

 

Our operating expenses consisted of general and administrative expenses, share based compensation, and depreciation and amortization.

 

General and administrative expense was $4,763,317 and $869,448 for the years ended December 31, 2022 and 2021, an increase of $3,893,869, or 448%. The increase was a result of our acquisition of Foreland. In the year ended December 31, 2022, general and administrative expenses consisted mainly of internal fuel of $1,321,555, professional fees of $844,631, and executive compensation of $514,715. In the year ended December 31, 2021, general and administrative expenses consisted mainly of executive compensation of $1,198,327, professional fees of $1,194,033, and internal fuel of $806,164.

 

Share based compensation was $209,132 and $0 for the years ended December 31, 2022 and 2021. In the year ended December 31, 2022, share based compensation consisted of the grant of 1,066,667incentive stock options to directors, officers, key employees and consultants expiring on August 31, 2027 with an exercise price of $0.90 and which vest equally in thirds on each anniversary of the grant date offset by forfeitures of 400,000 options (as adjusted for the reverse stock split). 


II-43 


Depreciation and amortization was $165,131 and $0 for the years ended December 31, 2022 and 2021. In the year ended December 31, 2022, depreciation and amortization consisted solely of depreciation of Foreland plant, property and equipment. 

 

Total operating expenses were $5,137,580 and $869,448 for the years ended December 31, 2022 and 2021, an increase of $4,268,132, or 491%.  

 

Loss from Operations

 

As a result of the items discussed above, our loss from operations was $1,481,445 and $1,436,491 for the years ended December 31, 2022 and 2021, respectively, an increase of $44,954, or 3%.

 

Other Expenses

 

Other expenses, consisting only of interest expenses, was $2,304,899 and $209,466 for the years ended December 31, 2022 and 2021, respectively, an increase of $2,095,433, or 1,000%. In the year ended December 31, 2022, our interest expense was related to charges related the Foreland acquisition and loans payable. In the year ended December 31, 2021, our interest expense was related to loans payable.

 

Loss Before Income Tax Benefit

 

Our loss before income tax benefit for the year ended December 31, 2022 was $3,786,344, and our loss before income tax benefit for the year ended December 31, 2021 was $1,645,957, an increase of $2,140,387, or 130%.

 

Liquidity and Capital Resources

 

Introduction

 

During the years ended December 31, 2022 and 2021, we had negative operating cash flows. Our cash on hand as of December 31, 2022 was $572,197. Our monthly cash flow burn rate in 2022 was approximately $226,000. Although we have strong short-term cash needs, 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.

 

Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2022 and 2021 were as follows:

 

December 31,
2022

December 31,
2021

Change

 

 

 

 

 

Cash

$

572,197

$

993,129

$

(420,932)

Total Current Assets

 

8,520,324

 

1,097,059

 

7,423,265

Total Assets

 

25,812,143

 

4,664,593

 

21,147,550

Total Current Liabilities

 

9,114,102

 

1,574,024

 

7,540,078

Total Liabilities

 

9,435,471

 

2,177,469

 

7,258,002

 

Our cash decreased by $420,932 as of December 31, 2022 as compared to December 31, 2021. Our total current assets increased by $7,423,265 primarily because of our increase in accounts receivables of $4,237,064 and inventory of $3,345,276. Our total assets increased by $21,147,550 because of our increase in current assets, plus an increase in property, plant and equipment of $5,479,130, an increase in oil and gas properties of $5,028,379, and in increase in goodwill of $3,209,003. The decrease in cash and all of these increases are primarily a result of our Foreland acquisition.


II-44 


 

As of December 31, 2022, current liabilities increased by $7,540,078 and our total liabilities increased by $7,258,002, both primarily as a result of an increase in accounts payable and accrued expenses of $5,309,411, an increase in current maturities on notes payable of $2,230,667 and increase of deferred tax liability of $187,856 offset by a decrease in non-current notes payable of $469,932. All of these increases are primarily a result of our Foreland acquisition.

 

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 December 31, 2022 was $572,197. Our monthly cash flow burn rate in 2022 was approximately $226,000. Although we have strong short-term cash needs, 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.

 

Sources and Uses of Cash

 

Operations

 

Our net cash used in operating activities for the years ended December 31, 2022 and 2021 were $2,716,208 and $1,337,064, respectively, an increase of $1,379,144, or 103%. Our net cash used in operating activities for the year ended December 31, 2022 consisted of a net loss of $2,714,225, plus primarily a deferred tax payable of $1,072,119, offset primarily by an increase in accounts payable and accrued expenses of $1,225,535. Our net cash used in operating activities for the year ended December 31, 2021 consisted of a net loss of $1,613,484, offset primarily by an increase in prepaid expenses and other assets of $139,248.

 

Investments

 

Our cash flow used in investing activities for the years ended December 31, 2022 and 2021 was ($9,274,185) and $(96,840), respectively, an increase of $9,177,345, or over 9,400%. Our investing activities in 2022 consisted of cash paid in acquisitions, net of cash acquired of $3,998,516 and purchase of property, plant and equipment of $5,275,669, both related to our Foreland acquisition.

 

Financing

 

Our net cash provided by financing activities for the years ended December 31, 2022 and 2021 was $11,675,461 and $2,302,679, respectively, an increase of $9,372,782, or over 400%. Our cash flows from investing activities in 2022 consisted of proceeds on issuance of equity of $16,127,024, offset by payments on notes payable of $4,451,563.


II-45 


 

BUSINESS

 

Overview

 

Sky Quarry Inc. and its subsidiaries (“Sky Quarry”, “SQI”, the “Company”, “we” or “us”) are, collectively, 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 and production of oil from asphalt shingles is expected to reduce the dependence of the American economy on landfills for the disposal of waste and to also reduce dependence on foreign and domestic virgin crude oil extraction for industrial uses.

 

We intend to retrofit the PR Spring Facility to recycle waste asphalt shingles using our ECOSolv technology and produce oil and asphalt paving aggregate from our bitumen deposit.

 

We also plan to develop a modular asphalt shingle recycling facility (“ASR Facility”), which can be deployed in areas 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.” We have three wholly-owned subsidiaries: 2020 Resources LLC (“2020 Resources”), 2020 Resources (Canada) Ltd. (“2020 Canada”), and Foreland Refining Corporation (“Foreland”).

 

On September 16, 2020, we acquired 2020 Resources LLC. The assets of 2020 Resources include an oil sands remediation facility (referred to in this Offering Circular as 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 PR Spring Facility

 

Construction of the PR Spring Facility completed in 2019 and originally utilized a hybrid water/biosolvent recovery system for the separation of oil from oily sands and asphalt sludge. This process has since been shown to be uneconomic in the current environment and to use significant amounts of water. The retrofitting of the facility to process both waste asphalt shingles and to remediate oil saturated surface oil sands will utilize a proprietary benign petroleum-based solvent (“ECOSolv”) formulation for recovery, requiring very little to no water in the process. This same solvent process has been demonstrated in bench tests to be effective in the separation of waste asphalt shingles into its base components of oil, sand and fiberglass.

 

We intend to retrofit the PR Spring Facility to utilize our ECOSolv process to recycle waste asphalt shingles into crude oil and clean solids, and to produce oil and asphalt paving aggregate from its bitumen deposits.

 

We also plan to develop a modular asphalt shingle recycling facility design which can be deployed in areas with high concentrations of waste asphalt shingles and near asphalt shingle manufacturing centers.


II-46 


The ECOSolv Process

 

Under the ECOSolv process, mined oil sands or WAS Pellets are crushed and then mixed with a proprietary hydrocarbon-based waterless solvent and heated and agitated in a mixing vessel into a slurry. The solvent “washes” the sand clean and separates the sand from the pre-oil liquid asphalt. The freed ‘pre-oil’ is then processed during the separation stage and various products can be produced – WTI market bitumen, heavy oil or heavy crude oil. The solvent is extracted by separation, distillation and evaporation processes and is captured for re-use in the closed loop system, leaving clean heavy oil behind ready for sale. Separation of the sand is done by mechanical drying units, which evaporate and capture the solvent for reuse, leaving behind clean sand.

 

Bench testing for oil recovery from waste asphalt shingles was performed using samples containing 22% to 25% weight saturation asphalt bitumen content. The samples were processed using our ECOSolv process and resulted in an end product containing, on average, 20.8% bitumen and less than 1% solvent, implying a hydrocarbon recovery factor of up to 95% and solvent recovery of up to 99%.

 

PR Spring Asphalt Bitumen Leases

 

2020 Resources holds a 100% undivided interest in three contiguous asphalt bitumen leases (the “PR Spring Leases”) covering approximately 5,930 acres in the PR Spring region of Uintah County, Utah. The leases were issued by the State of Utah’s School and Institutional Trust Land Administration (“SITLA”) and requires payment of annual rent of $6,380 per year and minimum royalties of $63,800 per year. Once production from the bitumen deposit begins production royalties will be paid at 6.5% of gross sales per year.

 

The PR Spring oil sands deposit is located along the southeast flank of the Uinta Basin, formed during late Cretaceous and Early Tertiary Period. The deposit is within the Eocene-aged Green River Formation of the Douglas Creek Member. In general, the sands thicken to the southeast, closer to their source, becoming increasingly finer-grained and carbonate rich to the north and northwest.

 

The location of the project is amongst rugged topography, meaning the overburden thickness of the oil-saturated sands is highly variable. This variability directly affects the total volume to bitumen in-place calculations across the property. The target deposit is topographically high, which has resulted in erosion of much of the non-reservoir overburden. The mine pits have been proposed in an ideal location where the target resource is very shallow and thick with minimal overburden and outcropping at the surface in some locations. Well data in the mine pits is very dense and high quality, with 70 core holes in the Phase 1 mine pit locations and over 180 cored wells across PR Spring acreage. A detailed understanding of the reservoir can be achieved by analysis of this data.

 

Foreland Refining Corporation - Eagle Springs Refinery

 

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 refinery has a “name plate” production capacity of 4,500 barrels per day (“bpd”), but over the past 2 – 3 years has produced an average of 1,500 barrels per day due to local constrained supply of heavy and light oil and past issues with logistics due to COVID-19 related work restrictions. In addition to securing additional crude oil from local producers, management anticipates that the heavy oil produced at PR Spring will be refined at the Eagle Springs Refinery, resulting in increased production and revenues and higher efficiencies across the production chain.

 

The refinery’s major processing units include crude oil distillation, catalytic cracker, naphtha hydrotreating, and reforming units, which produce diesel, vacuum gas oil, naphtha, asphalt paving oil and other associated refined products.


II-47 


 

Feedstock crude oil, consisting largely of heavy sulfur-heavy oil, is sourced from local producers in Nevada and Utah as well as other North American sources. All of the crude oil is delivered to the refinery by truck. Refined products are transported by third parties to wholesale, bulk, and retail customers primarily across Nevada, Utah and California and other North American jurisdictions.

 

Crude oil is received into the refinery tank farm and crude oil terminals, which include over 29,500 barrels of oil storage. The crude oil is processed through various refining units into products and where they are stored in the refinery’s approximately 73,800 barrels of refined product specific tankage.

 

Revenue Streams

 

Foreland produces diesel, vacuum gas oil, naphtha and asphalt paving liquids, which is then sold through short-term and long-term contracts to our established long-term customers and on the spot market.

 

The PR Spring Facility, once operational, is expected to produce asphalt paving aggregate, a low-sulfur heavy oil product from mined bitumen sands and from remediated asphalt shingles to be sold to and refined by the Eagle Springs Refinery, and cleaned sand.

 

Products anticipated to be derived from the recycling of waste asphalt shingles include liquid asphalt cement, shingle granules and sand aggregate, limestone and fiberglass, which can be sold back to asphalt paving companies or shingle manufacturers.

 

Reserves

 

We do not have any proven reserves on our bitumen leases at PR Spring, primarily due to the fact that our ECOSolv process, which we will use to produce oil from the bitumen leases, has not been used in a commercial setting.

 

ASR Facilities

 

The first complete asphalt shingle recycling facility (“ASR Facility”) is intended to be built in 2024 and operated in partnership with or at a standalone owned and operated construction and demolition waste management facility. We believe that this will provide us with a steady supply of waste shingle feedstock, allow for quality control and collection of tipping fees. Discussions with other suitable facilities with existing waste shingle stockpiles are underway.

 

We have completed the design of the ASR facility front end, which grinds and mills the shingle feedstock and in the process extracts and separates the granules and sand and presses the remaining bitumen and solids into pellets for ease of transportation. We have fabricated and intend to deploy and commission the first ASR facility front end in the first half of 2024 and two more front ends in the first half of 2025. Processed WAS pellets from the front-end modules will initially be shipped to the PR Spring Facility for secondary remediation while “back end” modules are developed and fabricated to allow for petroleum separation using the ECOSolv process and for complete on-site remediation.

 

We believe that the ASR Facility design will be capable of remediating waste asphalt shingles into their basic components – asphalt cement, shingle granules, sand aggregate, limestone and fiberglass – utilizing the ECOSolv separation process. These components will be sold for use as binding material and tar coat to the asphalt paving industry or to roofing shingle manufacturers. Our business plans call for the construction and operation of five or more ASR facilities during the next five years.

 

We have identified target markets across the United States, with the potential to scale regionally to Virginia, Vermont, Alabama, Florida, and Maryland before addressing larger markets such as California, Oregon, and Washington State.


II-48 


 

Waste Asphalt Shingle Market

 

According to a report by the United States Environmental Protection Agency titled “Advancing Sustainable Materials Management: Assessing Trends in Materials Generation and Management in the United States” dated December 2020, about 15.1 million tons of waste shingles are generated annually. Waste asphalt shingles amount to about 2.5 percent of the total building-related waste in the U.S. Over 96 percent of these waste shingles end up in landfills, occupying over 23 million cubic yards of space2.

 

This waste stream is expected to increase. Consider that four-out-of-five homes in the U.S. are roofed with asphalt shingles3 and that April 2022 saw the highest annualized housing starts (over 1.8 million single family dwellings) since 20064. Also consider that on average, nearly 5 million homes are reroofed each year5, each roof being comprised of 3,500 to 6,000 pounds (1.5 to 3 tons) of asphalt shingles6. U.S. demand for residential roofing is projected to rise 0.7% per year to reach 164.1 million squares (20.5 million tons) in 20247.

 

Asphalt shingles cannot be composted. Given that asphalt shingles are manufactured from refined petroleum, incineration would result in the emission of gases hazardous to human health. By contrast, every ton of asphalt shingles that are recycled reduces the need for virgin oil by two barrels8.

 

According to an industry survey9 conducted by the National Asphalt Pavement Association (NAPA) in 2021, use of recycled asphalt shingles in asphalt mixtures increased by approximately 8 percent, from an estimated 586,000 tons in 2020 to 630,000 tons in 2021. It was further estimated by NAPA that a total of 921,000 tons of RAS was used in asphalt mixtures during the 2021 construction season, which is estimated to have reduced the need for 126,000 tons of asphalt binder (equal to over 690,000 barrels) and about 315,000 tons of aggregate with a total estimated value of more than $69 million. Reclaiming 395,000 tons of unprocessed RAS for future use saved about 240,000 cubic yards of landfill space, and more than $21 million in gate fees for disposal in landfills.

 

States and local agencies around the U.S. are beginning to see the advantage of using recycled asphalt shingles (“RAS”) in road infrastructure projects on county, city and state roads10. They are using RAS in aggregate base courses and for granular base stabilization on local roads. Paving contractors in many states are using RAS for parking lots, private driveways and in HMA mixes for varied purposes such as patching and temporary roads11. The most promising future market may be local governments. Over the last ten years, Minnesota DOT has been doing laboratory and field tests with RAS on hiking and biking trails and on town and county road sections, with positive results12. Georgia DOT has also experienced good results using RAS on local roads to the extent that they have modified their HMA specifications to allow for 5 percent waste shingles in the total mix13.

 


2 420 lbs of shingles occupies 1 cubic yard. https://www.epa.gov/sites/default/files/2021-01/documents/2018_ff_fact_sheet_dec_2020_fnl_508.pdf

3 https://www.asphaltroofing.org/frequently-asked-questions

4 https://tradingeconomics.com/united-states/housing-starts

5 https://www.rubyhome.com/blog/roofing-stats/

6 https://www.saferoofing.ca/resource/roofing-cost-2023/

7 https://www.principiaconsulting.com/2022/08/10/residential-roofing-market-size/

8 https://www.networx.com/article/asphalt-shingle-recycling-facts-and-figu

9 https://www.asphaltpavement.org/uploads/documents/WMA%20Survey/Annual_Reports/IS138-2021_RAP-RAS-WMA_Survey_508_-_WITH_APPENDICES.pdf pg 26

10 https://www.asphaltpavement.org/uploads/documents/WMA%20Survey/Annual_Reports/IS138-2021_RAP-RAS-WMA_Survey_508_-_WITH_APPENDICES.pdf pg 31

11 http://asphaltmagazine.com/using-recycled-asphalt-shingles-in-asphalt-pavements

12 http://asphaltmagazine.com/using-recycled-asphalt-shingles-in-asphalt-pavements

13 http://asphaltmagazine.com/using-recycled-asphalt-shingles-in-asphalt-pavements


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The Oil Sands Market

 

As an unconventional hydrocarbon resource, oil sands (or bitumen) hold hundreds of billions of barrels of oil on a worldwide basis14. Although Canada is the only country that is currently extracting large quantities of oil from its oil sands deposits15, the United States also has large oil sands resources that can be developed16. In a 2007 Report entitled “A Technical, Economic, and Legal Assessment of North American Oil Shale, Oil Sands, and Heavy Oil Resources In Response to Energy Policy Act of 2005 Section 369(p)” (September 2007), prepared by the Utah Heavy Oil Program, Institute For Clean and Secure Energy and The University of Utah for the U.S. Department of Energy (the “2007 Report”17), the authors reported the following estimates, which estimates were based upon source material published in 1979, 1987 and 1993:

 

·The United States has an estimated 76 billion barrels of oil-in-place (OIP) from bitumen and heavy oil contained in oil sands resources (OIP are not estimates of reserves or recoverable resources).  

 

·In the United States, Utah is known to have the largest oil sands deposits, with total resource estimates ranging from 23 to 32 billion barrels of OIP from bitumen and heavy oil contained in oil sands formations and deposits.  

 

A substantial part of the oil sands deposits in the PR Spring Leases are accessible through outcroppings or in shallow depths with limited or no overburden. In our view, the location and accessibility of oil sands deposits at PR Spring creates an opportunity for commercial development, supported by positive economics, using surface mining techniques and our extraction technology.

 

The worldwide growing demand for heavy crude oil and the recent decline in  crude oil production in countries such as Venezuela, Russia and the Ukraine18 makes the high quality, low sulfur, heavy oil found in oil sands deposits in the United States a valuable resource that has been underdeveloped to date. The development of oil sands domestically has the potential to turn the United States into a major supplier of heavy oil to world markets. To date, oil sands development has been limited by the absence of a viable technology that can extract heavy oil and bitumen from the oil sands deposits in an economical and environmentally responsible manner. To that end, Sky Quarry aims to develop its oil sands leases in an economically and environmentally responsible manner.

 

Asphalt Paving Sales Market

 

Asphalt is a key infrastructure construction material noted for its durability, flexibility, and ability to withstand adverse weather conditions. Asphalt is widely used for resurfacing projects to extend the lifespan of existing infrastructure and to repair cracks, potholes, and deterioration. The asphalt market is driven by the demand for road infrastructure development, maintenance, and repair.

 

The paving infrastructure industry is seeing progress in the adoption of asphalt technologies aimed at elevating performance, durability, and sustainability, including the use of polymer-modified asphalt and warm mix asphalt, and the use of asphalt shingles and reclaimed asphalt pavement. For example, Missouri Department of Transportation reports that blending asphalt shingles to its hot mix asphalt results in a very durable, more-rut resistant asphalt at a much lower price, and that by using recycled asphalt shingles, the


14 https://web.archive.org/web/20070402100135/http://www.worldenergy.org/wec-geis/publications/default/tech_papers/17th_congress/3_1_04.asp

15 https://www.blm.gov/programs/energy-and-development/mining-and-minerals/oil-shale-and-tar-sands

16 https://www.energy.gov/ceser/articles/secure-fuels-domestic-resources-oil-shale-and-tar-sands

17 https://collections.lib.utah.edu/details?id=213918

18https://www.eia.gov/outlooks/steo/report/global_oil.php; https://tradingeconomics.com/ukraine/crude-oil-production


II-50 


department reduces the amount of liquid asphalt in a mix design by 20 percent to 25 percent19. Together, these innovations strive to extend the longevity, environmental impact, and durability of paving asphalt and to reduce the demand for virgin materials and promoting circular economy principles.

 

Recent favorable economic developments are expected to further boost overall activity and revenue in the construction industry where Federal and State government departments are investing in infrastructure projects such as highway or roadway repair, bridge and road construction and rehabilitation.

 

U.S. Infrastructure Bill

 

On November 15, 2021, President Biden signed into law a $1.2 trillion bipartisan package for new federal investments in America’s infrastructure over five years, including money for roads, bridges, mass transit, rail, airports, ports and waterways. Over $110 billion of new funds is allocated toward improving the nation’s roads and bridges, and investments in other major transportation programs20.

 

Under the infrastructure package, $2.6 billion will be invested in roads and bridges in Utah over the next five years21. Projects scheduled to start or already under construction in 2023 include a brand-new highway, new interchanges, widened freeways and highways, new paths for pedestrians and cyclists, maintenance to keep roads and bridges in good condition and improved access to a new state park. Under that same infrastructure package, California will receive $28.2 billion to build and repair more than 14,220 miles of highways and 1,536 bridges over five years22.

 

Oil Refining and Sales Market

 

The process of converting crude oil into usable products is called refining. Refining is part of the midstream sector, one of the three main components of the oil and gas industry. The most commonly made product from one barrel of crude oil is motor fuel, particularly gasoline and diesel. Processed crude oil has a wide array of uses. Apart from being turned into transportation fuels, it is also a major feedstock in the petrochemical industry and the building block for plastics as well as products associated with infrastructure markets. Oil refineries across the world extracted over 95 million barrels of crude oil per day in 202223. US Oil production was at an all-time high in 201924, largely due to greater demand by the mobility sector and industrial growth. As the gasoline and diesel retail market is one of the most important customers for refineries, the coronavirus pandemic and resulting mobility restrictions greatly affected profit margins of refiners around the world25. At the end of 2022, eight major refineries in the U.S. were returned to service after being retrofitted to bio-fuel outputs with a further six refineries currently offline expected to come onstream by the end of 202326. Our sustainable waste energy portfolio will leverage both crude oil with a blended waste to energy oil from waste asphalt shingles that we expect to benefit from the growing demand for refined oil.

 


19 https://www.sciencedirect.com/science/article/abs/pii/S0950061813007678

https://www.modot.org/roofs-roads

20 https://www.nytimes.com/2021/11/15/us/politics/biden-signs-infrastructure-bill.html

21 https://www.whitehouse.gov/wp-content/uploads/2023/05/Utah-Fact-Sheet-May.pdf

22 https://www.whitehouse.gov/wp-content/uploads/2023/02/California-Fact-Sheet-E3.pdf

23 https://www.statista.com/statistics/265203/global-oil-production-in-barrels-per-day/

24 https://www.eia.gov/todayinenergy/detail.php?id=43015

25 https://www.afpm.org/newsroom/blog/refinery-earnings-are-why

26 https://www.mckinsey.com/industries/oil-and-gas/our-insights/converting-refineries-to-renewable-fuels-no-simple-switch


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According to a 2022 report produced by the International Energy Agency (“IEA”), global oil consumption, given current government policies, will rise from 94 million barrels per day in 2021 to an estimated 103 million barrels per day by 2030 and then remain at or near that level until 205027.

 

The U.S. continues to be an important global supplier of crude oil and natural gas and has seen increased demand in local crude and refined oil products due to the national infrastructure projects that have been approved and initiated.

 

Regulation

 

OSHA and Other Laws and Regulations.

 

We are subject to the requirements of the Federal Occupational Safety and Health Act28 (“OSHA”), and comparable state laws. The OSHA hazard communication standard, the EPA community right-to-know regulations under the Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards related to workplace exposure to hazardous substances and employee health and safety.

 

Oil Pollution Act.

 

The Federal Oil Pollution Act of 199029 (“OPA”) and resulting regulations impose a variety of obligations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The term “waters of the United States” has been broadly defined to include inland water bodies, including wetlands and intermittent streams. The OPA assigns joint and several strict liability to each responsible party for oil removal costs and a variety of public and private damages. We believe that we are in compliance with the OPA and the federal regulations promulgated thereunder in the conduct of our operations.

 

Clean Water Act.

 

The Federal Water Pollution Control Act30 (“Clean Water Act”) and resulting regulations, which are primarily implemented through a system of permits, also govern the discharge of certain contaminants into waters of the United States. Sanctions for failure to comply strictly with the Clean Water Act are generally resolved by payment of fines and correction of any identified deficiencies. However, regulatory agencies could require us to cease construction or operation of certain facilities or to cease hauling wastewater to facilities owned by others that are the source of water discharges. We believe that we substantially comply with the Clean Water Act and related federal and state regulations.

 


27 https://iea.blob.core.windows.net/assets/830fe099-5530-48f2-a7c1-11f35d510983/WorldEnergyOutlook2022.pdf  pg 329

28 https://www.osha.gov/laws-regs/oshact/completeoshact

29 https://www.govinfo.gov/content/pkg/COMPS-2991/uslm/COMPS-2991.xml

30 https://www.epa.gov/sites/default/files/2017-08/documents/federal-water-pollution-control-act-508full.pdf


II-52 


 

Intellectual Property

 

We hold the following patents and patent applications:

 

ID Type

Patent Name

Filing Date

Patent 2578873

Removal of hydrocarbons from particulate solids (CANADA)

December 11, 2012

Patent 8758601B2

Removal of hydrocarbons from particulate solids (USA)

July 24, 2014

Patent 10184084B2

Oilsands processing using inline agitation and an inclined plate separator (USA)

January 22, 2019

Application 3028202 (1)

Method for producing pipeline specification bitumen from oil sands mining and extraction facilities using non-miscible solvents and centrifuge processing (CANADA)

December 20, 2018

Application 2017/ 0306242 A1 (1)

Method for producing pipeline specification bitumen from oil sands mining and extraction facilities (USA)

 

October 26, 2017

 

(1)Patent applications are currently under review and may not be renewed if they have no practical application under the new solvent-based recovery system being contemplated.  

 

Our ECOSolv process is protected as a trade secret.

 

Agreement with JP Morgan

 

On June 21, 2021, our stockholders unanimously consented to terminate a Stockholders Agreement entered into by all of the stockholders and us on September 24, 2020 and approved a governance agreement between us and JP Morgan, which grants to JP Morgan the following rights:

 

·a consent right with respect to certain business transaction matters, including: (a) material changes to the nature of our business, (b) a grant of certain stock options or restricted stock, (c) our entry into certain employment or compensation agreements, (d) the incurrence by us of more than $500,000 of debt, (e) our entry into a related party agreement, (f) a sale transaction, (g) a loan by us in excess of $500,000, (h) settlement of a lawsuit or other dispute in excess of $500,000 or (i) any investment by us in excess of $500,000;  

·Board of Director observation rights;  

·the right to receive certain quarterly and annual financial statements from us; and  

·certain inspection rights so long as JP Morgan owns at least 10% of our outstanding shares of common stock.  

 

See “Description of Securities-Preferred Stock”.

 

Employees

 

We currently have approximately 26 full-time employees and approximately 7 part-time employees and/or contractors.


II-53 


 

Offices

 

Our corporate headquarters are located in Woods Cross, Utah, where we lease office space at 707 W. 700 S, Suite 101. We do not currently have other leased offices.

 

All of our senior executives including our Chief Executive Officer and Executive Chairman, VP Finance and VP Business Development work remotely.

 

We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable space will be available to accommodate any such expansion of our operations.


II-54 


 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with us held by each person, and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.

 

Name

 

Age

 

Position(s)

David Sealock

 

63

 

Chief Executive Officer, Director

Marcus Laun

 

54

 

Executive Vice President, Director

Darryl Delwo

 

58

 

Vice President of Finance

Travis Schneider

 

50

 

Director

Matthew Flemming

 

55

 

Director

 

David Sealock, CEO, Director and Board Chair

 

Mr. Sealock has served as our Chief Executive Officer and Chairman since March 2019 and is a co-founder of the technology concepts and processes utilized by us. Previously from March 26, 2018 to January 2020, Mr. Sealock served as CEO and Executive Director for Petroteq Energy. From January 2015 to Decemer 2022, Mr. Sealock also served as President of Autus Ventures, Inc. where he established equity financing processes for startup and intermediate oil and gas companies and managed strategic planning and portfolio optimization. Prior to that, from January 2017 until August 2017, he was Vice President of Research & Development at Petroleum Technology Alliance Canada (PTAC), a Canadian hydrocarbon industry association that serves as a neutral non-profit facilitator of collaborative R&D and technology development. There he managed the coordination and services to facilitate the implementation of specific methane related projects. From August 2014 until December 2015, Mr. Sealock served as President and Chief Operating Officer of Sulvaris. Inc. During his tenure at Sulvaris, he collaborated to deliver equity financing and JV financing to recommence project construction. From 2008 to 2014, Mr. Sealock was the Executive Vice President of Sunshine Oilsands, Ltd., and was promoted to President and Chief Executive Officer (Interim) from 2013 to 2014, where he managed daily operations for engineering, construction, technology, operations, regulatory, human resources, investor relations, health, safety & environment, marketing, supply chain management, IT & systems, and corporate governance. From 2007-2008 he was Vice President of MegaWest Energy Corp. (now Gravis Energy) and from 2006-2007 he was Senior Manager of Total E&P (formerly Deer Creek Energy, Ltd.), where he was charged with leading a large-scale business & digital transformation to integrate Deer Creek Energy’s technology infrastructure into Total’s enterprise-wide global infrastructure. Mr. Sealock holds a bachelor’s degree, Business Management from the University of Phoenix and is a Registered Engineering Technologist with ASET.

 

Mr. Sealock brings to us a strong background in technology-related start-up operations, regulatory compliance and corporate governance, which qualifies him to be a director, and adds significant strategic, business and financial experience.

 

Marcus Laun, EVP and Director

 

Mr. Laun has spent the past twenty years as a founding principal or senior advisor to over fifteen publicly and privately held companies. Mr. Laun has served as CEO of GrowthCircle.com from May 2013 to present, a media company specializing in the production and distribution of short films for corporate clients. Mr.


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Laun also serves as CEO of Geopulse Exploration since August 2017 to present, and as Vice President for Net Cents Technology, Inc from March 2020 to present.

 

His experience includes advising and investing in an organic food brand company which eventually sold for $250mm. He has in-depth knowledge of media content and distribution having been a senior advisor to Digital Development Group which has a distribution platform with over 10,000 titles. Mr. Laun has also advised and raised capital for companies in the solar, wind, oil and gas and alternative fuel industries.

 

His extensive expertise in financing, which qualifies him to be a director, culminated as a Managing Director for Knight Capital Group (the largest market-maker of equities in the U.S.) where he managed syndicates for over $300 million in financing. He has a BS in Hotel Management from Cornell, and an MBA from Columbia University.

 

Darryl Delwo, VP Finance

 

Mr. Delwo has served as VP Finance since July 1, 2020. Previously, from 2018 to 2020, Mr. Delwo served as CFO of Noralta Technologies Inc., a SaaS based monitoring firm primarily servicing the oil & gas market. From March 2016 to July 2018, Mr. Delwo was the consulting finance leader providing strategic financial and operational turnaround initiatives including to Trilogy Net, Fratello Group of Companies, and Planit Builders. From October 2014 to March 2016, Mr. Delwo was Controller and Acting CFO for the start-up company Sulvaris Inc. supporting the venture funding to recommence project construction. Prior to that, from March 2012 to June 2014, Mr. Delwo served as Controller of Black Diamond Energy Services establishing the amalgamation of several acquisitions. From March 2010 to March 2012, Mr. Delwo was Assistant Controller of Wholesale Sports responsible for operational and financial results for Canadian and U.S.A retail operations. From March 2006 to March 2010, Mr. Delwo served as Assistant Controller of Regus Canada, managing Regus’s Canadian marketplace expansion. Mr. Delwo holds a CPA, CMA designation and Bachelor of Commerce, Accounting Major from Athabasca University and in 2022, was distinctly honored for his professional achievements, dedication and exceptional service to the CPA profession.

 

Travis Schneider, Director

 

Travis Schneider has served as a member of the board since May 2020. Previously he served as a director of Petroteq Energy Inc, a publicly traded company on the Canadian TSX Venture Exchange (“TSXV”) from December 2011 to March 2020. Most recently he served as Manager of Corporate Affairs for AgriMarine Holdings Inc. from October 2008 to November 2020. AgriMarine was a publicly traded company on the TSXV and later on the Canadian Securities Exchange from 2009 until its acquisition by Dundee Corporation in 2015. During his time at AgriMarine Mr. Schneider coordinated reports to senior management and the board of directors, assisted with audit and financial reporting and business planning, and was directly responsible for corporate regulatory maintenance and compliance, maintenance of license and permits, liaison with legal counsel, and matters involving human resources and information technology. Mr. Schneider brings to us a strong background in startup operations, regulatory compliance and corporate governance and adds significant strategic, business and financial experience, which qualifies him to be a director.

 

Matthew Flemming, Director

 

Mr. Flemming joined our board of directors in November 2023. Mr. Flemming has served as the Chairman of the Board of Correlate Energy Corp. (OTCQB: CIPI) since May 14, 2021 and was the Chief Executive Officer and acting Chief Financial Officer from May 14, 2021 through December 28, 2021. Mr. Flemming serves as the Chief Business Development Officer of SMG Industries Inc. (OTCQB: SMGI), a national transportation services business providing end to end logistics solutions since December 2020, and was its interim Chief Executive Officer and Interim Chief Financial Officer from January 2021 through July 2023, and prior thereto Mr. Flemming served as its Chief Executive Officer from September 2017


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through December 2020 and continues to serve as the Chairman of the Board of Directors. Prior thereto, Mr. Flemming was a consultant for a financial restructuring firm and a financial advisor to a private closely held oilfield services company during 2016 and early 2017. From June 2011 to March 2016, Mr. Flemming was the Chief Executive Officer, Treasurer, Secretary, and Chairman of the Board of HII Technologies Inc. an oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies and providing services in frac water management, safety services and portable power used by exploration and production companies in the United States. Prior thereto, from 2009 to 2011, Mr. Flemming was Chief Financial Officer of Hemiwedge Industries Inc., a proprietary valve technology company with oilfield applications, that was sold in 2011. From 2005 to 2009, Mr. Flemming was Chief Financial Officer of Shumate Industries, Inc., an oilfield manufacturing company and successor of Excalibur. Previous to that, from 2001 to 2005, Mr. Flemming was Chief Financial Officer of Excalibur Industries, Inc., an industrial and energy related manufacturer and fabrication company. From June 1999 to March 2001, he served as Chief Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held technology company. From January 1994 to May 1999, Mr. Flemming served as Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately held national specialty products company that he founded. Mr. Flemming received a Bachelor of Arts in Finance from the University of Houston.

 

Mr. Flemming brings a strong background in logistics and corporate governance, which qualifies him to be a director and adds significant strategic, business and financial experience.

 

JP Morgan holds one share of our Series A preferred stock. As the holder of this preferred share, JP Morgan has the right to appoint one person to our Board of Directors for so long as it holds over 15% of our shares. As of the date of this Offering Circular, JP Morgan’s share ownership was below 15%.

 

Family Relationships

 

There are no family relationships between any of our officers or directors.

 

Other Directorships; Director Independence

 

Other than as set forth above or elsewhere herein, none of our officers or directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

 

For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to the NASDAQ definition, Matthew Flemming and Travis Schneider are deemed independent.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file.

 

Board Committees

 

We have an Audit Committee comprised of Messrs. Matthew Flemming (Chair), Travis Schneider and David Sealock. All of the members of the Audit Committee meet the definition of “audit committee


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financial expert” as that term is defined by the Commission. The Committee is authorized to approve and retain the independent auditors to conduct the annual audit of our financial statements; to review the proposed scope and results of the audit; to review and pre-approve audit and non-audit fees and services; to review accounting and financial controls with the independent auditors and our financial and accounting staff; to review and approve transactions between us and our directors, officers and affiliates; to recognize and prevent prohibited non-audit services; to establish procedures for complaints received by us regarding accounting matters; and to oversee internal audit functions, if any.

 

We have a Compensation, Nomination and Corporate Governance Committee comprised of Messrs. Travis Schneider (Chair), Matthew Flemming and David Sealock. The Committee oversees identifying individuals qualified to become Board members and recommending directors to be elected by the Board, with the goal of assembling a diverse Board that brings together a variety of skills derived from high quality business and professional experience. The Committee also oversees compensation matters and is authorized to review and determine the compensation arrangements for management; to establish and review general compensation policies with the objective to attract and retain superior talent, to recognize and reward individual performance and to achieve our financial goals; to administer our stock incentive and purchase plans; and to review the independence of any compensation advisers.

 

We have a Health, Safety and Environment Committee comprised of Messrs. Travis Schneider (Chair), Marcus Laun and David Sealock. The Committee's primary purpose is to assist the Board in fulfilling its oversight responsibilities with respect to matters of employee health and safety; to provide oversight and support of the Company’s sustainability and ESG programs, goals and initiatives, and management system; and any other duties required under the Corporation’s by-laws, by applicable securities regulatory authorities, or by law.

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting.

 

We do not currently have a process for security holders to send communications to the Board. 

 

During the fiscal years ended December 31, 2022 and 2021, the Board of Directors met as necessary.

 

Involvement in Certain Legal Proceedings

 

In March 2013, one of our Directors, Marcus Laun, was suspended from associating with any FINRA member firm in any capacity for failing to respond to a FINRA request for information. The suspension was lifted in July 2013; however, in November 2013, Laun was fined $15,000 and once again suspended from FINRA for failing to disclose information about outside business activities from his FINRA member firm. Laun consented to the described sanctions and was suspended for seven months, after which the suspension was lifted by June 2014.

 

One of our directors, Matt Flemming, was an executive officer of HII Technologies, Inc. (“HII”) in 2016. Subsequent to his employment with HII, that company entered into a plan of reorganization under Chapter 11.

 

Other than as set forth above, none of our officers or directors has, in the past ten years, filed bankruptcy, been convicted in a criminal proceeding or named in a pending criminal proceeding, been the subject of any order, judgment, or decree of any court permanently or temporarily enjoining him or her from any securities activities, or any other disclosable event required by Item 401(f) of Regulation S-K.


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COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

 

The following Summary Compensation Table sets forth all compensation awarded to, earned by, or paid to each individual who served as our principal executive officer and our next two most highly compensated executive officers in respect of their service to our company during the years ended December 31, 2022 and 2021. We refer to these individuals as our “named executive officers.” The compensation information disclosed herein for our three named executive officers is disclosed in accordance with Regulation S-K, Item 402:

 

Name and Principal Position

Year

Salary
($)

Bonus
($)

Stock Awards
($)

Option Awards
($)

Non-Equity Incentive Plan Compensation ($)

Nonqualified Deferred Compensation ($)

All Other ($)

Total
($)

 

 

 

 

 

 

 

 

 

 

David Sealock

2021

-0-

40,000

-0-

-0-

-0-

-0-

-0-

40,000

Chief Executive Officer

2022

190,000

132,000

-0-

-0-

-0-

-0-

-0-

322,000

Marcus Laun

2021

-0-

40,000

-0-

-0-

-0-

-0-

-0-

40,000

Executive Vice President

2022

190,000

     157,500

 

 

 

 

 

 347,500

Darryl Delwo

2021

-0-

54,000

-0-

-0-

-0-

-0-

-0-

54,000

Vice President, Finance

2022

150,000

       54,000

-0-

190,000

-0-

-0-

-0-

 394,000

 

Employment Agreements

 

We have an employment agreement with David Sealock for an annual base salary of $120,000. In May 2022, the annual base salary was increased by our Board to $225,000. In addition, Mr. Sealock is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. Mr. Sealock is entitled to severance payments by us equal to twelve months of his base salary at the time of his termination if he is terminated without cause. Mr. Sealock waived payment of his salary in 2020 and 2021.

 

We have an employment agreement with Marcus Laun for an annual base salary of $120,000. In May 2022, the annual base salary was increased by our Board to $225,000. In addition, Mr. Laun is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. Mr. Laun is entitled to severance payments by us equal to twelve months of his base salary at the time of his termination if he is terminated without cause. Mr. Laun waived payment of his salary in 2020 and 2021.

 

We have an executive agreement with Darryl Delwo for an annual base salary of $90,000. In May 2022, the annual base salary increased by our Board to $180,000. In addition, Mr. Delwo is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. Mr. Delwo is entitled to severance payments equal to up to eighteen months of his base salary at the time of his termination if he is terminated without cause. Mr. Delwo waived payment of his salary in 2020 and 2021.

 

Bonuses

 

On December 8, 2021, the Board of Directors approved the award of a discretionary bonus (the “2021 Discretionary Bonus”) to certain directors and officers in the aggregate amount of $596,100 for the achievement of certain corporate performance milestones during the year ended December 31, 2021, of which $190,000 was paid as of December 31, 2021. The balance of the 2021 Discretionary Bonus was paid in full during the year ended December 31, 2022.


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Stock Option Plan

 

We have an Incentive Stock Option Plan (the “Plan”) which reserves 5,000,000 shares of common stock for issuance under the Plan. The Plan allows our Board of Directors to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting periods are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of Section 422 of the Internal Revenue Code. As of June 30, 2023 a total of 566,667 options have been granted pursuant to the Plan.

 

Grant of Plan-Based Awards

 

During the year ended December 31, 2022 we granted the following awards to our executive officers:

 

Name

 

Grant Date

 

Number of securities underlying options

 

Exercise price of option awards ($/sh)

 

Grant date fair value of option awards

Darryl Delwo

 

Sept 1, 2022

 

133,334

 

$ 2.70

 

$ 190,000

 

Compensation of Directors

 

For the fiscal year ended December 31, 2022 we paid our directors as follows:

 

Name of Director

Fees earned or paid in cash ($)

Stock awards ($)

Option awards ($)

Non-equity incentive plan compensation ($)

Nonqualified deferred compensation earnings

($)

All other compensation ($)

Total

($)

David Sealock

$60,000

-

-

-

-

-

$60,000

Marcus Laun

$30,000

-

-

-

-

-

$30,000

Travis Schneider

$112,000

-

$190,000

-

-

$62,600

$364,600

 

During the year ended December 31, 2021, Mr. Sealock waived payment of his sitting fees for acting as an executive director. During the year ended December 31, 2022, Mr. Sealock earned sitting fees as an executive director and fees to act as board chair of various board committees totaling $60,000. Fees described here do not include salary, bonus or other compensation listed under the Summary Compensation Table above.

 

During the year ended December 31, 2021, Mr. Laun waived payment of his sitting fees for acting as an executive director. During the year ended December 31, 2022, Mr. Laun earned sitting fees as an executive director totaling $30,000.  Fees described here do not include salary, bonus or other compensation listed under the Summary Compensation Table above.

 

During the year ended December 31, 2021, Mr. Schneider waived payment of his sitting fees for acting as an independent director and was awarded a cash performance bonus of $93,600, $31,000 of which was paid in 2021 and the balance in 2022. During the year ended December 31, 2022, Mr. Schneider earned sitting fees as an independent director and fees to act as chair of various board committees totaling $112,000. Mr. Schneider was paid the balance of the cash performance bonus awarded in 2021 of $62,600. Mr. Schneider was also granted 133,334 incentive stock options expiring on September 1, 2027, with an exercise price of $2.70 and vesting equally over three years commencing on the first-year anniversary of the date of grant. The options have a fair market value on the grant date of $190,000, which amount is amortized over the 36-month vesting term. As of June 30, 2023, none of these options were vested.


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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information with respect to our equity securities owned of record or beneficially by (i) each of our Officers and Directors; (ii) each person who owns beneficially more than 5% of each class of our outstanding equity securities; and (iii) all Directors and Executive Officers as a group, as of the date of this Offering Circular (after giving effect to the reverse stock split).

 

Name and Address
(1)

 

Common Stock Beneficial Ownership (2)

 

Percentage of Common Stock Beneficial Ownership Before Offering
(2) (3)

 

Percentage of Common Stock Beneficial Ownership After Offering (2) (4)

 

 

 

 

 

 

 

David Sealock (5)(6)

 

1,633,046

 

10.00%

 

8.31%

 

 

 

 

 

 

 

Marcus Laun (5)(7)

 

1,375,110

 

8.42%

 

6.97%

 

 

 

 

 

 

 

Darryl Delwo (5)(8)

 

425,000

 

2.60%

 

2.14%

 

 

 

 

 

 

 

Travis Schneider (5)(9)

 

425,000

 

2.60%

 

2.14%

 

 

 

 

 

 

 

Matthew Flemming (5)(10)

 

83,334

 

0.51%

 

0.42%

 

 

 

 

 

 

 

Janey Baker (11)

18124 Wedge Parkway Ste 925
Reno, Nevada, USA

 

1,084,044

 

6.64%

 

5.51%

 

 

 

 

 

 

 

JPMorgan Chase Funding Inc. (12)

4 New York Plaza, 21st Floor
New York, New York 10004

 

2,249,880

 

13.78%

 

0%

 

 

 

 

 

 

 

All Officers and Directors as a Group (5 Persons) (6)(7)(8)(9)(10)

 

3,941,490

 

24.15%

 

19.98%

 

 

(1)

Unless otherwise indicated, the address of the shareholder is c/o Sky Quarry Inc., 707 W. 700 S, Suite 101, Woods Cross, UT 84087

 

 

 

 

(2)

Unless otherwise indicated, based on the assumption that a reverse stock split of 1:3 has taken place.

 

 

 

 

(3)

Unless otherwise indicated, based on 16,323,089 shares of common stock issued and outstanding. This does not reflect shares of common stock issuable upon exercise of warrants to purchase 5,599,079 shares, options to purchase 566,667 shares, 119,048 shares of common stock issuable upon the conversion of 200,000 shares of Series B Convertible Preferred Stock and 416,667 shares of common stock issuable upon the conversion of a secured promissory note.

 

 

 

 

(4)

Unless otherwise indicated, based on 19,656,423 shares of common stock issued and outstanding, assuming the offering is fully subscribed, plus the exercise of any options held by the respective optionee.

 

 

 

 

(5)

Indicates one of our officers or directors.

 

 

 


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(6)

Includes 166,667 shares held by Mr. Sealock’s spouse and 438,879 shares held by Autus Ventures Ltd., an entity controlled by Mr. Sealock.

 

 

 

 

(7)

Includes 83,334 shares which may be acquired upon exercise of an option at $4.80 per share expiring October 15, 2028.

 

 

 

 

(8)

Includes 133,334 shares which may be acquired upon exercise of options at $2.70 per share expiring September 1, 2027 and 66,667 shares which may be acquired upon exercise of options at $4.80 per share expiring October 15, 2028.

 

 

 

 

(9)

Includes 133,334 shares which may be acquired upon exercise of options at $2.70 per share expiring September 1, 2027 and 33,334 shares which may be acquired upon exercise of options at $4.80 per share expiring October 15, 2028.

 

 

 

 

(10)

Includes 83,334 shares which may be acquired upon exercise of options at $4.80 per share expiring November 1, 2028.

 

 

 

 

(11)

Includes 825,000 shares held by Varie Asset Management, an entity controlled by Ms. Baker.

 

 

 

 

(12)

Does not include 1 share of Series A Preferred Stock, which is not convertible and has no voting rights. The address for JP Morgan is 4 New York Plaza, 21st Floor, New York, NY. We intend to redeem all of JP Morgan’s capital stock on or prior to the closing of this Offering. See “Use of Proceeds”.

 

We are not aware of any person who owns of record, or is known to own beneficially, five percent or more of the outstanding securities of any class of the issuer, other than as set forth above. Upon completion of the Offering, there are no classes of our stock other than common stock issued or outstanding.

 

There are no current arrangements which will result in a change in control.


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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Marcus Laun Transactions

 

On July 13, 2020, we issued a convertible promissory note to Marcus Laun, a director and the Executive Vice President of the Company, in the principal amount of $25,000. The note bears interest at 4% per year with balance due and payable on July 13, 2021. All or any portion of the principal and accrued interest is payable at the option of the note holder at any time into shares of our common stock at a conversion price of $0.0936 per share. On March 28, 2022 this note was converted in full.

 

Baker Transactions

 

On April 23, 2020, we issued a promissory note to an arm’s length third party in the principal amount of $50,000, convertible at the election of the holder into shares of common stock at a price of $0.0936 per share. The note had a term of twelve months and bore interest at a rate of 4% per annum payable at maturity. The note was subsequently acquired by Varie Asset Management Ltd, an entity controlled by Ms. Janey Baker, a shareholder holding over 5% of our issued and outstanding common stock. On March 28, 2022 at the election of the lender the note was converted into 575,401 shares in full and final satisfaction of the note.

 

On September 17, 2020, we issued a promissory note to Dual Dreams, LLC,  an entity controlled by Ms. Baker, in the principal amount of $75,000. The note was unsecured, bore a flat interest charge at 25% and matured on March 16, 2021. On January 4, 2022 the note was repaid in full. As partial consideration for the advancing the note, the lender was issued 75,000 shares of our common stock.

 

On September 21, 2020, we issued a promissory note to an arm’s length third party in the principal amount of $50,000, convertible at the election of the holder into shares of common stock at a price of $0.25 per share. The note had a term of twelve months and bore interest at a rate of 4% per annum payable at maturity. The note was subsequently acquired by Varie Asset Management Ltd, an entity controlled by Ms. Baker. On December 9, 2021 at the election of the lender the note was converted into 209,731 shares in full and final satisfaction of the note.

 

JP Morgan Transactions

 

On September 16, 2020, we issued a promissory note to JP Morgan, a significant shareholder, in the principal amount of $450,000. The note bears interest at 10% per annum with balance due and payable on September 16, 2023. On May 13, 2021, JP Morgan converted $200,475 into 202,500 shares of our common stock. On September 29, 2021, JP Morgan converted $111,375 into 112,500 shares of our common stock. On November 22, 2021, JP Morgan converted $57,995 into 58,584 shares of our common stock and $13,108 into 17,478 shares of our common stock. In addition, on November 22, 2021, JP Morgan was issued a convertible note in the amount of $25,000 in settlement of $25,000 of existing debt. The convertible note bears interest at 15% per annum, has a maturity of one year and is convertible into shares of our common stock at $1.25 per share. As incentive to advance the convertible note, on the note issuance date, JP Morgan was issued warrants to purchase 8,334 shares of our common stock at an exercise price of $1.50 for a period of eighteen months. On March 14, 2022 JP Morgan converted the balance of the note, being $85,928.54, into 22,914 shares of our common stock, fully extinguishing the note.

 

On June 21, 2021, our stockholders unanimously approved the execution of a governance agreement between us and JP Morgan the following summarized rights:

 

·a consent right with respect to certain business transaction matters, including: (a) material changes to the nature of our business, (b) a grant of certain stock options or restricted stock, (c) our entry into certain employment or compensation agreements, (d) the incurrence by  


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us of more than $500,000 of debt, (e) our entry into a related party agreement, (f) a sale transaction, (g) a loan by us in excess of $500,000, (h) settlement of a lawsuit or other dispute in excess of $500,000 or (i) any investment by us in excess of $500,000;

·Board of Director observation rights;  

·the right to receive certain quarterly and annual financial statements from us; and  

·certain inspection rights so long as JP Morgan owns at least 10% of our outstanding shares of common stock.  

 

On June 21, 2021, we issued one preferred share of Series A Preferred Stock (“Preferred Share”) to JP Morgan (the “Preferred Shareholder”), with the following summarized terms and conditions:

 

·The Preferred Shareholder has the right to appoint one nominee to the Board of Directors for as long as the Preferred Shareholder holds in excess of 15% of our common stock; 

·The Preferred Share is non-voting; 

·The Preferred Share is redeemable for $1.00 on either consummation of an IPO or by mutual written consent. 

Bonuses

 

On December 8, 2021, the Board of Directors approved the award of a discretionary cash bonus (the “2021 Discretionary Bonus”) to certain directors and officers in the aggregate amount of $596,100 for the achievement of certain corporate performance milestones during the year ended December 31, 2021, of which $190,000 was paid as of December 31, 2021. The balance of the 2021 Discretionary Bonus was paid in full during the year ended December 31, 2022.

 

Employment Agreements

 

We have an employment agreement with David Sealock for an annual base salary of $120,000. In May 2022, the annual base salary was increased to $225,000. In addition, Mr. Sealock is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. Mr. Sealock is entitled to severance payments by us equal to twelve months of his base salary at the time of his termination if he is terminated without cause. During the year ended December 31, 2021, Mr. Sealock waived payment of his salary and was awarded a cash performance bonus of $172,000, $40,000 of which was paid in 2021 and the balance paid in 2022. During the year ended December 31, 2022, Mr. Sealock was paid a salary of $190,000, earned sitting fees as a director and board chair totaling $60,000 and was paid the balance of the cash performance bonus awarded in 2021 of $132,000.

 

We have an employment agreement with Marcus Laun for an annual base salary of $120,000. In May 2022, the annual base salary was increased to $225,000. In addition, Mr. Laun is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. Mr. Laun is entitled to severance payments by us equal to twelve months of his base salary at the time of his termination if he is terminated without cause. During the year ended December 31, 2021, Mr. Laun waived payment of his salary and was awarded a cash performance bonus of $169,000, $45,000 of which was paid in 2021 and the balance paid in 2022. During the year ended December 31, 2022, Mr. Laun was paid a salary of $190,000, earned sitting fees as a director totaling $30,000 and was paid the balance of the cash performance bonus awarded in 2021 of $157,500. Mr. Laun waived payment of his salary in 2020 and 2021. On August 1, 2023, Mr. Laun was granted 83,334 incentive stock options expiring on August 1, 2028, with an exercise price of $9.09 and vesting equally over three years commencing on the first-year anniversary of the date of grant. These


II-64 


options were voluntarily surrendered and cancelled on October 15, 2023. On October 15, 2023, Mr. Laun was granted 83,334 incentive stock options expiring on October 15, 2028, with an exercise price of $4.80 and vesting equally over three years commencing on the first-year anniversary of the date of grant.

 

We have an executive agreement with Darryl Delwo for an annual base salary of $90,000. In May 2022, the annual base salary increased to $180,000. In addition, Mr. Delwo is eligible to earn an annual bonus, subject to the achievement of certain performance goals, milestones and objectives, as established from time to time by an appropriate committee of our Board. During the year ended December 31, 2021, Mr. Delwo waived payment of his salary and was awarded a cash performance bonus of $108,000, $54,000 of which was paid in 2021 and the balance paid in 2022. During the year ended December 31, 2022, Mr. Delwo was paid a salary of $150,000 and was paid the balance of the  cash performance bonus awarded in 2021 of $54,000. Mr. Delwo is entitled to severance payments equal to up to eighteen months of his base salary at the time of his termination if he is terminated without cause. Mr. Delwo waived payment of his salary in 2020 and 2021. On September 1, 2022, Mr. Delwo was granted 133,334 incentive stock options expiring on September 1, 2027, with an exercise price of $2.70 and vesting equally over three years commencing on the first-year anniversary of the date of grant. On August 1, 2023, Mr. Delwo was granted 66,667 incentive stock options expiring on August 1, 2028, with an exercise price of $9.09 and vesting equally over three years commencing on the first-year anniversary of the date of grant. These options were voluntarily surrendered and cancelled on October 15, 2023. On October 15, 2023, Mr. Delwo was granted 66,667 incentive stock options expiring on October 15, 2028, with an exercise price of $4.80 and vesting equally over three years commencing on the first-year anniversary of the date of grant.

 

During the year ended December 31, 2021, Mr. Schneider waived payment of his sitting fees for acting as an independent director and was awarded a cash performance bonus of $93,600, $31,000 of which was paid in 2021 and the balance in 2022. During the year ended December 31, 2022, Mr. Schneider earned sitting fees as an independent director and fees to act as chair of various board committees totaling $112,000. Mr. Schneider was paid the balance of the cash performance bonus awarded in 2021 of $62,600. Mr. Schneider was also granted 133,334 incentive stock options expiring on September 1, 2027, with an exercise price of $2.70 and vesting equally over three years commencing on the first-year anniversary of the date of grant. On August 1, 2023, Mr. Schneider was granted 33,334 incentive stock options expiring on August 1, 2028, with an exercise price of $9.09 and vesting equally over three years commencing on the first-year anniversary of the date of grant. These options were voluntarily surrendered and cancelled on October 15, 2023. On October 15, 2023 Mr. Schneider was granted 33,334 incentive stock options expiring on October 15, 2028, with an exercise price of $4.80 and vesting equally over three years commencing on the first-year anniversary of the date of grant.

 

On October 15, 2023, certain directors, officers, key employees and consultants voluntarily surrendered 680,167 options previously granted on August 1, 2023. Also on October 15, 2023, the Company granted a total of 616,334 incentive stock options to directors, officers, key employees and consultants of the Company and its subsidiaries. The options permit the holders to purchase up to 616,334 common shares at an exercise price of $4.80 per share for a period of five years and vest in equal amounts on the 12, 24, and 36-month anniversaries of the grant date.

 

Mr. Matthew Flemming joined the board of directors on November 1, 2023 and was granted 83,334 incentive stock options expiring on November 1, 2028, with an exercise price of $4.80 with 33% vesting immediately and the balance vesting equally over three years commencing on the first-year anniversary of the date of grant.


II-65 


 

DESCRIPTION OF SECURITIES

 

Reverse Stock Split

The Company intends to seek shareholder approval, and all other necessary consents, to file a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware to effect a reverse stock split of its shares of common stock (the “Reverse Stock Split”) at a ratio of one-for-three (the “Split Ratio”), without changing the par value, rights, terms, conditions, and limitations of such shares of common stock, to be made effective on qualification of this Offering Circular by the Commission (the “Effective Split Date”). No fractional shares will be issued in connection with the Reverse Stock Split, and any of our stockholders that would be entitled to receive a fractional share as a result of the Reverse Stock Split will instead receive one additional share of our common stock in lieu of the fractional share. The reverse stock split will not in itself affect any stockholder’s ownership percentage of our common stock, except to the extent that any fractional share is 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 will also be reduced by the Split Ratio as of the Effective Split Date and their respective exercise prices will be increased by the Split Ratio. Neither the authorized shares of capital stock nor the par value per share of our common stock will be affected by the Reverse Stock Split.

 

All historical share and per share information cited in this Offering Circular has been retroactively adjusted to reflect the impact of this reverse stock split. Our historical financial statements remain unchanged and have not been adjusted to reflect the reverse stock split.

 

All historical share and per share information cited in this Offering Circular has been retroactively adjusted to reflect the impact of this reverse stock split. Our historical financial statements remain unchanged and have not been adjusted to reflect the reverse stock split.

 

We are offering up to 3,333,333 shares of common stock at a price of $6.00 per share.

 

Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.0001, and 25,000,000 shares of preferred stock, par value $0.001. As of the date of this Offering Circular, there were 16,323,089 shares of our common stock issued and outstanding, one (1) share of Series A Preferred Stock issued and outstanding and 200,000 shares of Series B Preferred Stock issued and outstanding and a secured promissory note convertible into 416,667 shares of common stock.

 

Common Stock

 

We are authorized to issue 100,000,000 shares of common stock. Holders of our common stock are each entitled to cast one vote for each share held of record on all matters presented to the shareholders. Cumulative voting is not allowed; hence, the holders of a majority of our outstanding common shares can elect all directors.

 

Holders of our common stock are entitled to receive such dividends as may be declared by our Board of Directors out of funds legally available and, in the event of liquidation, to share pro rata in any distribution of our assets after payment of liabilities. Our Board of Directors is not obligated to declare a dividend. It is not anticipated that dividends will be paid on common stock in the foreseeable future.

 

Holders of our common stock do not have preemptive rights to subscribe to additional shares if issued. There are no conversions, redemption, sinking fund or similar provisions regarding the common stock. All outstanding shares of common stock are fully paid and non-assessable.

 

The Company intends to seek shareholder approval, and all other necessary consents, to file a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware to effect a reverse stock split of its shares of common stock (the “Reverse Stock Split”) at a ratio of one-for-three (the “Split


II-66 


Ratio”), without changing the par value, rights, terms, conditions, and limitations of such shares of common stock, to be made effective on qualification of this Offering Circular by the Commission (the “Effective Split Date”). No fractional shares will be issued in connection with the Reverse Stock Split, and any of our stockholders that would be entitled to receive a fractional share as a result of the Reverse Stock Split will instead receive one additional share of our common stock in lieu of the fractional share. The reverse stock split will not in itself affect any stockholder’s ownership percentage of our common stock, except to the extent that any fractional share is 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 will also be reduced by the Split Ratio as of the Effective Split Date and their respective exercise prices will be increased by the Split Ratio. Neither the authorized shares of capital stock nor the par value per share of our common stock will be affected by the Reverse Stock Split.

 

Preferred Stock

 

Our Articles of Incorporation currently authorize the issuance of 25,000,000 shares of preferred stock. Our directors have the power to issue shares without shareholder approval, and such shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future.

 

Although we presently have no commitments or contracts to issue any shares of preferred stock, authorized and unissued preferred stock could delay, discourage, hinder or preclude an unsolicited acquisition of the Company, could make it less likely that shareholders receive a premium for their shares as a result of any such attempt, and could adversely affect the market prices of, and the voting and other rights, of the holders of outstanding shares of our common stock.

 

Series A Preferred Stock

 

We have designated one (1) share of our preferred stock as Series A Preferred Stock. Our Series A Preferred Stock is not convertible into our common stock and has no voting rights, but is entitled to appoint one (1) member to our Board of Directors as long as the holder of the Series A Preferred Stock holds at least 15% of our issued and outstanding common stock. The holder of our Series A Preferred is also entitled to certain protective provisions described above to certain protective rights and certain preemptive rights upon the issuance of new securities (including the common shares being offered pursuant to this Offering Circular), in each case consistent with the terms of the Certificate of Designation.

 

Series B Convertible Preferred Stock

 

We have authorized a maximum of 4,800,000 shares of Series B Convertible Preferred Stock, 200,000 of which are issued and outstanding as of the date of the commencement of this Offering. The Series B Convertible Preferred Stock is convertible at any time after the issuance hereof into shares of our common stock on a one-for-one basis, subject to adjustment, prior to the Mandatory Conversion Date. The Series B Convertible Preferred Stock will automatically convert into shares of our common stock on the filing with the Commission of a registration statement on Form 8-A (the “Mandatory Conversion Date”) and upon the closing of an initial public offering of our common stock (including in this Regulation A Offering) (a “Qualified IPO”). Upon such conversion and subject to any additional adjustments as may be required pursuant to the anti-dilution provisions of the Series B Convertible Preferred Stock, the shares will be converted into a number of shares of our common stock equal to the quotient obtained by dividing $2.50 (plus all accrued but unpaid dividends) by seventy percent (70%) of the price per share or deemed price per share to the public in the Qualified IPO, rounded to the nearest whole share.

 

The Series B Convertible Preferred Stock will carry a dividend payment of 8% compounded annually. The dividend on the Series B Convertible Preferred Stock shall accrue beginning from the date of issuance. Dividends shall be computed on the basis of the actual number of days elapsed and a 365-day


II-67 


year. The dividends shall accrue until the conversion of the Series B Convertible Preferred Stock and, at our option, may be paid in cash. The Series B Convertible Preferred Stock will be senior preferred equity and contain customary provisions restricting the payment of dividends on junior and pari passu equity at any time when all dividends on the Series B Convertible Preferred Stock have not been paid in full in cash.

 

Upon our liquidation or winding up, the holders of the Series B Convertible Preferred Stock shall be entitled to receive $2.50 per share, plus all accrued and unpaid dividends, prior to the distribution to common stockholders, if any.

 

The Series B Convertible Preferred Stock shall vote with the common stock on a one-vote per share basis. In addition, the Series B Convertible Preferred Stock shall have consent rights with respect to (i) taking actions adversely affecting the rights, preferences and privileges of the holders (including by merger, consolidation or otherwise); and (ii) issuing securities that are senior or pari passu to the Series B Convertible Preferred Stock.

 

Options, Warrants, and Convertible Promissory Notes

 

The table below sets forth the Shares reserved by the Company for future potential issuance as of December 19, 2023 (after adjustment for the reverse stock split).

 

 

Maximum Issuable

Company Stock Option Plan maximum

5,000,000

Common Share Purchase Warrants outstanding

5,599,080

Shares reserved upon conversion of convertible note

416,667

Total Shares Reserved for Issuance

27,338,836  

 

As of June 30, 2023 the Company had issued and outstanding a total of 5,599,080 warrants, respectively, to purchase one share of common stock, exercisable at a range from $2.70 to $7.50 per share for a range of 24 to 60 months from the date of issuance and carry a put feature in the event of a change in control. The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.

 

On March 27, 2020, the Company adopted an incentive stock option plan (the “Plan”). The Plan allows the Board of Directors of the Company to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting periods are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of Section 422 of the Internal Revenue Code. The Plan is a fixed number plan with a maximum of 5,000,000 shares of common stock reserved issuable under the Plan.

 

The table below sets forth share options outstanding as of June 30, 2023 (after adjustment for the reverse stock split).

 

Grant Date

Options Issued

Exercise Price

Expiration

Vesting

2022-09-01

566,667

$ 2.70

2027-08-31

Equally over 3 years commencing on first anniversary of grant date

 

As of June 30, 2023, no options have vested, and no options are exercisable. The options issued during 2022 vest equally over 3 years commencing on the first anniversary of the grant date.

 

The following sets forth the outstanding common share options and related activity for the period ended June 30, 2023:

 


II-68 


 

 

Number of Options

Weighted Average

Exercise Price Per Share

Outstanding as of December 31, 2022

 

666,667

$                    2.70

Granted

 

-

-

Exercised

 

-

-

Forfeited

 

(100,00)

2.70

Outstanding as of June 30 2023

 

566,667

$                    2.70

 

On November 24, 2023 the Company issued a secured convertible promissory note in the amount of $2,000,000. The secured convertible promissory note is convertible into 416,667 shares of common stock.

 

On a fully diluted basis, the number of shares of common stock that could be issued and outstanding prior to this Offering is 27,338,836 shares.

 

On November 27, 2023 the Company authorized the offering and sale of up to $5,000,000 of convertible promissory notes. The notes will bear interest at 9% per annum, payable semi-annually, with a term of thirty-six months, and may be converted into shares of common stock of the Company at a price of $1.60 per share. The notes may be redeemed at the option of the Company, subject to a prepayment penalty of 3% if redeemed within the first 12 months of issuance or a prepayment penalty of 2% if redeemed within 24 months of issuance. The notes are guaranteed by all of the subsidiaries of the Company. On November 27, 2023 the Company accepted and closed on the sale of $2,000,000 in principal amount of notes from one subscriber.

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

 

Tanner LLC was our independent registered public accounting firm for the years ended December 31, 2022 and 2021.

 

Clyde Snow & Sessions, PC serves as our legal counsel in connection with this Offering. Brian A. Lebrecht, a shareholder at Clyde Snow & Sessions, PC, holds options to acquire 33,334 shares of common stock at $2.70 per share.

 

PROPERTIES

 

We do not currently own any properties.

 

Our corporate headquarters are located in Woods Cross, Utah, where we lease office space at 707 W. 700 S, Suite 101. We do not currently have other leased offices.

 

We currently own or lease the following additional principal properties:


II-69 


 

We hold mineral leases (or the operating rights under leases) covering approximately 5,930.3 net acres within the State of Utah. Our oilsands remediation facility at PR Spring is sited on one of these leases. Terms of the SITLA Leases are set forth in the table below.

Reference

Gross Acres

Net Acres

Lease Expiry Date (1)

Annual Rent (2)

Annual Advance Minimum Royalty (3)

Production Royalty Rate (4)

ML-49579

50.4

50.4

12/31/2024

$    500

$   5,000

6.5%

ML-49927

4,319.9

4,319.9

5/31/2025

4,320

43,200

6.5%

ML-51705

1,560.0

1,560.0

1/31/2020

1,560

15,600

8%

 

 

 

 

 

 

 

Total

5,930.3

5,930.3

 

$ 6,380

$ 63,800

 

 

Notes:

1.Leases may be extended past expiry date by continued payment of annual rent and annual advance minimum royalty. 

2.Annual rent may be credited against production royalties payable during the year. 

3.Annual advance minimum royalty may be credited against production royalties payable during the year. 

4.The production royalty is payable on the market price of products produced from the leased substances, without deduction of costs for mining, overhead, labor, distribution or general and administrative activities. 

 

We hold two leased land rights of way rentals in Nye County, Nevada, totaling approximately 40 acres. Our Eagle Springs Refinery is sited on one of these leases.

 

 

Acres

Expiration

Annual Fee

Right-of-Way Grant N-41035

19.66

2023-12-31

$ 2,850

Right-of-Way Grant N-42414

20.32

2044-12-31

  1,400

 

We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable space will be available to accommodate any such expansion of our operations.

 

We are seeking to develop the 5,930 acres of land in PR Spring, Utah for the production of heavy oil/bitumen and asphalt paving aggregate from bituminous asphaltic sands deposits, and are in the process of retrofitting our existing mining and processing facilities to utilize our ECOSolv technology. During the years ended December 31, 2022 and 2021 we conducted no mining operations. As of the date of this Offering Circular the PR Spring lands are classified as an exploration stage property and holds no Mineral Reserves or Proven Minerals Reserves, as those terms are defined in Subpart 1300 of Regulation S-K.

LEGAL PROCEEDINGS

 

We are not a party to or otherwise involved in any legal proceedings.

 

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.


II-70 


 

FINANCIAL STATEMENTS

 

Unaudited Financial Statements as of and for the three and six months ended June 30, 2023

 

 

 

Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

 

 

 

Consolidated Statement of Operations for the three and six months ended June 30, 2023 and 2022

 

 

 

Consolidated Statement of Cash Flows for the six months ended June 30, 2023 and 2022

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Audited Financial Statements as of and for the Years ended December 31, 2022 and 2021

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

Consolidated Balance Sheets as of December 31, 2022 and 2021

 

 

 

Consolidated Statement of Operations for the year ended December 31, 2022 and 2021

 

 

 

Consolidated Statement of Stockholders Deficit for the year ended December 31, 2022 and 2021

 

 

 

Consolidated Statement of Cash Flows for the year ended December 31, 2022 and 2021

 

 

 

Notes to Consolidated Financial Statements

 

 

 


II-71 


 

 

 

 

Picture 1 

 

 

 

 

 

 

 

SKY QUARRY INC.

formerly, Recoteq Inc.

 

 

 

Consolidated Financial Statements

As of and for the periods ended June 30, 2023 and December 31, 2022


F-1


 

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL RESULTS

 

The accompanying unaudited consolidated interim financial statements of the Company as at, and for the six months ended June 30, 2023 and 2022 have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) and are the responsibility of the Company’s management. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included, and all such adjustments are of a normal recurring nature. The interim financial statements and related financial reporting matters have been reviewed and approved by the Company's Audit Committee.

 

The Company’s independent auditor has not performed a review of the interim financial statements for the period ending June 30, 2023 and 2022.


F-2


Sky Quarry Inc.

Consolidated Balance Sheets

As of June 30 2023 and December 31, 2022

 

 

 

 

 

 

2023

 

 

2022

 

 

 

 

(Unaudited)

 

 

(Audited)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

1,065,142  

 

$

572,197  

Accounts receivables

 

 

3,543,777  

 

 

4,237,064  

Prepaid expenses and other assets

 

 

281,995  

 

 

269,500  

Inventory

 

 

3,431,119  

 

 

3,441,563  

 

Total current assets

 

 

8,322,033  

 

 

8,520,324  

 

 

 

 

 

 

 

 

Property, plant, and equipment

 

 

6,348,200  

 

 

5,823,209  

Oil and gas properties

 

 

7,686,457  

 

 

7,477,238  

Restricted cash

 

 

4,639,519  

 

 

782,369  

Goodwill 

 

 

3,209,003  

 

 

3,209,003  

 

 

 

 

 

 

 

 

 

Total assets

 

$

30,205,212  

 

$

25,812,143  

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

5,353,421  

 

$

5,944,981  

Current maturities of notes payable, net of debt issuance costs

 

 

6,791,090  

 

 

3,169,121  

 

Total current liabilities

 

 

12,144,511  

 

 

9,114,102  

 

 

 

 

 

 

 

 

Notes payable, less current maturities, net of debt issuance costs

100,453  

 

 

133,513  

Deferred tax liability

 

 

187,856  

 

 

187,856  

 

Total Liabilities

 

 

12,432,820  

 

 

9,435,471  

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

Preferred stock $0.001 par value: 25,000,000shares authorized; 1 share issued and outstanding

 

 

 

 

 

 

Common stock $0.0001 par value: 100,000,000 shares authorized: 48,869,268 and 48,674,268 shares issued and outstanding, respectively

 

 

4,887  

 

 

4,867  

Additional paid in capital

 

 

21,896,039 

 

 

21,352,231  

Accumulated other comprehensive loss

 

 

(168,113) 

 

 

(177,320) 

Accumulated deficit

 

 

(3,960,421) 

 

 

(4,803,106) 

 

Total shareholders’ equity

 

 

17,772,393  

 

 

16,376,672  

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

30,205,212  

 

$

25,812,143  


F-3


 

Sky Quarry Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Periods Ended June 30, 2023 and 2022 (unaudited)

 

 

 

2023

2022

2023

2022

 

Three months

ended June 30

Three months

ended June 30

Six months

ended June 30

Six months

ended June 30

Net sales

$12,418,517  

$ 

$24,759,951  

$ 

Cost of goods sold

(10,116,377) 

 

(20,527,195) 

 

 

 

 

 

 

          Gross profit (loss)

2,302,140  

 

4,232,757  

 

Operating expenses:

 

 

 

 

  General and administrative

2,040,561  

940,021  

3,185,404  

1,563,435  

  Share based payments

75,373  

 

223,316  

 

  Depreciation and amortization

60,562  

 

151,405  

 

        Total operating expenses

2,176,496  

940,021  

3,560,125  

1,563,435  

        Profit (loss) from operations

125,644  

(940,021) 

672,632  

(1,563,435) 

Other (income) expenses:

 

 

 

 

  Interest (income) expense

283,991  

(3,833) 

377,624  

104,480  

  Loss (gain) on sale

 

 

(550,000) 

 

 

 

 

 

 

     Profit (loss) before income tax benefits

(158,347) 

(936,188) 

845,008  

(1,667,915) 

Income tax benefits (expense)

 

 

(2,324) 

(3,723) 

Net profit (loss)

(158,347) 

(936,188) 

842,684  

(1,671,638) 

Other comprehensive loss

 

 

 

 

    Exchange gain (loss) on translation of foreign operations

(98,380) 

 

9,207  

(64,978) 

Net profit (loss) and comprehensive profit (loss)

$(256,727) 

$(936,188) 

$851,891  

$(1,736,616) 


F-4



Sky Quarry Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Periods Ended June 30, 2023 and 2022 (unaudited)

 

 

 

 

 

 

 

2023

 

 

2022

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net profit (loss)

 

$

842,684  

 

$

(1,671,638) 

Adjustments to reconcile net loss to cash used in operating

 

 

 

 

 

 

   activities:

 

 

 

 

 

 

 

Share based compensation

 

 

 

223,316  

 

 

 

Depreciation and amortization

 

 

 

151,405  

 

 

 

Amortization of debt issuance costs

 

 

64,658  

 

 

 

Factoring discount fee and interest 

 

 

 

212,760  

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

 

(1,980,057) 

 

 

 

Prepaid expenses and other assets

 

 

(112,496) 

 

 

(234,597) 

Inventory

 

 

 

10,444  

 

 

 

Accounts payable and accrued expenses

 

 

(591,560) 

 

 

240,285  

Deferred tax payable

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(1,178,846) 

 

 

(1,665,950) 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid in acquisition; net of cash acquired

 

 

 

 

 

 

Proceeds from sale of assets

 

 

200,000  

 

 

 

Purchase of property, plant, and equipment

 

 

(1,085,615) 

 

 

(1,514,583) 

 

Net cash used in investing activities

 

 

(885,615) 

 

 

(1,514,583) 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds on issuance of equity

 

 

 

35,000  

 

 

12,724,175  

Proceeds from note payable

 

 

 

3,842,825  

 

 

 

Proceeds from factoring agreements

 

 

 

20,501,839  

 

 

 

Repayments of factoring agreements

 

 

 

(18,041,255) 

 

 

 

Payments on note payable

 

 

 

(33,060) 

 

 

(1,134,296) 

 

Net cash generated by financing activities

 

 

6,305,349  

 

 

11,589,879  

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

 

9,207  

 

 

(64,978) 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and restricted cash        

 

 

4,250,095  

 

 

8,344,368  

Cash and restricted cash, beginning of the period

 

 

1,354,566  

 

 

1,767,725  

 

 

 

 

 

 

 

 

 

Cash and restricted cash, end of the period

 

$

5,604,661  

 

$

10,112,093  


F-5



1.NATURE OF OPERATIONS  

 

Sky Quarry Inc. and its subsidiaries (“Sky Quarry”, “SQI” or the “Company”) are, collectively, 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 soils. The recycling and production of oil from asphalt shingles is expected to reduce the dependence on landfills for the disposal of waste and to also reduce dependence on foreign and domestic virgin crude oil extraction for industrial uses.

 

The Company’s head office is located at 707 W 700 S, Ste 101, Woods Cross UT 84087. The Company is organized under the laws of the State of Delaware.

 

The Company was incorporated as Recoteq Inc. on June 4, 2019, in the State of Delaware, and changed its name to Sky Quarry Inc. on April 22, 2020.

 

The Company directly holds three wholly owned subsidiaries: 2020 Resources LLC (“2020 Utah”), 2020 Resources (Canada) Ltd. (“2020 Canada”) and Foreland Refining Corporation (“Foreland”) as shown below.

 

Picture 1 

 

2020 Utah (formerly, US Oil Sands (Utah) LLC and USO (Utah) LLC) was incorporated on November 2, 2017, in the State of Delaware. 2020 Utah is engaged in the exploration and development of oil sands properties using the Company’s proprietary solvent extraction technology. Through 2020 Utah, the Company has a 100% working interest in bitumen leases covering 5,930 acres of land in the PR Spring Uintah basin area of Utah.

 

2020 Canada (formerly, USO (Canada) Ltd.) was incorporated on April 26, 2018, in the Province of Alberta, Canada under the Canada Business Corporations Act. Sky Quarry anticipates future expansion into Canada, which will be facilitated through 2020 Canada.

 

On September 30, 2022, the Company acquired Foreland (formerly, Petro Source Resources) which was incorporated in the State of Texas on May 29, 1998. Foreland is engaged in the refining of heavy oil into diesel and other petroleum products at its Eagle Springs Refinery located near Ely, Nevada.

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Basis of preparation and use of estimates

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value.


F-6



The preparation of our financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. Estimates and underlying assumptions are reviewed periodically, and the effects of revisions are reflected in the period in which they are determined to be necessary. In preparing the financial statements, management makes estimates and assumptions regarding:

 

·the adequacy of the allowance for doubtful accounts; 

·any changes to regulatory compliance; and 

·other matters that affect reported amounts and disclosures of contingencies in the financial statements. 

 

Other sources of estimation uncertainty that have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year are specifically identified as a significant estimate. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.

 

Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.

 

These financial statements have been prepared on a consolidated basis whereby the assets, liabilities and results of Sky Quarry, 2020 Canada, 2020 Utah and Foreland have been combined.

 

Concentrations

The Company maintains its cash in various bank accounts, the balances of which at times may exceed federally insured limits. The Company has not experienced any losses related to these accounts, and management does not believe that the Company is exposed to significant credit risk.

 

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses on receivables which, when realized, have been within the range of management’s expectations. Management believes that adequate provision has been made for risk of loss on all credit transactions.

 

In the normal course of business, the Company may provide credit terms to its customers based on their credit rating and generally require no collateral. A major customer is considered to be one that comprises more than 10% of the Company’s accounts receivable or annual revenue.

 

Concentrations of revenues as of June 30, 2023 and December 31, 2022 were as follows:

 

 

 

June 30,

2023

December 31,

2022

Customer A

 

36%

33%

Customer B

 

25%

22%

Customer C

 

20%

19%

 

 

Concentrations of accounts receivable as of June 30, 2023 and December 31, 2022 were as follows:


F-7



 

 

June 30,

2023

December 31,

2022

Customer A

 

43%

25%

Customer B

 

16%

22%

Customer C

 

10%

18%

Customer D

 

*%

13%

*Customer did not account for more than 10% for the period presented.

 

Concentrations of vendors for the periods ended June 30, 2023 and December 31, 2022 were as follows:

 

 

 

June 30,

2023

December 31,

2022

Vendor A

 

23%

26%

Vendor B

 

20%

17%

Vendor C

 

19%

17%

 

Business Combinations 

Business combinations (whether partial, full or step acquisitions) are accounted for by the Company in accordance with the acquisition method of accounting pursuant to ASC 805 - Business Combinations and pushdown accounting is applied to record the fair value of the assets acquired by the Company. Under this method, the purchase price is allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Any excess of the amount paid over the estimated fair values of the identifiable net assets acquired will be allocated to goodwill. Hence, goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.

 

Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.


F-8



Translation of Foreign Currencies

Transactions in foreign currencies are translated into U.S. dollars at the exchange rate prevailing at the transaction date. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date.

 

The Company has a foreign currency exposure with respect to its Canadian operations as 2020 Canada operations are in Canada; therefore, US GAAP requires the Company to adjust the value of its investment for changes in foreign currency exchange rates. The Company determines the functional currency of its subsidiaries based upon the primary currency used to generate and expend cash, which is the currency of the country in which the subsidiary is located. For subsidiaries with functional currencies other than the U.S. dollar, the monetary assets and liabilities are translated into U.S. dollars using period-end exchange rates. The resulting foreign currency translation losses are deferred as other comprehensive loss and reclassified to earnings only upon sale or liquidation of that business. The foreign currency translation gain of $9,207 and loss of $64,978 as of June 30, 2023 and 2022 respectively, were recorded in accumulated other comprehensive loss.

 

Accounts receivable

Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about its customers’ current ability to pay. Account balances are charged against the allowance when management determines that the probability for collection is remote. Management determined that an allowance for doubtful accounts was not necessary as of June 30, 2023 and 2022.

 

Inventory

Inventory includes freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. The Company determines cost on the basis of the first-in, first-out method. Allowances are recorded for slow-moving, obsolete or unusable inventory. The Company assesses inventory for estimated obsolescence or unmarketable products and writes down the difference between the cost of the inventory and the estimated net realizable value based upon assumptions about future sales and supplies on-hand.

 

Oil and gas property and equipment

The Company follows the successful efforts method of accounting for its oil and gas properties per ASC 932. Acquisition costs associated with the acquisition of leases are capitalized. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with delay rentals and exploration overhead are charged against earnings as incurred. Costs of successful exploratory efforts along with acquisition costs and the costs of development of surface mining sites are capitalized. Costs incurred to obtain access to prove reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas are capitalized.

 

Site development costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, site development costs remain capitalized as proved properties. Costs of unsuccessful site developments are charged to exploration expense. For site development costs for reserves that cannot be classified as proved, costs continue to be capitalized as suspended exploratory site development costs if there have been sufficient reserves found to justify completion as a producing site and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future development activities are unlikely to occur, associated suspended exploratory development costs are expensed. In some instances, this determination may take longer than one year. The Company reviews the status of all suspended exploratory site development costs quarterly.


F-9



Capitalized costs of proved oil and gas properties are depleted by the unit-of-production method. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves. Capitalized costs of related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated based on proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the depreciation, depletion, and amortization (“DD&A”) rate (amortizable base divided by beginning of period proved reserves) to current period production.

 

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable.

 

Proved properties will be assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating location. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review.

 

Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field, or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of loss and comprehensive loss. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.

 

The Company capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development projects of oil and gas properties. As of June 30, 2023 and 2022 the Company had no proved reserves assigned to its properties.

 

Other property and equipment

Property, plant and equipment are stated at cost. Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. Depreciation and amortization are recorded principally by the straight-line method over the estimated useful lives of the assets, which are reviewed periodically and generally have the following ranges:

 

Years 

Buildings  10 

Machinery and equipment5 - 15 

Office furniture and equipment 2 - 7 

Leasehold improvements 4 - 5 


F-10



Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is accounted for in accordance with ASC 350, Intangibles-Goodwill and Other. The Company acquired goodwill in its acquisition of Foreland. The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. The impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. For the periods ended June 30, 2023 and 2022, the Company did not recognize an impairment related to goodwill.

 

Restricted cash

Restricted cash consists of cash amounts that are contractually restricted as to usage or withdrawal and represents surety bonds in the amount of $786,384 with the State of Utah in connection with mineral leases regarding the PR Spring facility property, and $3,853,135 in cash deposited by the Company into a separate bank account and designated as collateral for a standby letter of credit in the same amount in accordance with contractual agreements. Refer to Note 12 for more information about our standby letters of credit.

 

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with the Company’s accounting policy for property and equipment.

 

Revenue recognition 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue is measured based on the amount defined per the contract and recognized when performance obligations within a contract are satisfied which generally occurs with the transfer of control of the goods to the customer. Substantially all the Company’s revenues are derived from product sales that consist of a single performance obligation satisfied at a point in time.

Product sales to customers are made under a purchase order (PO), or in certain cases, in accordance with the terms of a master services agreement (MSA) or similar arrangement, which defines the rights and obligations of each party.

Payment terms and conditions vary by contract, although terms generally include a requirement of payments within 30 days.

The Company accounts for shipping and handling as activities to fulfill the promise to transfer the goods. As such, shipping and handling fees billed to customers in a sales transaction are recorded in sales and shipping and handling costs incurred are recorded in cost of sales.


F-11



Impairment of long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount.

 

The Company believes that the future undiscounted net cash flows to be received from its long-lived assets exceed the assets’ carrying values and, accordingly, the Company has not recognized any impairment losses for the six months ended June 30, 2023 and 2022.

 

Offering costs 

The Company complies with the requirements of ASC 340-10 in recording and treating costs associated with the offering of the Company’s securities. These costs consist of legal, escrow, exchange and marketing fees incurred in connection with the capital raising efforts of the Company. Under ASC 340-10, costs incurred are capitalized until the offering closes whereupon the offering costs are charged to shareholders’ equity if the offering is successful or expensed in the period of an aborted or unsuccessful offering.

 

Comparative amounts

The comparative amounts presented in these consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year.

 

3.GOING CONCERN 

 

These consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to realize its assets and satisfy its liabilities in the normal course of business for the foreseeable future. Management is aware, in making its going concern assessment, of material uncertainties related to events and conditions that may cast significant doubt upon the Company’s ability to continue as a going concern. As of June 30, 2023, the Company has an accumulated deficit of $3,960,421 and has, with the acquisition of Foreland on September 30, 2022, begun to generate cash flows from operations.

 

As of June 30, 2023, there is uncertainty about the Company’s ability to generate sufficient operating cash flows to pay for its expenditures and settle its obligations as they fall due. Management needs to raise funds by way of debt or equity issuances and improve the Company’s liquidity. The Company will closely monitor its cash and will take the necessary measures to preserve cash, such as reducing spending as needed until the Company succeeds in proving its extraction technology is viable in the open market. If the Company is unable to raise additional debt or equity financing these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and statement of financial position classifications that would be necessary were the going concern assumption inappropriate. These adjustments could be material.

 

4.ACQUISITION 

 

Foreland Refining Corporation

On September 30, 2022, the Company acquired Foreland by way of a share purchase agreement for total consideration of $10,395,667 (after a post-closing adjustment of $604,333), paid to Refinery Technologies Inc, (“Seller” or “RTI”) by way of cash payment of $4,000,000 at closing (net of cash received of $1,484) and issuance of a $6,395,667 promissory note to the Seller (See Note 12).


F-12



The acquisition of Foreland was accounted for using the acquisition method of accounting pursuant to ASC 805 - Business Combinations. The purchase consideration has been allocated based on an assessment of the fair market values of the acquired assets and liabilities assumed.

 

The fair values assigned to property, plant, and equipment were determined by reference to third party fair market value in place valuation.

 

Recognized amounts of identifiable net assets & liabilities acquired

 

Cash

$            1,484

Accounts receivable

4,180,562

Inventory

3,119,870

Prepaid expenses

14,104

Property, plant, and equipment

5,400,695

Goodwill

3,209,003

Deferred tax liability

(1,263,698)

Liabilities

(4,266,353)

Total acquired

$   10,395,667

 

 

 

5.DEFERRED OFFERING COSTS 

 

Deferred offering costs consisted of:

 

 

June 30,

2023

 

December 31,

2022

Balance, beginning of period

 

$           -

 

$                          -

Additions

 

-

 

797,947

Deductions

 

-

 

-

Allocated costs

 

$           -

 

$               797,947

 

Deferred offering costs were costs directly related to the Company’s registration-exempt securities offering made under Regulation A, which closed on September 30, 2022. These costs consisted of legal, marketing, accounting, printing, administration, broker-dealer, escrow and filing fees directly related to the offering.

 

6.INVENTORY 

 

Inventory consists primarily of raw crude, chemicals and finished goods. Inventory consisted as of the periods below:

 

 

 

June 30,

2023

December 31,

2022

Finished goods

 

$         2,425,319

$           2,322,835

Raw materials

 

            750,120

            890,210

Chemicals

 

255,679

228,518

 

 

$         3,431,119

$           3,441,563


F-13



7.MINERAL LEASES 

 

Through its acquisition of 2020 Utah, the Company indirectly acquired certain mineral rights under three mineral leases entitled “Utah State Mineral Lease for Bituminous-Asphaltic Sands” between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and 2020 Utah, as lessee, covering certain lands in the PR Spring Area largely adjacent to each other (the “SITLA Leases”).

 

 

 

SITLA

Mineral

Lease

 

 

Total

Cost

 

 

 

January 1, 2022

 

$     63,800

$     63,800

Additions

 

-

 

December 31, 2022

 

63,800

63,800

Additions

 

-

-

June 30, 2023

 

   $     63,800

$     63,800

 

 

 

 

Accumulated Amortization

 

 

 

June 30, 2023 and December 31, 2022

 

$               -

$               -

 

 

 

 

Carrying Amounts

 

 

 

June 30, 2023

 

$     63,800

$     63,800

December 31, 2022

 

$     63,800

$     63,800

 

During the periods ending June 30, 2023 and December 31, 2022, the Company had not amortization of the lease rights due to operations having not yet started.

 

The Company (through its subsidiary) holds mineral leases (or the operating rights under leases) covering approximately 5,930.3 net acres within the State of Utah. Terms of the SITLA Leases are set forth in the table below.

 

Reference

Gross Acres

Net Acres

Lease Expiry Date (1)

Annual Rent (2)

Annual Advance Minimum Royalty (3)

Production Royalty Rate (4)

ML-49579

50.4

50.4

12/31/2024

$    500

$   5,000

6.5%

ML-49927

4,319.9

4,319.9

5/31/2025

4,320

43,200

6.5%

ML-51705

1,560.0

1,560.0

1/31/2020

1,560

15,600

8%

 

 

 

 

 

 

 

Total

5,930.3

5,930.3

 

$ 6,380

$ 63,800

 

 

Notes:

1.Leases may be extended past expiry date by continued payment of annual rent and annual advance minimum royalty. 

2.Annual rent may be credited against production royalties payable during the year. 

3.Annual advance minimum royalty may be credited against production royalties payable during the year. 

4.The production royalty is payable on the market price of products produced from the leased substances, without deduction of costs for mining, overhead, labor, distribution or general and administrative activities. 


F-14



8.PROPERTY, PLANT, AND EQUIPMENT 

 

Property, plant, and equipment is comprised of the following:

 

 

 

June 30,

2023

December 31,

2022

Buildings

 

$           1,575,000

$     1,575,000

Machinery and equipment

 

5,083,003

4,406,607

Office furniture and equipment

 

6,733

6,733

 

 

        6,664,736

    5,988,340

Less: Accumulated depreciation and amortization

 

  (316,536)

(165,131)

 

 

$          6,348,200

$     5,823,209

 

PR Spring Property, plant and equipment consists of research and development equipment and mining equipment. Eagle Springs Refinery consists of tanks, buildings, refining processing equipment, shop, lab and equipment. Each class of property, plant and equipment is estimated to have a useful life of 5 years and will be amortized over a straight-line basis.

 

Depreciation and amortization expense totaled $151,405 and $165,131 for the periods ended June 30, 2023 and December 31, 2022, respectively.

 

9.OIL AND GAS PROPERTIES 

 

Oil and gas properties are comprised of the following:

 

 

 

June 30,

2023

December 31,

2022

Balance, beginning of period

 

$       7,477,238

$       2,448,859

Additions

 

409,219

5,028,379

Deletions

 

(200,000)

-

Balance, end of period

 

$       7,686,457

$       7,477,238

 

Oil and gas properties include undeveloped lands, unproved properties and seismic costs where management has not fully evaluated for technical feasibility and commercial viability.

 

Additions during the period ended June 30, 2023, relate to development of the land, extraction facility and mine at PR Spring. Deletions during the period ended June 30, 2023, relate to the sale of non-utilized equipment at PR Spring.

 

10.GOODWILL  

 

Goodwill is derived from the acquisition of Foreland in 2022. Goodwill recognized from the acquisition was $3,209,003. After a performance analysis conducted at quarter-end, the Company did not have an impairment loss related to goodwill.


F-15



11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES 

 

Accounts payable and accrued expenses consisted of the following:

 

 

 

June 30,

2023

December 31,

2022

Trade accounts payable

 

$           5,316,813

$           5,227,274

Accrued expenses

 

10,421

686,236

Accrued vacation

 

13,834

13,834

Sales tax payable

 

12,353

17,637

 

 

$          5,353,421

$          5,944,981

 

12.DEBT 

 

Debt consisted of the following:

 

 

 

Lender / Merchant

 

 

 

Maturity Date

 

 

Interest Rate

Principal

Balance

June 30,

2023

Principal

Balance

December 31,

2022

 

 

 

 

 

Alterna Capital Solutions

-

-

2,696,800

-

Libertas Funding

-

-

2,308,198

-

Lendspark Corporation

May 14, 2024

33%

1,462,500

-

Private Lender

Feb 17, 2023

20%

155,569

-

Private Lender

Jan 23, 2023

20%

86,141

-

Refinery Technologies Inc.

Oct 31, 2022

4%

-

2,895,540

ACMO USOS LLC

March 15, 2021

15%

-

191,699

USA SBA

March 1, 2026

1%

100,453

133,513

JPMorgan

Sept 16, 2023

10%

81,882

81,882

 

 

 

$   6,891,543

$   3,302,634

 

As of June 30, 2023, the maturity date of debt is as follows:

 

 

 

Due in less than one year (1)

 

$            6,824,574

Due in more than one year

 

66,969

 

 

$            6,891,543

 

1.A total of $33,484 is related to future amortization of the USA SBA loan described below. 

 

The debt terms related to private lenders, presented sequentially as above, are as follows:

 

On June 14, 2023, Foreland entered into a business loan and security agreement with Lendspark Corporation for a loan in the amount of $1,500,000. The loan is repaid in 44 equal weekly payments of $45,000 for total repayment of $1,980,000. The loan is secured by all of the assets of Foreland.

 

On February 21, 2023, the Company entered into a binding term sheet with a private lender for a convertible loan of $1,000,000 to be personally guaranteed and secured by members of the Board and received a deposit of $400,000. During the course of loan document preparation, it was determined that certain terms agreed to in the term sheet could not be completed. On April 6, 2023, the parties amended the terms of the term sheet by way of a debt satisfaction agreement under which the unsecured deposit, plus accrued interest calculated at 20% per annum, would be repaid on or before May 21, 2023, after which amounts unpaid would incur interest at the rate of 30% per annum. As inducement to enter into


F-16



the debt satisfaction agreement, the lender was issued 2,000,000 common share purchase warrants, each warrant granting the holder the right to purchase one common share of the Company at a price of $0.90 for a period of five years from issue. The Company has not received a notice of default from the lender as of the date of this report.

 

On January 23, 2023, the Company entered into a promissory note for $100,000 from a private lender. The note is unsecured, bears interest at 20% per annum and matured on March 23, 2023. As inducement for advancing the note, the lender was issued 20,000 share purchase warrants, each warrant granting the holder the right to purchase one common share of the Company at a price of $2.00 for a period of two years from issue. The Company has not received a notice of default from the lender as of the date of this report. The maturity date of the note is currently being renegotiated.

 

On September 30, 2022, the Company entered into a promissory note for $7,000,000 from RTI which formed part of the purchase price of the Foreland acquisition (see Note 12). The note ranks senior to all debt and is secured against all of the assets of the Company and of its subsidiaries. The note matured on October 31, 2022, and bears interest at 4% per annum. Terms of the note include a payment of $3,500,000 due October 15, 2022, which was issued and applied to the amount outstanding under the Note. The principal amount of the note was adjusted retroactively following the close of the Foreland acquisition by $604,333 (to $6,395,667). On November 3, 2022, the Company entered into a Closing Extension Agreement with RTI which extended maturity of the Note to November 15, 2022, and extended the split payment clause in the Share Purchase Agreement to December 31, 2022. In connection with the extension, the Company recorded a penalty for the extension of the split payment clause for $2,117,298, which was included in interest expense on the statement loss and comprehensive loss. On December 23, 2022, the Company entered into a Forbearance Agreement, effective as of December 1, 2022, with RTI, due to the Company’s default on the note and the purchase agreement, as amended under the closing extension agreement. Pursuant to the Forbearance Agreement, RTI agreed to forbear pursuing its rights and remedies against the Company until February 28, 2023 (the “Forbearance Period”). Under the terms of the Forbearance Agreement, from October 1, 2022, up to the Forbearance Period, the split payment clause under the purchase agreement was voided and Foreland paid a varying percentage of its net profits to RTI, in amounts of up to 100%, as management fees. As inducement to enter the Forbearance Agreement, RTI was issued 250,000 shares of common stock of the Company for no cash consideration. As of February 20, 2023, all of the Company’s obligations under the Forbearance Agreement, and its obligations under the Share Purchase Agreement and under the note, were satisfied in full. In connection with the issuance of the note payable and the acquisition, the Company also entered into a transition services agreement with the seller, which continued through July 31, 2023.

 

On September 16, 2020, the Company entered into a promissory note for $300,000 from ACMO USOS LLC which formed part of the Share Purchase Agreement. The note matured on December 15, 2020, and bears an interest rate at 10% per annum. On December 13, 2020, the interest rate was increased to 15% thereafter and the maturity date of the note was extended to March 16, 2021. On November 2, 2022 ACMO filed for voluntarily cancellation and was dissolved by the State of Delaware Division of Corporations effective December 27, 2022. As of the date of this report no notice of assignment or succession of the note has been received and consequently the loan is deemed forfeited.

 

On March 1, 2021, 2020 Resources LLC received a loan in the amount of $152,200 through the Payroll Protection Program from the U.S. Small Business Administration. The loan carries an interest rate of 1%, has a two-year term with no principal payments for 12 months and may be forgiven in whole or in part subject to certain terms and conditions and the use of funds by the Company. Commencing March 1, 2022, the Company is required to make monthly repayments of principal of the note and accrued interest, totaling $3,203.


F-17



On September 16, 2020, the Company entered into a promissory note for $450,000 from JPMorgan Chase Bank N.A. (“JPMorgan”). The note is unsecured, bears interest at 10% per annum and matures on September 28, 2023. Portions of the note have been converted from time to time into common shares. On March 14, 2022, at the election of the lender the balance outstanding under the note was converted into 68,742 Shares in full and final satisfaction of the note.

 

RECEIVABLES FINANCING AGREEMENT

 

On December 21, 2022 Foreland entered into an Invoice Purchase and Sale Agreement (the “IPSA”) and Inventory Finance Rider with Alterna Capital Solutions, LLC. Under the terms of the IPSA, Alterna provides an advance of 85% of the amount of the purchased receivables to Foreland and during the time the receivables remain outstanding, is granted a continuing security interest in all assets of Foreland, to the extent and in the amount of the purchased receivables. The Rider provides a standby security for certain letters of credit in place with certain crude oil suppliers to Foreland. The letters of credit are adjusted periodically to correlate with the price and quantities of purchased heavy crude oil. The Agreement is secured by the sale-ready and pre-sale petroleum product inventory on hand at Foreland. Funds drawn under the Agreement accrue interest at a per annum rate equal to the sum of the Wall Street Journal Prime Rate plus 2.25%. In addition, a collateral monitoring fee of 0.17% on outstanding advances made is due monthly.

 

As at June 30, 2023 a total of $3,204,441 has been advanced under the IPSA and $1,633,511 is owing under the Rider.

 

LIABILITY FOR SALE OF FUTURE REVENUES

 

As at June 30, 2023 we are party to three agreements related to the sale of future revenues with Libertas Funding, LLC. The agreements, summarized below, contain substantially the same terms and conditions and grant a continuing security interest in all assets of Foreland, to the extent and in the amount of the purchased receivables.

 

Discounts related to the agreements will be amortized to expense over the term of the agreements. During the six months ended June 30, 2023, the Company amortized an aggregate of $466,807 of discount, respectively, to interest expense. Unamortized discount, in aggregate is $1,228,806 at June 30, 2023.

 

On May 3, 2023, Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $884,450 of future sales receipts for gross proceeds of $665,000. Under the Agreement, Foreland will make weekly delivery of receivables not less than $19,143 until the amount sold is extinguished. As at June 30, 2023 a total of $731,298 remained outstanding.

 

On February 21, 2023, Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $990,000 of future sales receipts for gross proceeds of $750,000. On May 17, 2023, this agreement was refinanced into an Agreement of Sale of Future Receivables with Libertas Funding, LLC for the sale of $2,560,250 of future sales receipts for gross proceeds of $1,925,000. Under the refinanced Agreement, Foreland will make weekly delivery of receivables not less than $55,416 until the amount sold is extinguished. As at June 30, 2023 a total of $2,227,750 remained outstanding.

 

On January 17, 2023, Foreland entered into an Agreement of Sale of Future Receivables with Libertas Funding, LLC for the sale of $2,871,000 of future sales receipts for gross proceeds of $2,200,000. On June 30, 2023, this Agreement was refinanced into an Agreement of Sale of Future Receivables with Libertas Funding, LLC for the sale of $2,520,000 of future sales receipts for gross proceeds of $2,000,000. Under the refinanced Agreement, Foreland will make weekly delivery of receivables not less than $50,000 until the amount sold is extinguished.


F-18



13.INCOME TAXES  

 

The following table presents a reconciliation of the statutory federal rate and our effective tax rate:

 

 

 

June 30,

2023

December 31,

2022

Provision for income taxes at federal statutory rates

 

$          (785,059)

$           (785,059)

State taxes, net of federal benefits

 

(98,556)

(98,556)

Change in valuation allowance

 

(187,227)

(187,227)

Other

 

(1,277)

(1,277)

 

 

 $      (1,072,119)

$        (1,072,119)

 

Significant components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows as of June 30, 2023 and December 31, 2022:

 

 

 

June 30,

2023

December 31,

2022

Deferred tax assets (liabilities):

 

 

 

Accruals, reserves, and other

 

$                43,331

$                43,331

Depreciation and amortization

 

11,851

11,851

Stock compensation

 

51,593

51,593

Net operating loss carryover

 

1,292,151

1,292,151

  Total gross deferred tax assets

 

1,398,926

1,398,926

Less: valuation allowance

 

(360,414)

(360,414)

Net Deferred tax assets

 

1,038,512

1,038,512

  Total gross deferred tax liabilities

 

(1,226,368)

(1,226,368)

Net deferred taxes, June 30, 2023

 

$           (187,856)

$           (187,856)

 

As of June 30, 2023, the Company had U.S. federal net operating loss carryforwards of approximately $3.8 million, which may be available to offset future federal income and do not expire. As of December 31, 2022, the Company had state net operating losses of $3.8 million which may be available to offset future state income tax and do not expire. As of June 30, 2023, the Company had Canadian net operating losses of $1.6 million which may be available to offset future Canadian income tax and begin to expire in 2042.

 

The Company has evaluated the positive and negative evidence bearing upon the deferred tax assets and whether they will be realized. Based on the Company’s acquisition of Foreland who has a history of operating profits, the Company has concluded that it is more likely that the benefit of its deferred tax assets will be realized. As of June 30, 2023 the deferred tax liabilities of $1,226,368 is related to the acquisition of Foreland assets. As of June 30, 2023, the Company had a history of operating losses, the Company has concluded that it more than likely than not that the benefit of its deferred tax assets will not be fully realized. Accordingly, the Company has a valuation allowance for deferred tax assets as of June 30, 2023 and December 31, 2022, of $360,414 and $360,414, respectively.

 

The Company has not performed a Section 382 study to determine whether it had experienced a change in ownership and, if so, whether the tax attributes (net operating losses or credits) were impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.


F-19



As of June 30, 2023 and December 31, 2022, the Company does not have any unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2023 and December 31, 2022, the Company had no accrued interest or penalties related to uncertain tax positions.

 

14.EQUITY 

 

On April 20, 2021, the Company authorized an amendment to its Certificate of Incorporation which amended its authorized share structure by fixing the authorized shares of common stock issuable at a maximum of 100,000,000 with no change to the par value.

 

On June 21, 2021, the Company authorized an amendment to its Certificate of Incorporation which amended the terms regarding the issue of preferred stock to include “Blank-Check” provisions, specifically, authorizing its board of directors to provide, out of the unissued shares of authorized preferred stock, one or more classes of preferred stock or one or more series of preferred stock within any class thereof, and to set the voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, option or other special rights, and qualifications, limitations or restrictions thereof, which may differ from those of any and all other issuances, of each class of preferred stock or series of preferred stock within any class thereof, in accordance with the General Corporation Law of Delaware.

 

On September 29, 2021, the SEC qualified an offering of securities submitted by the Company under Regulation A (the “Reg A Offering”). Under the Reg A Offering, the Company proposed to sell up to 15 million units (“Units”) at a price of $1.25 per Unit. Each Unit was comprised of one share of common stock (an “Offering Share”) and one warrant to purchase an additional share (an “Offering Warrant”) at a price of $2.50 for a period of three years from issue. The Company reserved from treasury a maximum of 15,000,000 Shares issuable under the Reg A Offering, assuming full subscription, and a maximum of 15,000,000 shares issuable on exercise of the Offering Warrants (”Warrant Shares”) issued in connection with the Reg A Offering, assuming full subscription and full exercise. The Company did not issue Unit certificates but instead issued Offering Shares and Offering Warrants in the number of Units subscribed for to subscribers under the Reg A Offering. The Reg A Offering closed on September 30, 2022.

 

During the year ended December 31, 2022 the Company issued an aggregate of 14,579,957 shares of common stock. During the six months ended June 30, 2023 the Company issued an aggregate of 195,000 shares of common stock.

 

The table below sets forth the Shares reserved by the Company for future potential issuance as at June 30, 2023.

 

 

Maximum Issuable

Company Stock Option Plan maximum

5,000,000

(1,700,000 Options granted outstanding)

Common Share Purchase Warrants outstanding

 

16,797,236

 

 

TOTAL SHARES RESERVED FOR ISSUANCE

21,797,236

 

As at June 30, 2023 and December 31, 2022, the Company had issued and outstanding a total of 16,797,236 and 14,827,236 warrants, respectively, to purchase one share of common stock, exercisable at a range from $0.90 to $2.50 per share for a range of 24 to 60 months from the date of issuance and carry a put feature in the event of a change in control. The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.


F-20



15.STOCK OPTION PLAN 

 

On March 27, 2020, the Company adopted an incentive stock option plan (the “Plan”). The Plan allows the Board of Directors of the Company to grant options to acquire shares of common stock of the Company to directors, officers, key employees and consultants. The option price, term and vesting periods are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of Section 422 of the Internal Revenue Code. The Plan is a fixed number plan with a maximum of 5,000,000 shares of common stock reserved issuable under the Plan.

 

The table below sets forth share options outstanding as of June 30, 2023.

 

Grant Date

Options Outstanding

Exercise Price

Expiration

Vesting

2022-09-01

1,700,000

$ 0.90

2027-08-31

Equally over 3 years commencing on first anniversary of grant date

 

During the periods ended June 30, 2023 and December 31, 2022, the Company recorded share-based compensation expense of $223,316 and $209,132, respectively.

 

As of June 30, 2023, the Company had $375,052 of unrecognized share-based compensation costs related to non-vested awards that will be recognized over a weighted average period of 3 years. As of June 30, 2023, no options have vested, and no options are exercisable. The options issued during 2022 vest equally over 3 years commencing on the first anniversary of the grant date.

 

The following sets forth the outstanding common unit options and related activity for the period ended June 30, 2023:

 

 

 

Number of Options

Weighted Average

Exercise Price

Per Share

Outstanding as of December 31, 2022

 

2,000,000

$                    0.90

Granted

 

 

 

Exercised

 

-

-

Forfeited

 

(300,000)

0.90

Outstanding as of June 30, 2023

 

1,700,000

$                    0.90

 

16.RELATED PARTY TRANSACTIONS  

 

Related party transactions in these consolidated financial statements are as follows: 

 

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 December 31, 2022, 6,749,639 common shares (13.88%), 25,000 common share purchase warrants, and 1 preferred share of the Company.

 

On June 21, 2021, stockholders of the Company unanimously consented to terminate a Stockholders Agreement entered into by all of the stockholders and the Company on September 24, 2020, and approved a governance agreement (the “JPM Agreement”) between the Company and JPMorgan, which grants to JPMorgan the following rights:


F-21



·a consent right with respect to certain business transaction matters, including: (a) material changes to the nature of the Company’s business, (b) a grant of certain stock options or restricted stock, (c) the Company’s entry into certain employment or compensation agreements, (d) the incurrence by the Company of more than $500,000 of debt, (e) the Company’s entry into a related party agreement, (f) a sale transaction, (g) a loan by the Company in excess of $500,000, (h) settlement of a lawsuit or other dispute in excess of $500,000 or (i) any investment by the Company in excess of $500,000; 

 

·Board of Director observation rights; 

 

·the right to receive certain quarterly and annual financial statements of the Company; and 

 

·certain inspection rights so long as JPMorgan owns at least 10% of the Company’s outstanding shares of common stock. 

 

On July 13, 2020, the Company issued a promissory note in the amount of $25,000 to Marcus Laun, a director of the Company, convertible at the election of the holder into shares of common stock at an exercise price of $0.0936 per share with a maturity date of July 13, 2021. The note has a term of twelve months and bears interest at a rate of 4% per annum payable at maturity. On March 28, 2022, at the election of the lender the note was converted into 285,329 Shares in full and final satisfaction of the note.

 

For the periods ended June 30, 2023 and 2022, the Company paid sitting and committee fees of $74,000 and $153,500, respectively, to members of the board of directors.

 

17.GENERAL AND ADMINISTRATIVE EXPENSES 

 

General and administrative expenses consisted of the following for the years ended:

 

 

June 30,

2023

December 31,

2022

Internal fuel

$         1,321,556

$             806,164

Professional fees

668,170

1,194,033

Executive Compensation

          514,715

1,198,327

Insurance

143,779

570,959

Lease and utilities

105,629

34,374

Travel

85,223

320,837

Other

77,888

325,999

Automobile

76,695

40,903

Lab

63,013

63,081

Licenses

45,090

40,397

Safety and equipment

45,043

57,560

Repairs and maintenance

38,603

110,683

 

$          3,185,404

   $          4,763,317

 

18.COMMITMENTS AND CONTINGENCIES  

 

As of June 30, 2023, the Company has commitments for the following:

 

The Company holds two leased land rights of way in Nye County, Nevada, totaling approximately 40 acres, in the amount of $4,250 annually.


F-22



The Company is required by its crude suppliers to obtain and hold certain standby letters of credit. A letter of credit serves as a guarantee by the banking institution to pay the Company’s crude suppliers against presentation of unpaid invoices up to the amount stated in the standby letter of credit, in the event that these claims are not paid by the Company. Under the Inventory Financing Rider, the Company has cash collateralized the letters of credit, resulting in the cash being designated as restricted. Historically, it has not been necessary to draw on the standby letters of credit. Please refer to Note 2 for more information on restricted cash and Note 12 for more information on the Inventory Financing Rider, including the amount held in the standby letters of credit at June 30, 2023 and December 31, 2022. 

 

The Company leases office space at 707 W 700 S, Ste 101, Woods Cross, UT. The lease is for a three year term commencing July 1, 2023 at a rate of $6,967 per month, inclusive of all utilities, taxes etc.

 

In connection with the PR Spring mineral leases (See Note 8) the Company is required to post  surety bonds to cover costs associated with dismantling, decommissioning, and site disturbance remediation activities of its properties in case of abandonment. As of June 30, 2023 these costs were estimated at $708,000. These amounts are held in one or more certificates of deposit held at a bank for the benefit of the State of Utah in the event of default. These amounts may be subject to periodic review and adjustment by Utah Department of Oil, Gas and Minerals.

 

19.SUBSEQUENT EVENTS 

 

Management performed a review and determined that except as disclosed elsewhere herein and below, no material events occurred subsequent from June 30, 2023 to September 30, 2023, the date of presentation of these financial statements.

 

On July 1, 2023, the Company issued 100,000 shares to a third-party consultant in connection with the execution of a legal services agreement.

 

On August 1, 2023, the Company granted a total of 2,100,500 incentive stock options to certain directors, officers, employees and consultants of the Company and its subsidiaries. The options have an exercise price of $3.03 per Share for a period of five years and vest in equal amounts on the 12, 24, and 36 month anniversaries of the grant date.

 

On September 14, 2023, Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $1,463,000 of future sales receipts for gross proceeds of $1,100,000. Under the Agreement, Foreland will make weekly delivery of receivables not less than $31,667 until the amount sold is extinguished. The agreement grants a continuing security interest in all assets of Foreland, to the extent and in the amount of the purchased receivables.


F-23



Picture 1 

 

 

 

 

SKY QUARRY INC.

formerly, Recoteq Inc.

 

 

 

Consolidated Financial Statements

As of and for the years ended December 31, 2022 and 2021

 

Together with Report of Independent Registered Public Accounting Firm


F-24



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors
of Sky Quarry Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sky Quarry Inc. and subsidiaries (collectively, the Company) as of December 31, 2022 and 2021, the related statements of operations and comprehensive loss, shareholder’s equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has incurred substantial losses, with negative cash flows from operations, and has a retained deficit of approximately $4,800,000. Management’s evaluation of the events and conditions and management’s plans regarding those matters are also described in Note 4. If the Company is unable to raise additional debt or equity financing these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

 

We have served as the Company’s auditors since 2021.

 

/s/ Tanner LLC

 

Lehi, Utah

August 25, 2023


F-25



Sky Quarry Inc.

Consolidated Balance Sheets

As of December 31, 2022 and 2021

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

572,197

 

$

993,129

Accounts receivables

 

 

4,237,064

 

 

-

Prepaid expenses and other assets

 

 

269,500

 

 

7,643

Inventory

 

 

3,441,563

 

 

96,287

 

Total current assets

 

 

8,520,324

 

 

1,097,059

 

 

 

 

 

 

 

 

Property, plant, and equipment

 

 

5,823,209

 

 

344,079

Oil and gas properties

 

 

7,477,238

 

 

2,448,859

Restricted cash

 

 

782,369

 

 

774,596

Goodwill 

 

 

3,209,003

 

 

-

 

 

 

 

 

 

 

 

 

Total assets

 

$

25,812,143

 

$

4,664,593

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

5,944,981

 

$

635,570

Current maturities of notes payable

 

 

3,169,121

 

 

938,454

 

Total current liabilities

 

 

9,114,102

 

 

1,574,024

 

 

 

 

 

 

 

 

Notes payable, less current maturities, net of debt issuance costs

 

 

133,513

 

 

603,445

Deferred tax liability

 

 

187,856

 

 

-

 

Total Liabilities

 

 

9,435,471

 

 

2,177,469

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

Preferred stock $0.001 par value: 25,000,000

 

 

 

 

 

 

shares authorized; 1 share issued and outstanding

 

 

-

 

 

-

Common stock $0.0001 par value: 100,000,000 shares

 

 

 

 

 

 

authorized: 48,674,268 and 34,094,311 shares

 

 

 

 

 

 

issued and outstanding, respectively

 

 

4,867

 

 

3,409

Additional paid in capital

 

 

21,352,231

 

 

4,651,689

Accumulated other comprehensive loss

 

 

(177,320)

 

 

(79,093)

Accumulated deficit

 

 

(4,803,106)

 

 

(2,088,881)

 

Total shareholders’ equity

 

 

16,376,672

 

 

2,487,124

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

25,812,143

 

$

4,664,593

 

The accompanying notes are an integral part of these consolidated financial statements.


F-26



Sky Quarry Inc.

Consolidated Statements of Operations and Comprehensive Loss

For the Years Ended December 31, 2022 and 2021

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

Net sales

 

$

16,287,407

 

$

60,895

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

12,631,272

 

 

627,938

 

 

Gross profit (loss)

 

 

3,656,135

 

 

(567,043)

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

General and administrative

 

 

4,763,317

 

 

869,448

 

Share based compensation

 

 

209,132

 

 

-

 

Depreciation and amortization

 

 

165,131

 

 

-

 

 

Total operating expenses

 

 

5,137,580

 

 

869,448

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,481,445)

 

 

(1,436,491)

Other expenses:

 

 

 

 

 

 

 

Interest expense

 

 

2,304,899

 

 

209,466

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax benefit

 

 

(3,786,344)

 

 

(1,645,957)

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

1,072,119

 

 

32,473

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(2,714,225)

 

 

(1,613,484)

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

Exchange loss on translation of foreign operations

 

 

(98,227)

 

 

(117)

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(2,812,452)

 

$

(1,613,601)

 

 

The accompanying notes are an integral part of these consolidated financial statements.


F-27



Sky Quarry Inc.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2022 and 2021

 

 

 

Preferred Stock Outstanding

Preferred Stock

Common Stock Outstanding

Common Stock

Additional Paid-in-Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Total

Balance January 1, 2021

-

$             -

26,890,236

$     2,689

$   1,176,854

$     (475,397)

$         (78,976)

$     625,170

 

Common share subscription,

less offering costs

1

-

7,204,075

720

3,474,835

-

-

3,475,555

Other comprehensive loss

-

-

-

-

-

-

(117)

(117)

Net loss

-

-

-

-

-

(1,613,484)

-

 (1,613,484)

Balance December 31, 2021

1

-

34,094,311

3,409

  4,651,689

(2,088,881)

(79,093)

2,487,124

 

Common share subscription,

less offering costs

-

-

13,617,072

1,362

13,486,370

-

-

13,487,732

Share based compensation

-

-

-

-

209,132

-

-

209,132

Stock warrants issued

-

-

-

-

2,796,877

-

-

2,796,877

 

Common stock issued on

conversion of debt

-

-

962,885

96

208,163

-

-

208,259

Other comprehensive loss

-

-

-

-

-

-

(98,227)

(98,227)

Net loss

-

-

-

-

-

(2,714,225)

-

(2,714,225)

Balance December 31, 2022

1

$             -

48,674,268

$     4,867

$   21,352,231

$  (4,803,106)

$       (177,320)

$ 16,376,672

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.


F-28



Sky Quarry Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2022 and 2021

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(2,714,225)

 

$

(1,613,484)

Adjustments to reconcile net loss to cash used in operating

 

 

 

 

 

 

   activities:

 

 

 

 

 

 

 

Share based compensation

 

 

 

209,132

 

 

-

Depreciation and amortization

 

 

 

165,131

 

 

-

Amortization of debt issuance costs

 

 

-

 

 

18,177

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

 

(56,502)

 

 

29,168

Prepaid expenses and other assets

 

 

(247,754)

 

 

139,248

Inventory

 

 

 

(225,406)

 

 

-

Accounts payable and accrued expenses

 

 

1,225,535

 

 

89,827

Deferred tax payable

 

 

 

(1,072,119)

 

 

-

 

Net cash used in operating activities

 

 

(2,716,208)

 

 

(1,337,064)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid in acquisition; net of cash acquired

 

 

(3,998,516)

 

 

-

Purchase of property, plant, and equipment

 

 

(5,275,669)

 

 

(96,840)

 

Net cash used in investing activities

 

 

(9,274,185)

 

 

(96,840)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds on issuance of equity

 

 

16,127,024

 

 

3,240,186

Proceeds from note payable

 

 

 

-

 

 

397,200

Payments on note payable

 

 

 

(4,451,563)

 

 

(1,334,707)

 

Net cash generated by financing activities

 

 

11,675,461

 

 

2,302,679

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

 

(98,227)

 

 

(117)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and restricted cash        

 

 

(413,159)

 

 

868,658

Cash and restricted cash, beginning of the year

 

 

1,767,725

 

 

899,067

 

 

 

 

 

 

 

 

 

Cash and restricted cash, end of the year

 

$

1,354,566

 

$

1,767,725

 

The accompanying notes are an integral part of these consolidated financial statements.


F-29



Sky Quarry Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

$

2,304,899

 

$

209,466

Cash paid for taxes

 

 

 

-

 

 

32,473

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash paid in acquisition. See Note 5 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

$

4,180,562

 

$

-

Inventory

 

 

 

3,119,870

 

 

-

Prepaid expenses and other assets

 

 

 

14,104

 

 

-

Property plant, and equipment

 

 

 

5,400,695

 

 

-

Goodwill

 

 

 

3,209,003

 

 

-

Deferred tax liability

 

 

 

(1,263,698)

 

 

-

Accounts payable and accrued expenses

 

 

 

(4,266,353)

 

 

-

Issuance of debt

 

 

 

(6,395,667)

 

 

-

 

 

 

 

 

 

 

 

Net cash paid in acquisition

 

 

$

3,998,516

 

$

-

 

The accompanying notes are an integral part of these consolidated financial statements.


F-30


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


1.NATURE OF OPERATIONS  

 

Sky Quarry Inc. and its subsidiaries (“Sky Quarry”, “SQI” or the “Company”) are, collectively, 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 soils. The recycling and production of oil from asphalt shingles is expected to reduce the dependence on landfills for the disposal of waste and to also reduce dependence on foreign and domestic virgin crude oil extraction for industrial uses.

 

The Company’s head office is located at 707 W 700 S, Ste 101, Woods Cross UT 84087. The Company is organized under the laws of the State of Delaware.

 

The Company was incorporated as Recoteq Inc. on June 4, 2019, in the State of Delaware, and changed its name to Sky Quarry Inc. on April 22, 2020.

 

The Company directly holds three wholly owned subsidiaries: 2020 Resources LLC (“2020 Utah”), 2020 Resources (Canada) Ltd. (“2020 Canada”) and Foreland Refining Corporation (“Foreland”) as shown below.

 

Picture 1 

 

2020 Utah (formerly, US Oil Sands (Utah) LLC and USO (Utah) LLC) was incorporated on November 2, 2017, in the State of Delaware. 2020 Utah is engaged in the exploration and development of oil sands properties using the Company’s proprietary solvent extraction technology. Through 2020 Utah, the Company has a 100% working interest in bitumen leases covering 5,930 acres of land in the PR Spring Uintah basin area of Utah.

 

2020 Canada (formerly, USO (Canada) Ltd.) was incorporated on April 26, 2018, in the Province of Alberta, Canada under the Canada Business Corporations Act. Sky Quarry anticipates future expansion into Canada, which will be facilitated through 2020 Canada.

 

On September 30, 2022, the Company acquired Foreland (formerly, Petro Source Resources) which was incorporated in the State of Texas on May 29, 1998. Foreland is engaged in the refining of heavy oil into diesel and other petroleum products at its Eagle Springs Refinery located near Ely, Nevada.

 

 

2.REVISION OF FINANCIAL STATEMENTS 

 

During the financial close for the year ended December 31, 2022, the Company discovered certain errors related to other comprehensive loss and accumulated deficit. During the year ended December 31, 2021, the Company should have recognized $67,187 in operating loss that was recorded as other comprehensive loss. As a result, the Company adjusted its other comprehensive loss and accumulated deficit as of December 31, 2022. The adjustments did not result in a change in total equity as of December 31, 2021, but resulted in a reclassification to decrease accumulated deficit and increase other comprehensive loss of $67,187.


F-31


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Management has determined that this revision was not material on a quantitative or qualitative basis to the prior period financial statements based on our analysis performed in accordance with the guidance provided by SEC Staff Accounting Bulletins No. 99 – Materiality and No. 108 – Considering the Effects of Prior Year Misstatements.

 

The Company has determined that the impact of adjustments relating to the corrections of this accounting error is not material to previously issued annual audited and unaudited financial statements and as such no restatement was necessary. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. However, correcting the cumulative error in the current year would be material to the current year. Accordingly, these misstatements were corrected, and the adjustments are reflected in the related periods as noted above.

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Basis of preparation and use of estimates

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting practices (“US GAAP”) and have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value.

 

The preparation of our financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. Estimates and underlying assumptions are reviewed periodically, and the effects of revisions are reflected in the period in which they are determined to be necessary. In preparing the financial statements, management makes estimates and assumptions regarding:

 

·the adequacy of the allowance for doubtful accounts; 

·any changes to regulatory compliance; and 

·other matters that affect reported amounts and disclosures of contingencies in the financial statements. 

 

Other sources of estimation uncertainty that have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year are specifically identified as a significant estimate. Although these estimates are based on our knowledge of current events and actions the Company may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.

 

Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.

 

These financial statements have been prepared on a consolidated basis whereby the assets, liabilities and results of Sky Quarry, 2020 Canada, 2020 Utah and Foreland have been combined.

 

Concentrations

The Company maintains its cash in various bank accounts, the balances of which at times may exceed federally insured limits. The Company has not experienced any losses related to these accounts, and management does not believe that the Company is exposed to significant credit risk.


F-32


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses on receivables which, when realized, have been within the range of management’s expectations. Management believes that adequate provision has been made for risk of loss on all credit transactions.

 

In the normal course of business, the Company may provide credit terms to its customers based on their credit rating and generally require no collateral. A major customer is considered to be one that comprises more than 10% of the Company’s accounts receivable or annual revenue.

 

Concentrations of revenues for the years ended December 31, 2022 and 2021, were as follows:

 

 

 

December 31,

2022

December 31,

2021

Customer A

 

33%

*%

Customer B

 

22%

*%

Customer C

 

19%

*%

Customer D

 

*

100%

*Customer did not account for more than 10% for the period presented.

 

Concentrations of accounts receivable as of December 31, 2022, and 2021, were as follows:

 

 

 

December 31,

2022

December 31,

2021

Customer A

 

25%

*

Customer B

 

22%

*

Customer D

 

18%

*

Customer C

 

13%

*

*Customer did not account for more than 10% for the period presented.

 

Concentrations of vendors for the years ended December 31, 2022 and 2021, were as follows:

 

 

 

December 31,

2022

December 31,

2021

Vendor A

 

26%

*

Vendor B

 

17%

*

Vendor C

 

17%

*

*Vendor did not account for more than 10% for the period presented.

 

Business Combinations 

Business combinations (whether partial, full or step acquisitions) are accounted for by the Company in accordance with the acquisition method of accounting pursuant to ASC 805 - Business Combinations and pushdown accounting is applied to record the fair value of the assets acquired by the Company. Under this method, the purchase price is allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Any excess of the amount paid over the estimated fair values of the identifiable net assets acquired will be allocated to goodwill. Hence, goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.

 

Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.


F-33


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Translation of Foreign Currencies

Transactions in foreign currencies are translated into U.S. dollars at the exchange rate prevailing at the transaction date. Transaction gains or losses on foreign currencies are reflected in selling, general and administrative expenses and were $512 and $15,762 for the years ended December 31, 2022 and 2021, respectively. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date.

 

The Company has a foreign currency exposure with respect to its Canadian operations as 2020 Canada operations are in Canada; therefore, US GAAP requires the Company to adjust the value of its investment for changes in foreign currency exchange rates. The Company determines the functional currency of its subsidiaries based upon the primary currency used to generate and expend cash, which is the currency of the country in which the subsidiary is located. For subsidiaries with functional currencies other than the U.S. dollar, the monetary assets and liabilities are translated into U.S. dollars using period-end exchange rates. The resulting foreign currency translation losses are deferred as other comprehensive loss and reclassified to earnings only upon sale or liquidation of that business. The foreign currency translation losses of $98,227 and $117 as of December 31, 2022 and 2021, respectively, were recorded in accumulated other comprehensive loss.

 

Accounts receivable 

Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about its customers’ current ability to pay. Account balances are charged against the allowance when management determines that the probability for collection is remote. Management determined that an allowance for doubtful accounts was not necessary as of December 31, 2022 and 2021.

 

Inventory

Inventory includes freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. The Company determines cost on the basis of the first-in, first-out method. Allowances are recorded for slow-moving, obsolete or unusable inventory. The Company assesses inventory for estimated obsolescence or unmarketable products and writes down the difference between the cost of the inventory and the estimated net realizable value based upon assumptions about future sales and supplies on-hand.

 

Oil and gas property and equipment 

The Company follows the successful efforts method of accounting for its oil and gas properties per ASC 932. Acquisition costs associated with the acquisition of leases are capitalized. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with delay rentals and exploration overhead are charged against earnings as incurred. Costs of successful exploratory efforts along with acquisition costs and the costs of development of surface mining sites are capitalized. Costs incurred to obtain access to prove reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas are capitalized.

 

Site development costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, site development costs remain capitalized as proved properties. Costs of unsuccessful site developments are charged to exploration expense. For site development costs for reserves that cannot be classified as proved, costs continue to be capitalized as suspended exploratory site development costs if there have been sufficient reserves found to justify completion as a producing site and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future development activities are unlikely to occur, associated suspended exploratory development costs are expensed. In some instances, this determination may take longer than one year. The Company reviews the status of all suspended exploratory site development costs quarterly.


F-34


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Capitalized costs of proved oil and gas properties are depleted by the unit-of-production method. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves. Capitalized costs of related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated based on proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the depreciation, depletion, and amortization (“DD&A”) rate (amortizable base divided by beginning of period proved reserves) to current period production.

 

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable.

 

Proved properties will be assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating location. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review.

 

Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field, or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of loss and comprehensive loss. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.

 

The Company capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development projects of oil and gas properties. As of December 31, 2022 and 2021 the Company had no proved reserves assigned to its properties.

 

Other property and equipment

Property, plant and equipment are stated at cost. Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. Depreciation and amortization are recorded principally by the straight-line method over the estimated useful lives of the assets, which are reviewed periodically and generally have the following ranges:

 

Years 

Buildings  10 

Machinery and equipment5 - 15 

Office furniture and equipment 2 - 7 

Leasehold improvements 4 - 5 

 

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is accounted for in accordance with ASC 350, Intangibles-Goodwill and Other. The


F-35


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Company acquired goodwill in its acquisition of Foreland. The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. The impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. For the years ended December 31, 2022 and 2021, the Company did not recognize an impairment related to goodwill.

 

Restricted cash

Restricted cash consists of cash amounts that are contractually restricted as to usage or withdrawal and represent surety bonds with the State of Utah in connection with mineral leases regarding the PR Spring facility property.

 

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with the Company’s accounting policy for property and equipment.

 

Revenue recognition 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue is measured based on the amount defined per the contract and recognized when performance obligations within a contract are satisfied which generally occurs with the transfer of control of the goods to the customer. Substantially all the Company’s revenues are derived from product sales that consist of a single performance obligation satisfied at a point in time.

 

Product sales to customers are made under a purchase order (PO), or in certain cases, in accordance with the terms of a master services agreement (MSA) or similar arrangement, which defines the rights and obligations of each party.

 

Payment terms and conditions vary by contract, although terms generally include a requirement of payments within 30 days.

 

The Company accounts for shipping and handling as activities to fulfill the promise to transfer the goods. As such, shipping and handling fees billed to customers in a sales transaction are recorded in sales and shipping and handling costs incurred are recorded in cost of sales.

 

Impairment of long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount.


F-36


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


The Company believes that the future undiscounted net cash flows to be received from its long-lived assets exceed the assets’ carrying values and, accordingly, the Company has not recognized any impairment losses for the years ended December 31, 2022 and 2021.

 

Offering costs 

The Company complies with the requirements of ASC 340-10 in recording and treating costs associated with the offering of the Company’s securities. These costs consist of legal, escrow, exchange and marketing fees incurred in connection with the capital raising efforts of the Company. Under ASC 340-10, costs incurred are capitalized until the offering closes whereupon the offering costs are charged to shareholders’ equity if the offering is successful or expensed in the period of an aborted or unsuccessful offering.

 

Comparative amounts

The comparative amounts presented in these consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year.

 

 

4.GOING CONCERN 

 

These consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to realize its assets and satisfy its liabilities in the normal course of business for the foreseeable future. Management is aware, in making its going concern assessment, of material uncertainties related to events and conditions that may cast significant doubt upon the Company’s ability to continue as a going concern. As of December 31, 2022, the Company has an accumulated deficit of $4,803,106 and has, due to the acquisition of Foreland on September 30, 2022, begun to generate cash flows from operations.

 

As of December 31, 2022, there is uncertainty about the Company’s ability to generate sufficient operating cash flows to pay for its expenditures and settle its obligations as they fall due. Management needs to raise funds by way of debt or equity issuances and improve the Company’s liquidity. The Company will closely monitor its cash and will take the necessary measures to preserve cash, such as reducing spending as needed until the Company succeeds in proving its extraction technology is viable in the open market. If the Company is unable to raise additional debt or equity financing these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and statement of financial position classifications that would be necessary were the going concern assumption inappropriate. These adjustments could be material.

 

 

5.ACQUISITION 

 

Foreland Refining Corporation

On September 30, 2022, the Company acquired Foreland by way of a share purchase agreement for total consideration of $10,395,667 (after a post-closing adjustment of $604,333), paid to Refinery Technologies Inc, (“Seller” or “RTI”) by way of cash payment of $4,000,000 at closing (net of cash received of $1,484) and issuance of a $6,395,667 promissory note to the Seller.

 

The acquisition of Foreland was accounted for using the acquisition method of accounting pursuant to ASC 805 - Business Combinations. The purchase consideration has been allocated based on an assessment of the fair market values of the acquired assets and liabilities assumed.


F-37


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


The fair values assigned to property, plant, and equipment were determined by reference to third party fair market value in place valuation.

 

Recognized amounts of identifiable net assets & liabilities acquired

 

Cash

$1,484  

Accounts receivable

4,180,562  

Inventory

3,119,870  

Prepaid expenses

14,104  

Property, plant, and equipment

5,400,695  

Goodwill

3,209,003  

Deferred tax liability

(1,263,698) 

Liabilities

(4,266,353) 

Total acquired

$10,395,667  

 

 

6.DEFERRED OFFERING COSTS 

 

Deferred offering costs consisted of:

 

 

December 31,

2022

December 31,

2021

Balance, beginning of year

 

$- 

$- 

Additions

 

797,947 

455,837 

Allocated costs

 

$797,947 

$455,837 

 

Deferred offering costs were costs directly related to the Company’s registration-exempt securities offering made under Regulation A. These costs consisted of legal, marketing, accounting, printing, administration, broker-dealer, escrow and filing fees directly related to the offering.

 

 

7.INVENTORY 

 

Inventory consists primarily of raw crude, chemicals and finished goods. Inventory consisted as of December 31:

 

 

 

December 31,

2022

December 31,

2021

Finished goods

 

$2,322,835 

$- 

Raw materials

 

890,210 

- 

Chemicals

 

228,518 

96,287 

 

 

$3,441,563 

$96,287 


F-38


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


8.MINERAL LEASES 

 

Through its acquisition of 2020 Utah, the Company indirectly acquired certain mineral rights under three mineral leases entitled “Utah State Mineral Lease for Bituminous-Asphaltic Sands” between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and 2020 Utah, as lessee, covering certain lands in the PR Spring Area largely adjacent to each other (the “SITLA Leases”).

 

 

SITLA

Mineral

Lease

Total

Cost

 

 

 

January 1, 2021

 

$     63,800

$     63,800

Additions

 

-

 

December 31, 2021

 

63,800

63,800

Additions

 

-

-

December 31, 2022

 

   $     63,800

$     63,800

 

 

 

 

Accumulated Amortization

 

 

 

December 31, 2022 and 2021

 

$               -

$               -

 

 

 

 

Carrying Amounts

 

 

 

December 31, 2022

 

$     63,800

$     63,800

December 31, 2021

 

$     63,800

$     63,800

 

During the years ended December 31, 2022 and 2021, the Company had not amortization of the lease rights due to operations having not yet started.

 

The Company (through its subsidiary) holds mineral leases (or the operating rights under leases) covering approximately 5,930.3 net acres within the State of Utah. Terms of the SITLA Leases are set forth in the table below.

Reference

Gross Acres

Net Acres

Lease Expiry Date (1)

Annual Rent (2)

Annual Advance Minimum Royalty (3)

Production Royalty Rate (4)

ML-49579

50.4

50.4

12/31/2024

$    500

$   5,000

6.5%

ML-49927

4,319.9

4,319.9

5/31/2025

4,320

43,200

6.5%

ML-51705

1,560.0

1,560.0

1/31/2020

1,560

15,600

8%

 

 

 

 

 

 

 

Total

5,930.3

5,930.3

 

$ 6,380

$ 63,800

 

 

Notes:

1.Leases may be extended past expiry date by continued payment of annual rent and annual advance minimum royalty. 

2.Annual rent may be credited against production royalties payable during the year. 

3.Annual advance minimum royalty may be credited against production royalties payable during the year. 

4.The production royalty is payable on the market price of products produced from the leased substances, without deduction of costs for mining, overhead, labor, distribution or general and administrative activities. 


F-39


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


 

9.PROPERTY, PLANT, AND EQUIPMENT 

 

Property, plant, and equipment is comprised of the following:

 

 

 

December 31,

2022

December 31,

2021

Buildings

 

$           1,575,000

  $               -

Machinery and equipment

 

4,406,607

343,104

Office furniture and equipment

 

6,733

976

 

 

         5,988,340

    344,079

Less: Accumulated depreciation and amortization

 

  (165,131)

-

 

 

$          5,823,209

$     344,079

 

PR Spring Property, plant and equipment consists of research and development equipment and mining equipment. Eagle Springs Refinery consists of tanks, buildings, refining processing equipment, shop, lab and equipment. Each class of property, plant and equipment is estimated to have a useful life of 5 years and will be amortized over a straight-line basis.

 

Depreciation and amortization expense totaled $165,131 and $0 for the years ended December 31, 2022 and 2021, respectively.

 

 

10.OIL AND GAS PROPERTIES 

 

Oil and gas properties are comprised of the following:

 

 

 

December 31,

2022

December 31,

2021

Balance, beginning of year

 

$       2,448,859

$          2,352,015

Additions

 

5,028,379

96,844

Balance, end of year

 

$       7,477,238

$           2,448,859

 

Oil and gas properties include undeveloped lands, unproved properties and seismic costs where management has not fully evaluated for technical feasibility and commercial viability.

 

Additions during the period ended December 31, 2022, relate to development of the land, extraction facility and mine at PR Spring.

 

 

11.GOODWILL  

 

Goodwill is derived from the acquisition of Foreland in 2022. Goodwill recognized from the acquisition was $3,209,003. After a performance analysis was conducted at year-end, the Company did not have an impairment loss related to goodwill.


F-40


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


 

12.ACCOUNTS PAYABLE AND ACCRUED EXPENSES 

 

Accounts payable and accrued expenses consisted of the following:

 

 

 

December 31,
2022

December 31,

2021

Trade accounts payable

 

$           5,227,274

  $             95,500

Accrued expenses

 

686,236

540,070

Accrued vacation

 

13,834

-

Sales tax payable

 

17,637

-

 

 

$          5,944,981

 $           635,570

 

 

13.DEBT 

 

Debt consisted of the following:

 

 

 

Lender

 

 

 

Maturity Date

 

 

Interest Rate

Principal Balance December 31,
2022

Principal

Balance

December 31,
2021

Refinery Technologies Inc.

October 31, 2022

4%

$  2,895,540

$                  -

ACMO USOS LLC

March 15, 2021

15%

191,699

191,699

USA SBA

March 1, 2026

1%

133,513

152,200

JPMorgan

September 16, 2023

10%

81,882

83,370

Loeb Term Solutions

September 1, 2024

14.25%

-

680,000

Private Lender

June 30, 2021

 

-

134,630

Private Lender

October 31, 2021

 

-

75,000

Private Lender

March 16, 2021

 

-

25,000

 

 

 

$   3,302,634

$   1,341,889

 

As of December 31, 2022, the maturity date of debt is as follows:

 

 

 

Due in less than one year

 

$            3,169,121

Due in one year

 

133,513

 

 

$            3,302,634

 

The debt terms related to private lenders, presented sequentially as above, are as follows:

 

On September 30, 2022, the Company entered into a promissory note for $7,000,000 from RTI which formed part of the purchase price of the Foreland acquisition, see Note 5. The note ranks senior to all debt and is secured against all of the assets of the Company and of its subsidiaries. The note matured on October 31, 2022, and bears interest at 4% per annum. Terms of the note include a payment of $3,500,000 due October 15, 2022. The principal amount of the note was adjusted retroactively following the close of the Foreland acquisition by $604,333 (to $6,395,667). A payment was issued on October 15, 2022, in the amount of $3,500,000 and applied to the amount outstanding under the Note. On November 3, 2022, the Company entered into a Closing Extension Agreement with RTI which extended maturity of the Note to November 15, 2022, and extended the split payment clause in the purchase agreement to December 31, 2022. In connection with the extension, the Company recorded a penalty for the extension of the split payment clause for $2,117,298, which was included in interest expense on the statement loss and comprehensive loss. On December 23, 2022, the Company entered into a forbearance agreement, effective as of December 1, 2022, with RTI, due to the Company’s default on the note and the purchase agreement, as amended under the closing extension agreement. Pursuant to the forbearance agreement, RTI agreed to forbear pursuing its rights and remedies against the Company until February 28, 2023 (the


F-41


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


“Forbearance Period”). Under the terms of the forbearance agreement, from October 1, 2022, up to the Forbearance Period, the split payment clause under the purchase agreement was voided and Foreland paid a varying percentage of its net profits to RTI, in amounts of up to 100%, as management fees. As inducement to enter the forbearance agreement, RTI was issued 250,000 shares of common stock of the Company. As of February 20, 2023, all of the Company’s obligations under the forbearance agreement, and its obligations under the purchase agreement and the note, were satisfied in full. In connection with the issuance of the note payable and the acquisition, the Company also entered into a transition services agreement with the seller, which continued through July 31, 2023.

 

On September 16, 2020, the Company entered into a promissory note for $300,000 from ACMO USOS LLC which formed part of the Share Purchase Agreement. The note matured on December 15, 2020, and bears an interest rate at 10% per annum. On December 13, 2020, the interest rate was increased to 15% thereafter and the maturity date of the note was extended to March 16, 2021. Terms of the note, including adjustments to principal and interest and maturity date, are currently being renegotiated.

 

On March 1, 2021, 2020 Resources LLC received a loan in the amount of $152,200 through the Payroll Protection Program from the U.S. Small Business Administration. The loan carries an interest rate of 1%, has a two-year term with no principal payments for 12 months and may be forgiven in whole or in part subject to certain terms and conditions and the use of funds by the Company. Commencing March 1, 2022, the Company is required to make monthly repayments of 1% of the principal amount of the note and accrued interest, totaling $3,203. Forgiveness is not automatic and will be assessed by the lender once applied for. As of August 25, 2023, this amount has not been forgiven.

 

On September 16, 2020, the Company entered into a promissory note for $450,000 from JPMorgan Chase Bank N.A. (“JPMorgan”). The note is unsecured, bears interest at 10% per annum and matures on September 28, 2023. Portions of the note have been converted from time to time into common shares. On March 14, 2022, at the election of the lender the balance outstanding under the note was converted into 68,742 Shares in full and final satisfaction of the note.

 

On August 31, 2020, the Company entered into a promissory note for $1,000,000 from Loeb Term Solutions LLC. The note ranks senior to all debt and is secured against all of the assets of the Company and of its subsidiaries. The note matures on September 1, 2024, and bears interest at 14.25% per annum. Terms of the note includes a mandatory repayment against principal of $20,000 per monthly instalment. On March 15, 2022, the note was repaid in full.

 

On September 17, 2020, the Company entered into a promissory note for $200,000 from a private lender. The note is unsecured, bears a flat interest charge of 10% and matured on December 18, 2020. On May 25, 2021, terms of the note were amended to a principal amount of $220,000, interest accruing at 10% per quarter retroactive to December 18, 2020, and a maturity date of June 30, 2021. On March 15, 2022, the note was repaid in full.

 

On September 17, 2020, the Company entered into a promissory note for $75,000 from a private lender. The note is unsecured, bears a flat interest charge at 25% and matured on March 16, 2021. On January 4, 2022, the note was repaid in full.

 

On September 17, 2020, the Company entered into a promissory note for $25,000 from a private lender. The note is unsecured, bears a flat interest charge at 25% and matured on March 16, 2021. On January 4, 2022, the note was repaid in full.


F-42


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


 

14.CONVERTIBLE DEBENTURES 

 

Lender

 

Maturity

Date

Interest Rate

Principal Due

December 31,

2022

Principal Due

December 31,

2021

 

 

 

 

 

 

Private Lender

 

April 23, 2021

4%

$                -

$     50,000

Marcus Laun

 

July 13, 2021

4%

-

25,000

Private Lender

 

September 12, 2021

4%

-

-

Private Lender

 

November 5, 2022

15%

-

50,000

Private Lender

 

November 7, 2022

15%

-

50,000

JPMorgan

 

November 22, 2022

15%

-

25,000

 

 

 

 

$                -

$    200,000

 

Private Lender

On April 23, 2020, the Company issued a promissory note in the amount of $50,000, convertible at the election of the holder into shares of common stock at an exercise price of $0.0936 per share with a maturity date of April 23, 2021. The note has a term of twelve months and bears interest at a rate of 4% per annum payable at maturity. On March 28, 2022, at the election of the lender the note was converted into 575,401 Shares in full and final satisfaction of the note.

 

Marcus Laun

On July 13, 2020, the Company issued a promissory note in the amount of $25,000 to Marcus Laun, a director of the Company, convertible at the election of the holder into shares of common stock at an exercise price of $0.0936 per share with a maturity date of July 13, 2021. The note has a term of twelve months and bears interest at a rate of 4% per annum payable at maturity. On March 28, 2022, at the election of the lender the note was converted into 285,329 Shares in full and final satisfaction of the note.

 

Private Lender

On September 21, 2020, the Company issued a promissory note in the amount of $50,000, convertible at the election of the holder into shares of common stock at an exercise price of $0.25 per share. The note has a term of twelve months and bears interest at a rate of 4% per annum payable at maturity. On December 9, 2021 the noteholder elected to convert the amount owing under the note into 209,731 Shares in full and final satisfaction of the amount owing under the note.

 

Private Lender

On November 5, 2021, the Company issued a promissory note in the amount of $50,000 to an arms’ length lender with a term of twelve months and bearing interest at a rate of 15% per annum payable at maturity. All or any part of the principal and accrued interest due under the note is convertible at the election of the holder during the term of the note into shares of common stock at an exercise price of $1.25 per share. As inducement for advancing the note, the lender was issued 50,000 share purchase warrants. On May 20, 2022, the Company provided notice to the noteholder of its intent to prepay the note in full. The noteholder elected to receive the repayment of the principal amount in cash and to convert the interest into 6,000 Shares.

 

Private Lender

On November 7, 2021, the Company issued a promissory note in the amount of $50,000 to an arms’ length lender with a term of twelve months and bearing interest at a rate of 15% per annum payable at maturity. All or any part of the principal and accrued interest due under the note is convertible at the election of the holder during the term of the note into shares of common stock at an exercise price of $1.25 per share. As inducement for advancing the note, the lender was issued 50,000 share purchase warrants. On May 20, 2022, the Company provided notice to the noteholder of its intent to prepay the note in full. The noteholder elected to receive the repayment of the principal amount in cash and to convert the interest into 6,000 Shares.


F-43


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


JPMorgan

On November 22, 2021, the Company issued a promissory note to JPMorgan in the amount of $25,000 with a term of twelve months and bearing interest at a rate of 15% per annum payable at maturity. All or any part of the principal and accrued interest due under the note is convertible at the election of the holder during the term of the note into shares of common stock at an exercise price of $1.25 per share. As partial consideration for advancing the note, JPMorgan was issued 25,000 share purchase warrants. The note was paid by a corresponding cancellation of $25,000 of existing debt owing under the debt. On May 20, 2022, the Company issued 21,413 Shares to JPMorgan for conversion of debt in the amount of $26,766.25 in full and final satisfaction of the amount owing under the note.

 

 

15.INCOME TAXES  

 

The following table presents a reconciliation of the statutory federal rate and our effective tax rate:

 

 

 

December 31,

2022

December 31,

2021

Provision for income taxes at federal statutory rates

 

$          (785,059)

$           (354,137)

State taxes, net of federal benefits

 

(98,556)

(52,308)

Change in valuation allowance

 

(187,227)

412,594

Other

 

(1,277)

(38,622)

 

 

 $      (1,072,119)

$             (32,473)

 

Significant components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows as of December 31, 2022 and 2021:

 

 

 

December 31,

2022

December 31,

2021

Deferred tax assets (liabilities):

 

 

 

Accruals, reserves, and other

 

$                43,331

$                22,844

Depreciation and amortization

 

11,851

12,862

Stock compensation

 

51,593

-

Net operating loss carryover

 

1,292,151

511,935

  Total gross deferred tax assets

 

1,398,926

547,641

Less: valuation allowance

 

(360,414)

(547,641)

Net Deferred tax assets

 

1,038,512

-

  Total gross deferred tax liabilities

 

(1,226,368)

-

Net deferred taxes, December 31, 2022

 

$           (187,856)

$                         -

 

As of December 31, 2022, the Company had U.S. federal net operating loss carryforwards of approximately $3.8 million, which may be available to offset future federal income and do not expire. As of December 31, 2022, the Company had state net operating losses of $3.8 million which may be available to offset future state income tax and do not expire. As of December 31, 2022, the Company had Canada net operating losses of $1.6 million which may be available to offset future Canadian income tax and begin to expire in 2042.

 

The Company has evaluated the positive and negative evidence bearing upon the deferred tax assets and whether they will be realized. Based on the Company’s acquisition of Foreland who has a history of operating profits, the Company has concluded that it is more likely that the benefit of its deferred tax assets will be realized. As of December 31, 2022 the deferred tax liabilities of $1,226,368 is related to the acquisition of Foreland assets. As of December 31, 2022, the Company had a history of operating losses, the Company has concluded that it more than likely than not that


F-44


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


the benefit of its deferred tax assets will not be fully realized. Accordingly, the Company has a valuation allowance for deferred tax assets as of December 31, 2022 and 2021, of $360,414 and $547,641, respectively.

 

The Company has not performed a Section 382 study to determine whether it had experienced a change in ownership and, if so, whether the tax attributes (net operating losses or credits) were impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.

 

As of December 31, 2022 and 2021, the Company does not have any unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions.

 

 

16.EQUITY 

 

On April 20, 2021, the Company authorized an amendment to its Certificate of Incorporation which amended its authorized share structure by fixing the authorized shares of common stock issuable at a maximum of 100,000,000 with no change to the par value.

 

On June 21, 2021, the Company authorized an amendment to its Certificate of Incorporation which amended the terms regarding the issue of preferred stock to include “Blank-Check” provisions, specifically, authorizing its board of directors to provide, out of the unissued shares of authorized preferred stock, one or more classes of preferred stock or one or more series of preferred stock within any class thereof, and to set the voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, option or other special rights, and qualifications, limitations or restrictions thereof, which may differ from those of any and all other issuances, of each class of preferred stock or series of preferred stock within any class thereof, in accordance with the General Corporation Law of Delaware.

 

During the years ending December 31, 2022 and 2021, the Company issued 14,579,957 and 7,204,075 shares respectively for acceptance of share subscriptions and conversion of debt, amounting to $16,492,868 and $3,475,555, net of offering costs.

 

On September 29, 2021, the SEC qualified an offering of securities submitted by the Company under Regulation A (the “Reg A Offering”). Under the Reg A Offering, the Company proposed to sell up to 15 million units (“Units”) at a price of $1.25 per Unit. Each Unit was comprised of one share of common stock (an “Offering Share”) and one warrant to purchase an additional share (an “Offering Warrant”) at a price of $2.50 for a period of three years from issue. The Company reserved from treasury a maximum of 15,000,000 Shares issuable under the Reg A Offering, assuming full subscription, and a maximum of 15,000,000 shares issuable on exercise of the Offering Warrants (”Warrant Shares”) issued in connection with the Reg A Offering, assuming full subscription and full exercise. The Company did not issue Unit certificates but instead issued Offering Shares and Offering Warrants in the number of Units subscribed for to subscribers under the Reg A Offering. The Reg A Offering closed on September 39, 2022.


F-45


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


The table below sets forth the Shares reserved by the Company for future potential issuance.

 

 

Maximum Issuable

Company Stock Option Plan

5,000,000

Common Share Purchase Warrants issued

125,000

Shares issuable on exercise of outstanding Offering Warrants issued under the Reg A Offering

14,556,670

Brokers Warrants issued under the Reg A Offering

145,566

 

 

TOTAL SHARES RESERVED FOR ISSUANCE

19,827,236

 

As of December 31, 2022, the Company had issued and outstanding a total of 14,827,236 warrants to purchase one share of Common Stock, exercisable at a range from $0.50 to $2.50 per share for cash. The warrants are exercisable for 72 months from the date of issuance and carry a put feature in the event of a change in control. The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.

 

As of December 31, 2022 and 2021, the Company has share purchase warrants issued and outstanding of 13,351,006 and 1,351,230 respectively.

 

On August 16, 2021, the Company entered into an Engagement Agreement with Digital Offering, LLC to provide broker-dealer services in connection with the Offering. Under the terms of the Engagement Letter, the Company will issue a warrant to purchase one Share of the Company (an “Agent Warrant”) for each 100 Shares sold to investors under the Offering at an exercise price of $1.25 and subject to transfer, lock-up and exercise restrictions as set forth in Rule 5110 of the Financial Industry Regulatory Authority, Inc (“FINRA”), as applicable. Accordingly, the Company has reserved a maximum of 150,000 Shares issuable on exercise of the Agent Warrants issuable to Digital Offering, LLC in connection with its services under the Offering, assuming full subscription of the Offering and full exercise of the Agent Warrants.

 

 

17.STOCK OPTION PLAN 

 

On March 27, 2020, the Company adopted an incentive stock option plan (the “Plan”). The Plan allows the Board of Directors of the Company to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting periods are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of Section 422 of the Internal Revenue Code. The Plan is a fixed number plan with a maximum of 5,000,000 Shares reserved issuable under the Plan.

 

The table below sets forth share options outstanding as of December 31, 2022.

 

Grant Date

Options Issued

Exercise Price

Expiration

Vesting

2022-09-01

3,200,000

$ 0.90

2027-08-31

Equally over 3 years commencing on first anniversary of grant date

 

During the years ended December 31, 2022 and 2021, the Company recorded share-based compensation expense of $209,132 and $0, respectively.

 

As of December 31, 2022, the Company had $740,868 of unrecognized share-based compensation costs related to non-vested awards that will be recognized over a weighted average period of 3 years. As of December 31, 2022, no options have vested, and no operations are exercisable. The options issued during 2022 vest equally over 3 years commencing on the first anniversary of the grant date.


F-46


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


The following sets forth the outstanding common unit options and related activity for the year ended December 31, 2022:

 

 

 

Number of

Options

Weighted Average

Exercise Price Per Share

Outstanding as of December 31, 2021

 

-

$                        -

Granted

 

3,200,000

0.90

Exercised

 

-

-

Forfeited

 

(1,200,000)

0.90

Outstanding as of December 31, 2022

 

2,000,000

$                         -

 

 

18.RELATED PARTY TRANSACTIONS  

 

Related party transactions in these consolidated financial statements are as follows: 

 

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 December 31, 2022, 6,749,639 common shares (13.88%), 25,000 common share purchase warrants, and 1 preferred share of the Company.

 

On June 21, 2021, stockholders of the Company unanimously consented to terminate a Stockholders Agreement entered into by all of the stockholders and the Company on September 24, 2020, and approved a governance agreement (the “JPM Agreement”) between the Company and JPMorgan, which grants to JPMorgan the following rights:

 

·a consent right with respect to certain business transaction matters, including: (a) material changes to the nature of the Company’s business, (b) a grant of certain stock options or restricted stock, (c) the Company’s entry into certain employment or compensation agreements, (d) the incurrence by the Company of more than $500,000 of debt, (e) the Company’s entry into a related party agreement, (f) a sale transaction, (g) a loan by the Company in excess of $500,000, (h) settlement of a lawsuit or other dispute in excess of $500,000 or (i) any investment by the Company in excess of $500,000; 

 

·Board of Director observation rights; 

 

·the right to receive certain quarterly and annual financial statements of the Company; and 

 

·certain inspection rights so long as JPMorgan owns at least 10% of the Company’s outstanding shares of common stock. 

 

On July 13, 2020, the Company issued a promissory note in the amount of $25,000 to Marcus Laun, a director of the Company, convertible at the election of the holder into shares of common stock at an exercise price of $0.0936 per share with a maturity date of July 13, 2021. The note has a term of twelve months and bears interest at a rate of 4% per annum payable at maturity. On March 28, 2022, at the election of the lender the note was converted into 285,329 Shares in full and final satisfaction of the note.

 

For the years end December 31, 2022 and 2021, the Company paid sitting and committee fees of $202,000 and $0, respectively, to members of the board of directors. The directors voluntarily waived payment of such fees in 2021.


F-47


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


19.GENERAL AND ADMINISTRATIVE EXPENSES 

 

General and administrative expenses consisted of the following for the years ended:

 

 

 

December 31,

2022

December 31,

2021

Professional fees

 

$         1,194,033

$             258,676

Executive Compensation

 

1,198,327

              434,760

Internal fuel

 

806,164

                          -

Insurance

 

          570,959

              37,488

Other

 

325,999

                85,058

Travel expenses

 

320,837

                53,466

Repairs and maintenance

 

110,683

                          -

Lab

 

63,081

                          -

Lease and utilities

 

57,560

                          -

Automobile

 

40,903

                          -

Safety and environment

 

34,374

                          -

Licenses

 

40,397

                          -

 

 

$          4,763,317

$             869,448

 

 

20.COMMITMENTS AND CONTINGENCIES  

 

As of December 31, 2023, the Company has the following commitments for two leased land rights of way rentals in Nye County, Nevada, totaling approximately 40 acres:

 

 

Acres

Expiration

Annual Fee

Right-of-Way Grant N-41035

19.66

2023-12-31

$ 2,850

Right-of-Way Grant N-42414

20.32

2044-12-31

  1,400

 

 

 

$ 4,250

 

 

21.SUBSEQUENT EVENTS 

 

Management performed a review and determined that except as disclosed elsewhere herein and below, no material events occurred subsequent from December 31, 2022 to August 25, 2023, the date of presentation of these financial statements.

 

On January 17, 2023. Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $2,871,000 of future sales receipts for gross proceeds of $2,200,000. On June 30, 2023, this agreement was refinanced into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $2,520,000 of future sales receipts for gross proceeds of $2,000,000.

 

On January 23, 2023, the Company entered into a promissory note for $100,000 from a private lender. The note is unsecured, bears interest at 20% per annum and matured on March 23, 2023. As inducement for advancing the note, the lender was issued 20,000 share purchase warrants, each warrant granting the holder the right to purchase one common share of the Company at a price of $2.00 for a period of two years from issue. The maturity date of the note is currently being renegotiated.

 

On January 31, 2023 Foreland drew down $2,959,684 under an Invoice Purchase and Security Agreement with Alterna Capital Solutions, LLC to retire all of the obligations under the RTI Note. The Agreement further provides certain letters of credit in place with certain crude oil suppliers to


F-48


SKY QUARRY INC.

Notes to the Consolidated Financial Statements


Foreland, to a maximum of $12 million, and is secured by the sales and pre-sales petroleum products inventory on hand at Foreland.

 

On January 31, 2023, the Company closed an equity financing of Units for gross proceeds of $75,000. Each Unit was comprised of one share of common stock of the Company and one common share purchase warrant entitling the holder to purchase an additional share of common stock for a period of 36 months at a price of $2.00.

 

On February 21, 2023, Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $990,000 of future sales receipts for gross proceeds of $750,000. On May 17, 2023, this agreement was refinanced into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $2,60,250 of future sales receipts for gross proceeds of $1,925,000.

 

On February 21, 2023, the Company entered into a binding term sheet with a private lender for a convertible loan of $1,000,000 to be personally guaranteed and secured by members of the Board and received a deposit of $400,000. During the course of loan document preparation, it was determined that certain terms agreed to in the term sheet could not be completed. On April 6, 2023, the parties amended the terms of the term sheet by way of a debt satisfaction agreement under which the deposit, plus accrued interest calculated at 20% per annum, would be repaid on or before May 21, 2023, after which amounts unpaid would incur interest at the rate of 30% per annum. As inducement to enter into the debt satisfaction agreement, the lender was issued 2,000,000 common share purchase warrants, each warrant granting the holder the right to purchase one common share of the Company at a price of $0.90 for a period of five years from issue.

 

On April 16, 2023, the Company issued 100,000 shares to a third-party consultant as partial consideration for legal services.

 

On May 3, 2023, Foreland entered into an agreement of sale of future receivables with Libertas Funding, LLC for the sale of $884,450 of future sales receipts for gross proceeds of $665,000.

 

On May 6, 2023, the Company issued 60,000 shares of common stock to certain stockholders on the cashless exercise of 100,000 share purchase warrants.

 

On June 14, 2023, Foreland entered into a business loan and security agreement with Lendspark Corporation for a loan in the amount of $1,500,000. The loan is repaid in 44 equal weekly payments of $45,000 for total repayment of $1,980,000.

 

On July 1, 2023, the Company issued 100,000 shares to a third-party consultant as partial payment for legal services.

 

On August 1, 2023, the Company granted a total of 2,100,500 incentive stock options to certain directors, officers, employees and consultants of the Company and its subsidiaries. The options have an exercise price of $3.03 per Share for a period of five years and vest in equal amounts on the 12, 24, and 36 month anniversaries of the grant date.


F-49



PART III – EXHIBITS

 

Exhibit No.

 

Exhibit Description

1

 

Underwriting Agreement

2.1 (1)

 

Amended and Restated Certificate of Incorporation

2.2 (1)

 

Amendments to Certificate of Incorporation

2.3 (1)

 

Company Bylaws as Amended

3.1 (1)

 

Form of Warrant Held by Investors

3.2 (1)

 

Stock Plan

3.3 (1)

 

Certificate of Designation of Series A Preferred Stock

3.5 (1)

 

Promissory Note – JPMorgan Chase Bank N.A dated September 16, 2020

4

 

Subscription Agreement

6.1 (1)

 

Employment Agreements

6.1.1 (1)

 

Executive Employment Agreement with David Sealock dated March 15, 2020

6.1.2 (1)

 

Executive Employment Agreement with Marcus Laun dated March 15, 2020

6.1.3 (1)

 

Executive Employment Agreement with Darryl Delwo dated March 15, 2020

6.2 (1)

 

Agreements relating to the acquisition of 2020 Resources LLC and 2020 Resources (Canada) LTD.

6.2.1 (1)

 

Securities Purchase Agreement with 2020 Resources Holdings LLC dated September 16, 2020

6.3 (1)

 

Digital Offering Engagement Letter

6.3.1 (1)

 

Agent’s Warrant

6.3.1a (2)

 

Agent’s Warrant (Amended)

6.3.1b (3)

 

Agent’s Warrant (Amended)

6.4 (1)

 

Prime Trust, LLC Escrow Agreement

6.5

 

Mineral Leases

6.5.1 (1)

 

ML-49927-OBA as amended

6.5.2 (1)

 

ML-49579-OBA

6.5.3 (1)

 

ML-51705-OBA

6.6 (1)

 

Agreement with JP Morgan Chase Bank

6.7 (5)

 

Sale of Future Receivables Agreement with Libertas Funding, LLC

6.8 (5)

 

Invoice Purchase and Sale Agreement with Alterna Capital Solutions, LLC

6.9 (5)

 

Debt Satisfaction Agreement with KF Business Ventures LP

6.10 (5)

 

Sale of Future Receivables Agreement with Libertas Funding, LLC

6.11 (5)

 

Sale of Future Receivables Agreement with Libertas Funding, LLC

6.12 (5)

 

Sale of Future Receivables Agreement with Libertas Funding, LLC

6.13 (5)

 

Loan with Lendspark Corporation

6.14

 

Form of Convertible Note

6.15

 

Sale of Future Receivables Agreement with Libertas Funding, LLC dated October 23, 2023

8

 

Escrow Agreement, as amended

11.3

 

Consent of Attorney (included in Exhibit 12)

11.4

 

Consent of Auditor to Sky Quarry Inc

12

 

Opinion of Counsel

99.1 (5)

 

Audit Committee Charter

99.2 (5)

 

Compensation, Nomination, and Corporate Governance Committee Charter

99.3 (5)

 

Health, Safety and Environment Committee Charter

99.4 (5)

 

Company Code of Business Conduct and Ethics


Part III - 1



(1)Incorporated by reference from our Offering Statement on Form 1-A filed with the Commission on July 7, 2021. 

(2)Incorporated by reference from our Post-Effective Amendment No. 1 to the Offering Statement on Form 1-A filed with the Commission on November 15, 2021. 

(3)Incorporated by reference from our Post-Effective Amendment No. 2 to the Offering Statement on Form 1-A filed with the Commission on November 16, 2021. 

(4)Incorporated by reference from our Post-Effective Amendment No. 3 to the Offering Statement on Form 1-A filed with the Commission on January 3, 2022. 

(5)Incorporated by reference from our Semiannual Report to the Offering Statement on Form 1-SA/A filed with the Commission on November 21, 2023. 


Part III - 2



SIGNATURES

 

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonably grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilmington, State of Delaware, on December 19, 2023. 

 

 

Sky Quarry Inc.,

 

a Delaware corporation

 

 

 

 

Dated: December 19, 2023

/s/ David Sealock  

 

By:David Sealock 

 

Its:Chief Executive Officer 

 

 

 

 

 

 

This offering statement has been signed by the following persons in the capacities and on

the dates indicated.

 

 

Dated: December 19, 2023

/s/ David Sealock  

 

David Sealock, Chief Executive Officer, Director

 

 

 

 

 

 

Dated: December 19, 2023

/s/ Marcus Laun  

 

Marcus Laun, Executive Vice-President, Director

 

 

 

 

 

 

Dated: December 19, 2023

/s/ Travis Schneider  

 

Travis Schneider, Director

 

 

 

 

 

 

Dated: December 19, 2023

/s/ Matthew Flemming  

 

Matthew Flemming, Director

 

 

 

 

 

 

Dated: December 19, 2023

/s/ Darryl Delwo  

 

Darryl Delwo, Vice President of Finance


Part III - 3

THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

Principal Amount: $___________Issue Date: ______________ 


9% Secured Convertible Promissory Note

 

FOR VALUE RECEIVED, SKY QUARRY INC., a Delaware corporation (hereinafter called “Borrower” or “Company”), hereby promises to pay to the order of _________ (the “Holder”), address at _______________, the sum of +___________Dollars ($___________) (“Principal Amount”), with interest accruing thereon, payable on ___________ (the “Maturity Date”), if not sooner paid, converted or modified as permitted herein.  This Note is being issued in connection with the Note Purchase Agreement entered into by and between Borrower and Holder dated ____________ (“Purchase Agreement”).  Terms not otherwise defined herein shall have the meanings assigned to them in the Purchase Agreement.

 

The following terms shall apply to this Note:

 

ARTICLE I

 

GENERAL PROVISIONS

 

1.1Interest Rate and Interest Payment Date.   Interest payable on this Note shall accrue at a rate of nine percent (9.0%) per annum from the Issue Date through the Maturity Date. Interest shall be paid on a semi-annual basis commencing on ____________.  Payment of interest shall be made to the Holder in the form of cash or shares of the Company’s common stock, at the Holder’s option.  Holder shall notify the Borrower at least 10 days prior to the interest payment date (“Interest Notification Date”) as to the form of interest payment Holder elects to receive. If Holder does not notify the Borrower, on or before the Interest Notification Date, as to the form of interest payment it elects to receive with respect to a semi-annual interest payment, such semi-annual interest payment will be paid in cash.  If Holder elects to receive a semi-annual interest payment in the form of shares of the Company’s common stock, the number of shares to be issued to Holder shall be calculated based on the interest payment amount divided by the Conversion Price (defined below) as then in effect. 

 

1.2Maturity Date. The Maturity Date shall be _______________ (36 months from date of the issuance of the Note). 

 

1.3Payment Grace Period.  The Borrower shall have a ten (10) day grace period to pay any monetary amounts due under this Note.  After the Maturity Date and during the pendency of an Event of Default, (as defined in Article IV) the interest rate shall be increased to twelve percent (12%) per annum. 


1.4Miscellaneous.   Interest on this Note shall be calculated on the basis of a 365-day year and the actual number of days elapsed.  Principal and interest on this Note and other payments in connection with this Note shall be payable at the Holder’s offices as designated above in lawful money of the United States of America in immediately available funds without set-off, deduction or counterclaim.  Upon assignment of the interest of Holder in this Note, Borrower shall instead make its payment pursuant to the assignee’s instructions upon receipt of written notice thereof. 

 

ARTICLE II

CONVERSION RIGHTS

 

The Holder shall have the right to convert the principal and any interest due under this Note into Shares of the Borrower’s Common Stock, $0.0001 par value per share (“Common Stock”) as set forth below.

 

2.1.Conversion into the Borrower’s Common Stock

 

(a)The Holder shall have the right at any time commencing on the date hereof until this Note is fully paid, to convert any outstanding and unpaid principal portion of this Note, and accrued interest, at the election of the Holder (the date of giving of such notice of conversion being a “Conversion Date”) into fully paid and non-assessable shares of Common Stock. Upon delivery to the Borrower of a completed Notice of Conversion, a form of which is annexed hereto as Schedule A, Borrower shall issue and deliver to the Holder within five (5) business days after the Conversion Date (such fifth day being the “Delivery Date”) that number of shares of Common Stock for the portion of the Note converted in accordance with the foregoing.  The Holder will not be required to surrender the Note to the Borrower until the Note has been fully converted or satisfied.  The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal of the Note and interest, if any, to be converted, by the Conversion Price. 

 

(b)Subject to adjustment as provided in Article 2.1(c) hereof, the conversion price (“Conversion Price”) per share shall be a price equal to $1.60 per share of the Company’s Common Stock.  

 

(c) The Conversion Price and number and kind of shares or other securities to be issued upon conversion determined pursuant to Article 2.1(a), shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows: 

 

A.Merger, Sale of Assets, etc.  If (A) the Borrower effects any merger or  consolidation of the Borrower with or into another entity, (B) the Borrower effects any sale of all or substantially all of its assets in one or a series of related transactions,  (C) any tender offer or exchange offer (whether by the Borrower or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (D) the Borrower consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities acquire more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by such other persons or entities making or party to, or associated or affiliated with the other persons or entities making or party to, such stock purchase agreement or other business combination), (E) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Borrower), or (F) the Borrower effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than a reverse merger)  (in any such case, a “Fundamental   


Transaction”), this Note, as to the unpaid principal portion thereof and accrued interest thereon, if any, shall thereafter be deemed to evidence the right to convert into such number and kind of shares or other securities and property as would have been issuable or distributable on account of such Fundamental Transaction, upon or with respect to the securities subject to the conversion right immediately prior to such Fundamental Transaction.  The foregoing provision shall similarly apply to successive Fundamental Transactions of a similar nature by any such successor or purchaser.  Without limiting the generality of the foregoing, the anti-dilution provisions of this Article shall apply to such securities of such successor or purchaser after any such Fundamental Transaction.

 

B.Reclassification, etc.  If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes that may be issued or outstanding, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. 

 

C.Stock Splits, Combinations and Dividends.  If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. 

 

(d)Whenever the Conversion Price is adjusted pursuant to Article 2.1(c) above, the Borrower shall promptly but not later than the fifth (5th) business day after the effectiveness of the adjustment, provide notice to the Holder setting forth the Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.  Failure to provide the foregoing notice is an Event of Default under this Note. 

 

2.2Method of Conversion.  This Note may be converted by the Holder in whole or in part as described in Article 2.1(a) hereof.  Upon partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. 

 

ARTICLE III

 

REDEMPTION

 

This Note may be prepaid, in whole or in part, by the Borrower, at any time after the issuance hereof, without the consent of the Holder except as otherwise described in this Note.  Such prepayment option may only be exercised by Borrower one time during each twelve (12) month period while the note is outstanding commencing on the date hereof.  If the Note is prepaid prior to the date that is twelve months from the date of this Note, the Borrower shall pay a three percent (3%) prepayment penalty to Holder and if prepaid after twelve months but prior to the date that is twenty-four (24) months from the date of this Note, the Borrower shall pay a two percent (2%) prepayment penalty to Holder.  Any pre-payment penalty shall only be applied to the then outstanding principal amount being prepaid.  Any prepayment made after the date that is twenty-four (24) months from the date of this Note shall not be subject to any pre-payment penalty. Borrower shall provide Holder at least thirty (30) days prior written notice of its intent to prepay the Note, which shall be affirmatively acknowledged by Holder of its receipt of written notice thereof, during which time Holder may elect to convert all or a portion of the outstanding principal and accrued  


interest of the Note.  Holder shall notify Borrower in writing of its election to convert the Note at least five (5) days prior to the prepayment date, pursuant to which it shall indicate the amount of principal and/or accrued interest it intends to convert into shares of the Borrower’s common stock at the Conversion Price then in effect.  If Holder does not timely notify Borrower of its election to convert the Note in accordance herewith, Holder shall not be entitled to convert the Note at such time, however, if the Note is not repaid in full Holder shall continue to have the right to convert the Note in connection with any future repayment notices provided to Holder.

 

ARTICLE IV

 

EVENT OF DEFAULT 

 

The occurrence of any of the following events of default (“Event of Default”) shall, at the option of the Holder hereof, make all sums of principal and interest then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, upon demand, without presentment or grace period, all of which hereby are expressly waived, except as set forth below:

 

4.1Failure to Pay Principal or Interest.  The Borrower fails to pay any installment of principal, interest or other sum due under this Note when due in full, subject to any applicable grace period set forth herein. 

 

4.2Breach of Covenant.  The Borrower or any Subsidiary breaches any material covenant or other term or condition of the Note Purchase Agreement or this Note in any material respect and such breach, if subject to cure, continues for a period of twenty (20) business days after written notice to the Borrower from the Holder. 

 

4.3Breach of Representations and Warranties.  Any material representation or warranty of the Borrower made herein, in the Note Purchase Agreement, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading in any material respect as of the date made and the Closing Date and such inaccuracy, if subject to cure, continues for a period of twenty (20) business days after written notice to the Borrower from the Holder. 

 

4.4Liquidation.   Any dissolution, liquidation or winding up of Borrower or a Subsidiary’s substantial portion of their business. 

 

4.5Cessation of Operations.   Any cessation of operations by Borrower or a Subsidiary. 

 

4.6Maintenance of Assets.   The failure by Borrower or any Subsidiary to maintain any material intellectual property rights, personal, real property, equipment, leases or other assets which are necessary to conduct its business (whether now or in the future) and such breach is not cured with twenty (20) business days after written notice to the Borrower from the Holder. 

 

4.7Receiver or Trustee.  The Borrower or any Subsidiary shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 

 

4.8Judgments.  Any money judgment, writ or similar final process shall be entered or made in a non-appealable adjudication against Borrower or any Subsidiary or any of its property or other assets for more than $250,000, unless stayed vacated or satisfied within ten days. 


4.9Bankruptcy.  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Borrower or any Subsidiary. 

 

4.10Notification Failure.   A failure by Borrower to notify Holder of any material event of which Borrower is obligated to notify Holder pursuant to the terms of this Note or any other Transaction Document. 

 

ARTICLE V

 

MISCELLANEOUS

 

5.1Failure or Indulgence Not Waiver.  No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 

 

5.2Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the first business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be: (i) if to the Borrower to:  Sky Quarry Inc., 707 W. 700 S, Suite 101, Woods Cross, UT 84087, Attn: President, facsimile: (801) 606-2722, and (ii) if to the Holder, to the name, address and facsimile number set forth in the Note Purchase Agreement. 

5.3Amendment Provision.  The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 

 

5.4Assignability.  This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns.   

 

5.5Cost of Collection.  If default is made in the payment of this Note, Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys’ fees. 

 

5.6Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of Delaware without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction.  Any action brought by either party against the other concerning the transactions contemplated by this Agreement must be brought only in the civil or state courts of the state of Delaware or in the federal courts located in the state of Delaware.  Both parties and the individual signing this Agreement on behalf of the Borrower agree to submit to the jurisdiction of such  


courts.  The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs.  In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Borrower in any other jurisdiction to collect on the Borrower’s obligations to Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other decision in favor of the Holder.  

 

5.7Maximum Payments.  Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum rate permitted by applicable law.  In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum rate permitted by applicable law, any payments in excess of such maximum rate shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 

 

5.8Non-Business Days.   Whenever any payment or any action to be made shall be due on a Saturday, Sunday or a public holiday under the laws of the State of Delaware, such payment may be due or action shall be required on the next succeeding business day and, for such payment, such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date. 

 

 

IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by an authorized officer as of the ____day of ________, _____.

 

 

SKY QUARRY INC.

 

 

 

By: ________________________________

                                                                                     Name: David Sealock

                                                                                     Title: CEO


 

SCHEDULE A - NOTICE OF CONVERSION

 

(To be executed by the Registered Holder in order to convert the Note)

 

 

The undersigned hereby elects to convert $_________ of the principal and $_________ of the interest due on the Note issued by Sky Quarry Inc. (“Borrower”) on ________ ___, 2023 into Shares of Common Stock of Borrower according to the conditions set forth in such Note, as of the date written below.

 

 

 

Date of Conversion:____________________________________________________________________

 

 

Conversion Price:______________________________________________________________________

 

 

Shares To Be Delivered:_________________________________________________________________

 

 

Signature:____________________________________________________________________________

 

 

Print Name:__________________________________________________________________________

 

 

Address:_____________________________________________________________________________

 

  ___________________________________________________________________________

 

 

Picture 1 

Libertas Funding, LLC
411 West Putnam Ave Suite 220, Greenwich, CT 06380

 

AGREEMENT OF SALE OF FUTURE RECEIPTS

 

This AGREEMENT OF SALE OF FUTURE RECEIVABLES (this "Agreement") dated as of 10/23/2023, is made by and between Libertas Funding, LLC, a Connecticut Limited Liability Company as purchaser ("Purchaser"), the merchant whose name, address and other pertinent information is set forth below, as seller ("Merchant"), and the individual owner/guarantor of the Merchant whose name, address and other pertinent information are set forth below ("Guarantor"). For good and valuable consideration, the mutual receipt and sufficiency of which is hereby acknowledged, the parties to this Agreement agree as follows:

 

Merchant Information (see addendum)

 

Merchant Legal Name: FORELAND REFINING CORPORATION, et al.

DBA Name: EAGLE SPRINGS REFINERY

Entity Type: Corporation

FEIN: [ REDACTED ]

State Of Incorporation: NV

Bank Name: [ REDACTED ]

Address: US HIGHWAY 6, CURRANT,NV, 89301

Phone: [ REDACTED ]

 

 

OWNER INFORMATION (referred to individually or collectively as the ("Owner"))

 

Name of Owner Guarantor 1:

DAVID OWEN SEALOCK

Cell Phone: [ REDACTED ]

Social Security #: [ REDACTED ]

Home Address: [ REDACTED ]

City/State: [ REDACTED ]

Zip Code: [ REDACTED ]

Ownership %: 11

Email: dsealock@skyquarry.com

 

 

Name of Owner Guarantor 2:

MARCUS GOETZ LAUN

Cell Phone: [ REDACTED ]

Social Security #: [ REDACTED ]

Home Address: [ REDACTED ]

City/State: [ REDACTED ]

Zip Code: [ REDACTED ]

Ownership %: 7

Email: marcus@skyquarry.com

 

 

PRIMARY TERMS

 

THIS AGREEMENT INCLUDES A JURY TRIAL AND CLASS ACTION WAIVER. PLEASE READ IT CAREFULLY.

In this Agreement, you are selling to us a specified amount of future payments your customers make for your goods and services, as further defined below ("Future Receipts"). We agree to buy from you (and you agree to sell to us) the amount of Future Receipts shown below (the "Amount Sold") in exchange for the "Purchase Price" shown below. In order to deliver to us the Amount Sold, you assign to us the share of your Future Receipts ("Specified Percentage") shown below, every week from the date we deliver the Purchase Price until we have received the entire Amount Sold and all fees or other amounts due under this Agreement (the "Completion Amount").

We are buying Future Receipts from you, not loaning you money. You are not required to pay interest on the Purchase Price and this Agreement has no term or required payment amounts that are not subject to change based on your future revenue. Instead, your obligation is to deliver to us the Specified Percentage of your Future Receipts as they are generated in the ordinary course of your business. This means that your obligation to us aligns with your cash flow. When your Future Receipts decline because business is slow, you will be able to deliver Future Receipts to us more slowly.

By purchasing Future Receipts from you, we assume risks such as not obtaining the Future Receipts we bought as quickly as we anticipated, or not receiving all of them if you go out of business. However, you are not allowed to engage in "bad acts" that unfairly prevent us from receiving what we paid for. For example, unless you cease operations, you are not allowed to change the bank account in which we collect our Weekly Delivery Amounts (see below) without our approval, block our ability to collect our Weekly Delivery Amounts, sell your Future Receipts to another funding company (stacking) or close your business and start up another similar business right away. Additionally, you are representing that the information that you provided us is accurate in all material respects and that you have not omitted providing us with information that is material to your business. The details on this are below.


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Detailed Terms and Conditions

 

KEY BUSINESS TERMS AND DEFINITIONS:

Amount Sold

$1,731,660.00

The dollar value of Future Receipts that Merchant agrees to sell to Purchaser.

Purchase Price

$1,302,000.00

The total amount that Purchaser agrees to pay for the Amount Sold.

Future Receipts

$4,562,900.29

All sums received by or payable to Merchant from its customers as payment for Merchant’s goods and/or services in the ordinary course of Merchant’s business after Merchant receives the Purchase Price from Purchaser. Future Receipts include, among other things, payments by cash, physical or electronic checks, credit cards, charge cards, debit cards, other payment cards, ACH or other electronic payments, and any other form of funds transfer or payment. When the Payment Card Split Method of delivering Future Receipts is used, Purchaser will collect only Future Receipts processed through the Approved Card Processor (defined below).

Direct Payments to Third Parties/Renewals

383,483.08

Amounts paid to Purchaser and/or Other Funders.

Total Amount Sent to Merchant

$875,439.92

The Purchase Price minus the Origination Fee (see below) minus Direct Payments to Third Parties/Renewals (see above).  [ REDACTED ]

Specified Percentage

20%

The percentage of Future Receipts that the Merchant is required to deliver to Purchaser until the entire Completion Amount is delivered to Purchaser in accordance with this Agreement.

Weekly Delivery Amount

$37,481.82

The dollar amount that Merchant and Purchaser agree to be an approximation of the Specified Percentage of Future Receipts each week as of the date of this Agreement, based upon the information provided by Merchant to Purchaser concerning Merchant’s most recent receipts.

Discount Factor

1.33

The adjustment to the Amount Sold that enables us to calculate the Purchase Price.

Origination Fees

$17,577.00

The amount Purchaser will deduct from the Purchase Price and retain to compensate it for due diligence and other costs in evaluating whether to purchase the Amount Sold.

Repurchase Price (applicable discounts)

1.07 @ 1 month(s)

1.09 @ 2 month(s)

1.11 @ 3 month(s)

1.13 @ 4 month(s)

1.15 @ 5 month(s)

1.17 @ 6 month(s)

The discounted price Merchant may pay to end this financing transaction early by repurchasing Future Receipts sold to Purchaser but not yet delivered. The Repurchase Price is equal to the discount factor set forth in the column to the left for each month following the Commencement Date. This shall be multiplied by the Purchase price unless amounts collected prior to the date in which the Repurchase price is paid.

Good Faith Estimate of Term

11 Months

This Agreement has no term. However, based on your historical revenue, we have estimated how long it will take you to deliver the Amount Sold to us under this Agreement.

Commencement Date

 

The date when the Purchase Price is paid to Merchant.

Business Day

 

Monday through Friday except bank holidays.

Remittance Method

ACH

Method of remittance agreed upon by Purchaser and Merchant.

 

Note: The bold type terms in the tables above and below shall constitute defined terms with respect to this Agreement. PLEASE NOTE THAT THE PURCHASER WILL NOT TAKE MORE THAN THE EXPECTED WEEKLY REMITTANCE WITHOUT THE CONSENT OF THE

 

I.SALE OF FUTURE RECEIPTS; PAYMENT OF PURCHASE PRICE: 

 

1.Sale of Future Receipts; Not a Loan. In exchange for the Purchase Price, Merchant hereby sells, assigns, transfers and conveys (hereinafter, the “Sale”) to Purchaser all of Merchant’s right, title and interest in and to the Specified Percentage of its Future Receipts until the Completion Amount is delivered to Purchaser. This Sale is made without recourse against Merchant and Guarantor except as specifically set forth in this Agreement. By virtue of this Agreement, Merchant transfers to Purchaser full and complete ownership of the Amount Sold and Merchant retains no legal or equitable interest therein. Merchant and Purchaser agree that the Purchase Price is payment for the assignment and sale of the Amount Sold and that this transaction is not intended to be, nor shall it be construed as, a loan from Purchaser to Merchant. Furthermore, Purchaser’s ability to collect the Amount Sold is contingent on the continued operation of Merchant’s business, and the timing of deliveries of the Specified Percentage of Future Receipts will depend on how quickly Merchant’s business generates Future Receipts. Merchant and Guarantor expressly agree not to take the position that this transaction is a loan, and they expressly waive any and all claims and defenses based on that position in any action or proceeding arising out of this Agreement, including without limitation claims or defenses of usury. 

 

2.Purchasers Acceptance through Payment of Purchase Price. 

a.Should Purchaser wish to accept this Agreement after the satisfactory completion of Purchaser’s due diligence (in its discretion), Purchaser may accept the Agreement without signing it by sending Merchant the Purchase Price minus the Origination Fee, subject to Section 2(b) below. 

b.If Merchant previously sold Future Receipts to Purchaser but has not yet remitted the full Completion Amount pursuant to the prior transaction, Merchant hereby requests to repurchase the undelivered balance of the Amount Sold from that transaction and directs Purchaser to deduct the repurchase price from the Purchase Price and apply it to complete the prior transaction. Similarly, if Merchant previously obtained a loan from Purchaser and has a balance due on such loan, Merchant hereby instructs Purchaser to deduct the balance due on the prior loan from  


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the Purchase Price and apply it to pay off the prior loan. In the event that the agreement for the prior sale of Future Receipts does not permit repurchase of any portion of the amount sold, such agreement is hereby amended to permit repurchase on the same terms as set forth in this Agreement.

 

II.DELIVERY OF AMOUNT SOLD: 

 

3.Method of Delivery of Amount Sold. Purchaser offers three methods by which Merchant may deliver the Specified Percentage of its Future Receipts to Purchaser: each week ACH debits by Purchaser from Merchant’s bank account, weekly remittances from Merchant’s payment card processor, and a lockbox arrangement. Each of these methods is described below. The method to be used initially is specified on the first page of this Agreement. The method of delivery may be changed by written agreement between Purchaser and Merchant. a. 

Direct Debit Method.

Under the Direct Debit Method, Merchant agrees to deposit all Future Receipts into one (and only one) bank account which shall be preapproved by Purchaser (the “Approved Bank Account”). Merchant shall execute an ACH Authorization allowing Purchaser to debit directly from the Approved Bank Account each week the Weekly Delivery Amount via ACH debit, as specified below. b.

Payment Card Split Method.

Under the Payment Card Split Method, Merchant shall exclusively use a single Approved Card Processor (defined below) to process all payments made by credit, debit, and other payment cards for Merchant’s goods and services. Merchant shall instruct such Approved Card Processor to remit each week to Purchaser the Specified Percentage of the Future Receipts for that week, and to remit the balance (less any fees charged by the Approved Card Processor) to Merchant. c.

Lockbox Method.

Under the Lockbox Method, Merchant agrees to deposit all Future Receipts into a special bank account established jointly by Purchaser and Merchant in accordance with a lockbox arrangement among Merchant, Purchaser and a banking institution chosen by Purchaser (the “Lockbox Account”), and Purchaser shall debit each week the Weekly Delivery Amount from the Lockbox Account.

4.Direct Debit Method and Lockbox Method Provisions. The following terms apply if either the Direct Debit Method or the Lockbox Method is used, unless otherwise specified herein. 

a.Weekly Delivery Amount. Purchaser and Merchant agree that, for efficiency purposes, Merchant may deliver the Specified Percentage of Future Receipts each week by remitting the Weekly Delivery Amount, which Purchaser has calculated to be roughly equivalent to the Specified Percentage of Merchant’s historical revenue each week. Purchaser, Merchant, and Guarantor acknowledge that Merchant’s actual Future Receipts may vary each week or from Merchant’s historical revenue, but they agree that the Weekly Delivery Amount is a fair and reasonable estimate of the Specified Percentage of Future Receipts. The Weekly Delivery Amount may be adjusted as set forth in Section 11. Merchant also has the right to reconcile any difference between the Weekly Delivery Amounts received in a given four-week period and the Specified Percentage of Future Receipts actually generated during that four-week period, as set forth in Sections 10 and 11. 

At any time during the term of this Agreement, Purchaser may change the method by which it will accept the Weekly Delivery by providing Merchant with written instructions of a new method of delivery of Weekly Delivery to Purchaser.

5.Timing of Weekly Deliveries. Merchant hereby authorizes Purchaser to debit the Weekly Delivery Amount from the Approved Bank Account or the Lockbox Account, as applicable, via ACH or electronic checks once each week on the same day of the week as the Commencement Date. If a debit is scheduled to occur on a bank holiday, the debit shall be made on the following Business Day. Debits of the Weekly Delivery Amount shall commence on a date selected by Purchaser which shall be no later than 15 days following the Commencement Date. Weekly deliveries shall continue until Purchaser has received the Completion Amount, unless Merchant files for bankruptcy and/or goes out of business in the ordinary course, without first committing a Bad Act (as defined below). In the event that the final weekly delivery results in Purchaser receiving more than Amount Sold (not including fees), Purchaser shall refund any amount in excess of the Amount Sold (not including fees) within 5 business days of the final weekly delivery. 

6.Approved Bank Account. If the Direct Debit Method is used, and for the purpose of allowing Purchaser to debit any fees due under this Agreement if the Payment Card Split Method is used, Merchant designates the bank account below as the Approved Bank Account, subject to approval by Purchaser. Merchant agrees to designate a different bank account acceptable to Purchaser if Purchaser does not approve the account designated below. In the event the Approved Bank Account becomes unavailable or Purchaser requests that a different bank account be used for any reason (such as difficulties debiting the Weekly Delivery Amount from such bank account), Merchant shall arrange for another Approved Bank Account immediately, and in no event later than five calendar days after the prior account becomes unavailable or Purchaser requests the designation of a new Approved Bank Account. If any weekly delivery (or multiple weekly deliveries) required under the Direct Debit Method does not occur due to a change in the Approved Bank Account, Purchaser may debit the missed weekly deliveries together with the next weekly delivery. 

Account Number: [ REDACTED ]Routing Number: [ REDACTED ] 

7.Lockbox Account. If the Lockbox Method is used, Merchant hereby authorizes Purchaser to initiate a lockbox arrangement and to instruct Merchant’s Approved Card Processor and Merchant’s invoiced customers/clients/vendees to deposit all sums due to Merchant from each of those parties directly to the Lockbox Account. If required, Merchant shall enter into a lockbox agreement with Purchaser and the banking institution chosen by Purchaser, and complete any additional paperwork, for the purpose of establishing the Lockbox Account. 

8.Third Party Appointment and Authorization. By signing below, Merchant acknowledges that Purchaser may, at any time, at Purchaser’s sole discretion, and without prior notice, appoint a third party, which may be an affiliate of Purchaser, including, without limitation, Kinetic Direct Funding, LLC (such third party being the “Servicing Agent”) to perform any or all of the actions authorized by the ACH Authorization and the Agreement. Merchant further agrees and acknowledges that Servicing Agent shall have all of the same rights, responsibilities, and authorizations granted to Purchaser by the ACH Authorization and the Agreement. For purposes of clarity, any Servicing Agent may perform any and all activities to service the Agreement, including the collection of Future Receipts (as set forth above) and fees, as if it was the Purchaser. 


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9.Fees Associated with Weekly Deliveries. It shall be Merchant’s exclusive responsibility to pay to its banking institution and/or Purchaser’s banking institution directly (or to compensate Purchaser if it is charged) all fees, charges and expenses incurred by either Merchant or Purchaser due to rejected electronic checks or ACH debit attempts, overdrafts or rejections by Merchant’s banking institution of the transactions contemplated by this Agreement. 

10.Merchants Right to Reconciliation of Weekly Deliveries. 

a.Merchant shall have the right, in its sole and absolute discretion but subject to the provisions of Section 11 below, to request retroactive reconciliation of any difference between the Weekly Delivery Amounts received by Purchaser through the four weekly deliveries immediately preceding the day when such request for reconciliation is received by Purchaser (each such four-week period, a “Reconciliation Month”) and the Specified Percentage of Future Receipts actually generated during that Reconciliation Month. 

b.Purchaser will perform each timely requested reconciliation (each, a “Reconciliation”) within five (5) Business Days following its receipt of the Merchant’s request for reconciliation by either crediting or debiting the difference back to or from the Approved Bank Account or the Lockbox Account, as applicable, so that the total amount debited by Purchaser from the Approved Bank Account or the Lockbox Account (as applicable) during the Reconciliation Month at issue is equal to the Specified Percentage of the Future Receipts that Merchant actually collected during the Reconciliation Month at issue. 

 

III. Request for Reconciliation Procedure. 

 

11.Merchants Right for Reconciliation of Weekly Deliveries. 

 

a.It shall be Merchant’s sole responsibility and right hereunder to initiate Reconciliation of Merchant’s actual Future Receipts during any Reconciliation Month by sending a request for reconciliation to Purchaser. 

b.Any such request for Reconciliation of Merchant’s Weekly receipts for a specific Reconciliation Month shall be in writing, shall include a copy of Merchant’s bank statement(s) and credit card processing statement(s) for the Reconciliation Month at issue, and must be received by Purchaser via email at customer.service@libertasfunding.com within five (5) Business Days after the last day of the Reconciliation Month at issue (time being of the essence). Any request for Reconciliation received after this deadline will not be honored. 

c.Merchant shall have the right to request Reconciliation as many times during the term of this Agreement as it deems proper, and Purchaser shall comply with such request, provided that: 

i.Each such request is made in accordance with the terms of this Section 11. 

ii.If a request for Reconciliation is timely made after Purchaser has received the Completion Amount, and the Reconciliation results in part of the Completion Amount being refunded to Merchant, then Purchaser shall continue to receive weekly deliveries until it receives the Completion Amount. 

iii.If Purchaser becomes aware that it has received funds that it is not entitled to, then Purchaser shall return those funds to the Merchant without request by the Merchant for reconciliation as set forth above. 

d.Unless Purchaser has received the Completion Amount, Purchaser is entitled to continue receiving weekly deliveries whether or not Merchant has made a request for Reconciliation. Merchant agrees not to take any action to interfere with weekly deliveries based on the pendency of a request for Reconciliation. 

12.Adjustment of Weekly Delivery Amount. 

 

a.If a Reconciliation is performed that results in a refund to the Merchant of at least 20% of the aggregate Weekly Delivery Amounts received by Purchaser during the applicable Reconciliation Month, Merchant shall have the option to request, subject to the requirements of Section 13 below, modification (“Adjustment”) of the Weekly Delivery Amount on a going-forward basis. Purchaser in its sole and absolute discretion may allow a temporary Adjustment upon Merchant’s proof of circumstances warranting such Adjustment, such as a natural disaster requiring temporary closure of Merchant’s business. After an Adjustment is granted, the adjusted Weekly Delivery Amount shall replace and supersede the amount of the Weekly Delivery Amount set forth in the preamble of this Agreement and future weekly deliveries shall be made in the adjusted amount. All Adjustments made in accordance with this section or other sections of this Agreement, shall be effective for one-month, after which time, the Merchant must provide Purchaser with its bank statements each month to allow Purchaser to re-evaluate the Merchant’s information to determine whether a continued Adjustment is warranted. 

b.The Adjustment of the Weekly Delivery Amount shall be performed by Purchaser within five (5) Business Days following its receipt of the Merchant’s request for Adjustment. 

13.Request for Adjustment Procedure. 

 

a.It shall be Merchant’s sole responsibility and right to initiate the Adjustment by sending a request for Adjustment to Purchaser. 

b.A request for Adjustment (an “Adjustment Request”) shall be in writing, shall include copies of: (i) Merchant’s three (3) consecutive bank statements for the Approved Bank Account or Lockbox Account, as applicable, immediately preceding the date of Purchaser’s receipt of the Adjustment Request; (ii) Merchant’s three (3) consecutive payment card processing statements immediately preceding the date of Purchaser’s receipt of the Adjustment Request; and/or (iii) Merchant’s bank statements and payment card processing statements previously provided by Merchant to Purchaser when applying to sell Future Receipts to Purchaser, or when applying for the most recent Adjustment that was made, if applicable. The Adjustment Request shall be sent by email to Purchaser at customer.service@libertasfunding.com within five (5) Business Days after the date that is the later of the last day for which activity is shown on the latest bank statement enclosed with the Adjustment Request and the last day for which activity is shown on the latest card processing statement enclosed with the Adjustment Request (time being of the essence). Any Adjustment Request received after this deadline will not be honored. 

c.Merchant may request Adjustment of the Weekly Delivery Amount as many times as it deems proper, and Purchaser shall comply with such Adjustment Requests, provided that: 

i.Each Adjustment Request is made in accordance with the requirements set forth in this Section 12; 

ii.No Adjustment Request may be made after Purchaser has received the Completion Amount; and 

iii.Unless Purchaser has received the Completion Amount, Purchaser is entitled to continue receiving weekly deliveries whether or not Merchant has made an Adjustment Request. Merchant agrees not to take any action to interfere with weekly deliveries based on the pendency of an Adjustment Request. 


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IV.Payment Card Split Method Provisions. The following terms (see Sections 14-16) apply if the Payment Cared Split Method is used, unless otherwise specified herein. 

14.Approved Card Processor. Merchant agrees to enter into a payment card processing agreement with a payment card processor approved by Purchaser (the “Approved Card Processor”) in order to obtain card processing services for credit cards, charge cards, debit cards, prepaid cards, or other payment cards used to purchase Merchant’s goods and/or services. If Merchant has entered into a payment card processing agreement before the date of this Agreement, Merchant may request that Purchaser review such agreement and any other information it deems pertinent for approval of the existing payment card processor in the sole and absolute discretion of Purchaser. Merchant agrees to process all of its payment card transactions through the Approved Card Processor, and not to switch to a different payment card processor or use an additional payment card processor without Purchaser’s express written consent. If Purchaser permits Merchant to use a different payment card processor, the new processor shall become the Approved Card Processor. In the event the Approved Card Processor becomes unavailable or Purchaser requests that a different payment card processor be used for any reason (such as the Approved Card Processor failing to timely deliver the Specified Percentage of Future Receipts to Purchaser on a consistent basis), Merchant shall arrange for another Approved Card Processor immediately, and in no event later than five calendar days after the Approved Card Processor becomes unavailable or Purchaser requests the designation of a new Approved Card Processor. 

15.Processing Arrangement. Merchant hereby authorizes and directs the Approved Card Processor, and any other processor, acquirer, service provider, or financial institution taking custody of, holding, possessing, or issuing payment instructions with respect to Future Receipts (together, the “Receipts Custodians”) to deliver the Specified Percentage of Future Receipts on each Business Day (the “Weekly Delivery Amount”) to Purchaser rather than Merchant until Purchaser has received the Completion Amount, or, in the event that Purchaser declares the entire Completion Amount to be deliverable based on a breach of this Agreement, to deliver this amount. On days when banks are not open, the Specified Percentage will be delivered to Purchaser on the next banking day. For example, the Specified Percentage for Friday, Saturday, and Sunday will be delivered on the following Monday (or Tuesday if Monday is a bank holiday). Merchant acknowledges that the Approved Card Processor will be acting on behalf of Purchaser to collect the Specified Percentage of Future Receipts. Merchant agrees that the Future Receipts sold under this Agreement are Purchaser’s property. Purchaser shall have no obligation to refund or return the Amount Sold or any portion thereof to Merchant in the event that the Approved Card Processor or any other Receipts Custodian initiates a refund, credit, reversal, or chargeback of a transaction subject to this Agreement, as such adjustments typically are netted against future card volume. Merchant agrees that when a Receipts Custodian takes custody of, holds, possesses, or issues payment instructions with respect to Future Receipts, it does so in trust for Purchaser. If there has not been a default, a Receipts Custodian will not deliver any particular day’s Weekly Amount to us if that Weekly Amount has already been delivered to us by another Receipts Custodian. Merchant agrees that it does not have the right to revoke or otherwise seek to override the authorization and direction set forth in this section and that this authorization may only be revoked by Purchaser. You agree that a Receipts Custodian may rely on any instructions issued by us with respect to the delivery of the Future Receipts, including an instruction to deliver all Future Receipts to us in the event we declare the Completion Amount to be deliverable based on a breach of this Agreement. You waive and release any and all claims you may have against any Receipts Custodian that are in any way related to the Receipts Custodian delivering Future Receipts to us as described in this section. You authorize each Receipts Custodian to provide us with any and all information we request about the Receivables that Receipts Custodian possesses or has access to, including without limitation information about weekly volumes, number of transactions, distributions, chargebacks, offsets, withdrawals, and totals. YOU, YOUR SUCCESSORS AND PERMITTED ASSIGNEES AND AFFILIATES, AGREE TO FOREVER DEFEND, PROTECT, INDEMNIFY AND HOLD HARMLESS PURCHASER, EACH RECEIPTS CUSTODIAN, AND THEIR AND OUR SUCCESSORS, ASSIGNS, OFFICERS, DIRECTORS, MANAGERS, MEMBERS, AFFILIATES, AND REPRESENTATIVES AGAINST ALL DAMAGES, EXPENSES, CLAIMS, SUITS, DEMANDS, COSTS, ATTORNEYS’ FEES OR LOSSES ARISING OUT OF OR ALLEGED TO HAVE ARISEN OUT OF OR IN CONNECTION WITH DELIVERING FUTURE RECEIPTS TO US AS DESCRIBED IN THIS SECTION. IN NO EVENT WILL WE OR THE RECEIPTS CUSTODIANS BE LIABLE TO YOU OR TO ANY THIRD PARTY FOR ANY LOSS OF USE, REVENUE OR PROFIT OR LOSS OF DATA OR FOR ANY DIRECT, CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL OR PUNITIVE DAMAGES, WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, REGARDLESS OF WHETHER SUCH DAMAGE WAS FORESEEABLE AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. The Parties agree that any amounts due a Receipts Custodian under your agreement with such Receipts Custodian or otherwise take priority over amounts to be delivered to us under this Agreement. The Parties agree that each Receipts Custodian is a third-party beneficiary of this Agreement and may rely on this Agreement even though it is not a party to this Agreement. You grant to us an irrevocable power of attorney, coupled with an interest, and appoint us and our designees as your attorney-in-fact, to take any and all actions necessary or appropriate to direct any new or additional processor to make payment to us as contemplated by this Section. 

a.Processing Trial. After this Agreement has been executed by Purchaser and Merchant, Purchaser has the option in its sole and absolute discretion to conduct a processing trial (the “Processing Trial”) to determine whether the Specified Percentage will be correctly processed and/or reported by the Approved Card Processor to Purchaser. If Purchaser elects to conduct a Processing Trial, Merchant acknowledges and agrees that Purchaser will decide in its sole and absolute discretion whether to purchase the Amount Sold after completion of the Processing Trial. If Purchaser elects not to do so, any amounts received by Purchaser during the Processing Trial shall be refunded to the Merchant. 

V.MERCHANTS OBLIGATIONS, COVENANTS, REPRESENTATIONS AND WARRANTIES Merchant agrees, covenants, represents, and warrants as follows at the time it executes this Agreement and on a continuing basis until such time as Purchaser has received the Completion Amount or Merchant has filed for bankruptcy or gone out of business in the ordinary course: 

a.Business Purpose; Use of Purchase Price. MERCHANT REPRESENTS AND WARRANTS THAT IT IS ENTERING INTO THIS AGREEMENT SOLELY FOR BUSINESS PURPOSES AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES. Merchant agrees to use the Purchase Price exclusively for the benefit and advancement of Merchant’s business operations and for no other purpose. 

b.Financial Condition and Financial Information. Merchant represents and warrants that its bank and financial statements, copies of which have been furnished to Purchaser, and future statements which may be furnished hereafter pursuant to this Agreement or upon Purchaser’s  


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request, fairly represent the financial condition of Merchant or other information set forth therein as of the dates such statements are issued, and prior to execution of the Agreement there have been no material adverse changes, financial or otherwise, in such condition, operation or ownership of Merchant. Merchant has a continuing, affirmative obligation to advise Purchaser of any material adverse change in its financial condition, operation, or ownership. Purchaser may request statements at any time during the term of this Agreement and Merchant shall provide them to Purchaser within Five (5) Business Days. Merchant’s failure to do so is a material breach of this Agreement.

c.Read Only Access to the Approved Bank Account and Approved Card Account. Merchant hereby agrees that, until Purchaser has received the Completion Amount, Purchaser shall have the right to perform ongoing read-only electronic monitoring of transactions occurring in the Approved Bank Account and Merchant’s account with the Approved Card Processor (the “Approved Card Account”). Merchant agrees to provide Purchaser all required online access codes for the Approved Bank Account and the Approved Card Account. If Purchaser’s electronic (online) access to Merchant’s Approved Bank Account or the Approved Card Account is disabled for any reason, Merchant shall immediately and diligently undertake all steps required of it to restore Purchaser’s access to both accounts. Merchant’s failure to comply with the provisions of this Section 16 shall constitute Merchant’s material breach of its obligations under this Agreement. 

d.Governmental Approvals. Merchant represents and warrants that it is in compliance and, until Purchaser receives the Completion Amount, shall be in compliance with all laws and has valid permits, authorizations and licenses to own, operate and lease its properties and to conduct the business in which it is presently engaged. 

e.Good Standing. Merchant represents and warrants that it is a corporation/limited liability company/limited partnership/other type of business entity that is in good standing and duly incorporated or otherwise organized and validly existing under the laws of its jurisdiction of incorporation or organization and has full power and authority necessary to carry its business as it is now being conducted. 

f.Authorization. Merchant represents and warrants that it has all requisite power to execute, deliver and perform this Agreement and consummate the transactions contemplated hereunder; entering into this Agreement will not result in breach or violation of, or default under, any agreement or instrument by which Merchant is bound or any statute, rule, regulation, order, or other law to which Merchant is subject, nor require the obtaining of any consent, approval, permit or license from any governmental authority having jurisdiction over Merchant. All organizational and other proceedings required to be taken by Merchant to authorize the execution, delivery and performance of this Agreement have been taken. The person signing this Agreement on behalf of Merchant represents and warrants that he or she has full power and authority to bind Merchant to perform its obligations under this Agreement. 

g.Accounting Records and Tax Returns. Merchant shall treat receipt of the Purchase Price and delivery of the Specified Percentage of Future Receipts in a manner consistent with its nature as a true sale of Future Receipts in its accounting records and tax returns and further agrees that Purchaser is entitled to audit Merchant’s accounting records upon reasonable Notice in order to verify compliance. Merchant hereby waives any rights of privacy, confidentiality, or taxpayer privilege in any litigation or arbitration arising out of this Agreement in which Merchant asserts that this transaction is anything other than a sale of future receipts. 

h.Taxes; Workers Compensation Insurance. Merchant will promptly pay, when due, all taxes, including, without limitation, income, employment, sales and use taxes, imposed upon Merchant’s business by law, and will maintain workers compensation insurance required by applicable governmental authorities. 

i.Business Insurance. N/A 

j.No Change of Business. You will not materially change the goods or services you sell, materially change the nature of your business, change the business entity through which you carry on your business, change any of the locations where you operate your business, or change the name under which you do business without first notifying us and obtaining our prior written consent. 

k.No Closing of Business. Merchant represents and warrants that it has no current plans to close its business either temporarily (for renovations, repairs or any other purpose), or permanently. Merchant agrees that, until Purchaser receives the Completion Amount, Merchant will not voluntarily close its business on a permanent or temporary basis for renovations, repairs, or any other purposes. Notwithstanding the foregoing, Merchant shall have the right to close its business temporarily if such closing is necessitated by a requirement to conduct renovations or repairs imposed upon Merchant’s business by legal authorities having jurisdiction over Merchant’s business (such as from a health department or fire department) or if such closing is necessitated by circumstances outside Merchant’s reasonable control. Prior to any such temporary closure of its business, Merchant shall provide Purchaser ten (10) Business Days’ advance notice, or as much notice as reasonably possible under the circumstances. 

l.No Pending Bankruptcy. As of the date of Merchant’s execution of this Agreement, Merchant is not insolvent, has not filed, and does not contemplate filing, any petition for bankruptcy protection under Title 11 of the United States Code, and there has been no involuntary bankruptcy petition brought or threatened against Merchant. Merchant represents that it has not consulted with a bankruptcy attorney on the issue of filing bankruptcy within the six-month period immediately preceding the date of this Agreement. A breach of any of these representations shall be a material breach of this Agreement. If you go out of business or become the subject of a voluntary or involuntary bankruptcy filing within forty-five (45) days of our purchasing the Amount Sold, you agree that there will be a rebuttable presumption of a material breach. 

m.Estoppel Certificate. Each time that we request, you will, upon at least one (1) day’s prior notice from us, execute, acknowledge and deliver to us and/or to any other person, person firm or corporation specified by us, a statement certifying that this Agreement is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and stating the dates which all or any portion of the Amount Sold has been delivered. 

n.Unencumbered Future Receipts. Merchant has and will continue to have good, complete and marketable title to all Future Receipts, free and clear of any and all liabilities, liens, claims, changes, restrictions, conditions, options, rights, mortgages, security interests, equities, pledges and encumbrances of any kind or nature whatsoever or any other rights or interests other than by virtue or entering into this Agreement. Merchant shall not sell Future Receipts or obtain any additional financing before Purchaser has received the Completion Amount without Purchaser’s express written consent. Merchant shall not take any action inconsistent with or in derogation of Purchaser’s ownership of the Amount Sold. 


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o.No Default Under Contracts with Third Parties. Merchant’s execution of and/or performance of its obligations under this Agreement will not cause or create an event of default by Merchant under any contract which Merchant is or may become a party to, or otherwise violate any of Merchant’s obligations to third parties. 

p.Right of Access. In order to ensure Merchant’s compliance with the terms of this Agreement, Merchant hereby grants Purchaser the right to enter, without notice, the premises of Merchant’s business for the purpose of inspecting and checking Seller’s transaction processing terminals to ensure the terminals are properly programmed to submit and or batch Merchant’s Future Receipts to its Approved Card Processor and to ensure that Merchant has not violated any other provision of this Agreement. Furthermore, Merchant hereby grants Purchaser and its employees and consultants’ access to Merchant’s employees and records and all other items of property located at the Merchant’s place of business during the term of this Agreement. Merchant hereby agrees to provide Purchaser, upon request, all and any information concerning Merchant’s business operations, banking relationships, names and contact information of Merchant’s suppliers, vendors and landlord(s), to allow Purchaser to interview any of those parties regarding any matters relevant to this Agreement. 

q.Phone Recordings and Contact. Merchant agrees that any call between Merchant and Purchaser and its owners, managers, employees and agents may be recorded and/or monitored. 

r.Knowledge and Experience of Decision Makers. The persons authorized to make management and financial decisions on behalf of Merchant with respect to this Agreement have such knowledge, experience and skill in financial and business matters in general and with respect to transactions of a nature similar to the one contemplated by this Agreement so as to be capable of evaluating the merits and risks of, and making an informed business decision with regard to, Merchant entering into this Agreement. 

s.Merchants Due Diligence. The person authorized to sign this Agreement on behalf of Merchant: (i) has received all information that such person deemed necessary to make an informed decision with respect to a transaction contemplated by this Agreement; and (ii) has had unrestricted opportunity to make such investigation as such person desired pertaining to the transaction contemplated by this Agreement and verify any such information furnished to him or her by Purchaser. 

t.Arms-Length Transaction. The person signing this Agreement of behalf of Merchant: (a) has read and fully understands content of this Agreement; (b) has consulted to the extent he/she wished with Merchant’s own counsel in connection with the entering into this Agreement; (c) he or she has made sufficient investigation and inquiry to determine whether this Agreement is fair and reasonable to Merchant, and whether this Agreement adequately reflects his or her understanding of its terms. 

u.Integration; No Reliance on Oral Representations. This Agreement contains the entire agreement between Merchant and Purchaser with respect to the subject matter of this Agreement and supersedes each course of conduct previously pursued or acquiesced in, and each oral agreement and representation previously made, by the parties with respect thereto (if any), whether or not relied or acted upon. No course of performance or other conduct subsequently pursued or acquiesced in, and no oral agreement or representation subsequently made, whether or not relied or acted upon, and no usage of trade, whether or not relied or acted upon, shall amend this Agreement or impair or otherwise affect the parties’ obligations pursuant to this Agreement or any rights and remedies of the parties to this Agreement. 

 

VI.PLEDGE OF SECURITY: 

 

17.Acknowledgment of Security Interest and Security Agreement. The Future Receipts sold by Merchant to Purchaser pursuant to this Agreement are “accounts” or “payment intangibles” as those terms are defined in the Uniform Commercial Code in effect in the state in which Merchant is located (the “UCC”). Such Sale shall constitute and shall be construed and treated for all purposes as a true and complete sale, conveying good title to the Future Receipts free and clear of any liens and encumbrances, from Merchant to Purchaser. To the extent the Future Receipts are “accounts” or “payment intangibles” then (i) the sale of the Future Receipts creates a security interest as defined in the UCC; (ii) this Agreement constitutes a “security agreement” under the UCC; and (iii) Purchaser has all the rights of a secured party under the UCC with respect to such Future Receipts. Merchant further agrees that, with or without an Event of Default, Purchaser may notify account debtors, or other persons obligated on the Future Receipts, on holding the Future Receipts of Merchant’s sale of the Future Receipts and may instruct them to make payment or otherwise render performance to or for the benefit of Purchaser. 

18.Financing Statements. Merchant authorizes Purchaser to file one or more UCC-1 forms consistent with the UCC to give notice that the Amount Sold is the sole property of Purchaser. The UCC filing may state that such sale is intended to be a sale and not an assignment for security and may state that Merchant is prohibited from obtaining any financing that impairs the value of the Amount Sold or Purchaser’s ability to collect same. Merchant authorizes Purchaser to debit the Approved Bank Account or Lockbox Account, as applicable, for all costs incurred by Purchaser associated with the filing, amendment or termination of any UCC filings. 

19.Security. You understand that we have the right to take delivery of the Future Receipts we purchased as they are generated in the ordinary course of your business. The Security Interest granted in this section is being given solely for the purpose of ensuring that you do not take any action to deprive us of that right. This Security Interest does not mean that we have made a loan to you, does not create a debt, and does not make you a debtor or us a creditor. As security for the prompt and complete performance of any and all obligations, covenants, and agreements of Merchant under this Agreement, now or hereafter arising from, out of, or relating to this Agreement, whether direct, indirect, contingent or otherwise (hereinafter referred to collectively as the “Merchant Obligations”), Merchant hereby pledges, assigns and hypothecates to Purchaser and grants to Purchaser a continuing, perfected and first priority lien upon and security interest in, to and under all of Merchant’s right, title and interest in and to the following (collectively, the “Collateral”), whether now existing or hereafter from time to time acquired: 

a.all accounts, including without limitation, all deposit accounts, accounts-receivable, and other receivables, chattel paper, documents, equipment, general intangibles, instruments, and inventory, as those terms are defined by Article 9 of the UCC, now or hereafter owned or acquired by Merchant; and 

b.all Merchant’s proceeds, as that term is defined by Article 9 of the UCC. 

20.Termination of Pledge. Upon the performance by Merchant in full of the Merchant Obligations, the security interest in the Collateral pursuant to this Pledge shall automatically terminate without any further act of either party being required, and all rights to the Collateral shall revert to Merchant. Upon any such termination, Purchaser will execute, acknowledge (where applicable) and deliver such satisfactions, releases and termination statements, as Merchant shall reasonably request. 


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21.Representations with Respect to Collateral. Merchant hereby represents and warrants to Purchaser that: the execution, delivery and performance by Merchant of this Pledge, and the remedies in respect of the Collateral under this Pledge (i) have been duly authorized; (ii) do not require the approval of any governmental authority or other third party or require any action of, or filing with, any governmental authority or other third party to authorize same (other than the filing of the UCC-1s); (iii) do not and shall not (A) violate or result in the breach of any provision of law or regulation, any order or decree of any court or other governmental authority, or (B) violate, result in the breach of or constitute a default under or conflict with any indenture, mortgage, deed of trust, agreement or any other instrument to which Merchant is a party or by which any of Merchant’s assets (including, without limitation, the Collateral) are bound. 

22.Further Assurances. Upon the request of Purchaser, Merchant at its sole cost and expense, shall execute and deliver all such further UCC- 1s, continuation statements, assurances and assignments of the Collateral, and consents with respect to the pledge of the Collateral and the execution of this Pledge, and shall execute and deliver such further instruments, agreements and other documents and do such further acts and things, as Purchaser may request in order to more fully effectuate the purposes of this Pledge and the assignment of the Collateral and obtain the full benefits of this Pledge and the rights and powers herein created. 

23.Attorney-in-fact. Merchant hereby authorizes Purchaser at any time to take any action and to execute any instrument, including without limitation to file one or more financing statements and/or continuation statements, to evidence and perfect the security interest created hereby and irrevocably appoints Purchaser as its true and lawful attorney-in-fact, which power of attorney shall be coupled with an interest, with full authority in the place and stead of Merchant and in the name of Merchant or otherwise, from time to time, in Purchaser’s sole and absolute discretion, including without limitation (a) for the purpose of executing such statements in the name of and on behalf of Merchant, and thereafter filing any such financing and/or continuation statements and (b) to receive, endorse and collect all instruments made payable to Merchant. 

 

VII.EVENTS OF DEFAULT AND REMEDIES: 

 

24.Events of Default by Merchant. The occurrence of any of the following events shall constitute an “Event of Default” by Merchant: 

a.Events of Default. 

 

b.Bad Acts. If you commit any of the following acts (“Bad Acts”) without our prior written consent before we receive the Completion Amount, you will be in default: 

i.you sell, transfer or otherwise encumber or attempt to sell, transfer or otherwise encumber Future Receipts, whether or not such Future Receipts are part of the Amount Sold, sometimes referred to as “stacking” our Purchase Price with other funding companies; 

ii.you encumber or allow any encumbrance to attach to our interest in the Amount Sold; 

iii.you sell all or substantially all of your assets used in the operation of your business to a third party; 

iv.you materially change the operation of your business (e.g., changes in industry, concept, size, etc.); 

v.you stop accepting a particular method of payment while you remain open for business; 

vi.you change your legal name or jurisdiction of formation, or carry-on business through a different business entity; 

vii.you change, close, or terminate the Approved Bank Account or Approved Card Processor, or interfere with the lockbox arrangement, without our express written consent; 

viii.you do not obtain a replacement Approved Bank Account or Approved Card Processor acceptable to us within fifteen (15) days after your bank or processor terminates its relationship with you; 

ix.you process any card transaction through a payment card processor other than the Approved Card Processor; 

x.you provide us with false or misleading information about your business or revenue (in your application or otherwise) that is material to our decision to purchase Future Receipts from you; 

xi.you deposit or cause to be deposited by others Future Receipts into any account other than the Approved Bank Account or Lockbox Account, if applicable; xii. you take or fail to take an action that hinders our taking delivery of our Specified Percentage of Future Receipts from the Approved Bank Account, Lockbox Account, or any Receivables Custodian, as applicable; xiii. you disconnect or interfere with the operation of Purchaser’s bank monitoring software; or 

xiv.you commit any act or omission specified in this Agreement to be a material breach. However, we will not consider any of these acts to be Bad Acts if they occur because you go out of business in the ordinary course. These Bad Acts are prohibited solely to protect our ability to collect the Amount Sold and receive the benefit of our bargain. They do not create any obligation for Merchant to deliver Future Receipts to Purchaser if they are simply not generated by Merchant’s business. 

c.Other Breaches. If you commit an act that is not a Bad Act but that otherwise violates a term or covenant in this Agreement (an “Other Breach”), you will be in default. 

25.Remedies. If you commit a Bad Act, you will be liable to us in an amount in cash equal to (a) the undelivered portion of the Amount Sold, plus (b) any other fees and other amounts due to us under this Agreement, plus (c) any additional amounts you would owe us for committing an Other Breach. If you commit an Other Breach, you will be liable to us for all damages resulting from the Other Breach, including, but not limited to, our reasonable attorneys’ fees, expenses and costs incurred in any proceeding pursued against you to recover the amounts due us under this Agreement. You agree to pay us the amounts due or we may (d) withdraw such amounts from the Approved Bank Account or Lockbox Account, as applicable, or any other account into which you deposit Future Receipts, via ACH or electronic checks; (e) direct the Approved Card Processor, any other Receipts Custodian, and/or any other payment card processor you use in violation of this Agreement to deliver all of your Future Receipts to us until we have received the amount due; (f) enforce our rights as a secured creditor under the UCC including, without limitation, notifying any of your account debtor(s) of our security interest; (g) enforce Guarantor’s personal guaranty of performance provisions of this Agreement against the Guarantor(s) without first seeking recourse from Merchant; (h) commence a suit in equity or by action at law, or both, whether for the specific performance of any covenant, agreement or other provision contained herein, or to enforce the discharge of Merch ant’s and Guarantor’s obligations hereunder or any other legal or equitable right or remedy including without limitation Purchaser’s rights of a secured party under the UCC. All rights available to us are cumulative and not exclusive of any other remedies available to us in law or equity. 

26.Power of Attorney. Each Merchant and Guarantor irrevocably appoints Purchaser and its representatives as their respective agents and attorneys-in-fact with full authority to take any action or execute any instrument or document to do the following: (A) to settle all obligations due to Purchaser from any payment card processor and/or account debtor(s) of Merchant; (B) upon occurrence of a Bad Act, to perform any  


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and all such obligations of Merchant under this Agreement, including without limitation (i) to collect monies due or to become due under or in respect of any of the Collateral; (ii) to receive, endorse and collect any checks, notes, drafts, instruments, documents or chattel paper in connection with clause (i) above; (iii) to sign Merchant’s name on any invoice, bill of lading, or assignment directing customers or account debtors to make payment directly to Purchaser; and (iv) to file any claims or take any action or institute any proceeding against Merchant and/or Guarantor which Purchaser may deem necessary for the collection of any portion of the undelivered Amount Sold from the Collateral, or otherwise to enforce its rights under this Agreement.

27.Service of Process. Merchant and Guarantor(s) consent to service of process and legal notices made by Certified or Priority Mail delivered by the United States Postal Service and addressed to the respective party’s address set forth on the first page of this Agreement or any other address(es) provided in writing to Purchaser by Merchant or Guarantor(s), and unless applicable law or rules provide otherwise, any such service or legal notice will be deemed complete upon dispatch. Merchant and Guarantor(s) agree that it will be precluded from asserting that it did not receive service of process or any other legal notice mailed to the address located in the Merchant Information and Owner Information sections set forth on the first page of this Agreement if it does not furnish a certified mail return receipt signed by Purchaser demonstrating that Purchaser was provided with a notice of a change of address. 

 

VIII.ADDITIONAL TERMS: 

 

28.Fees. In addition to all other sums due to Purchaser under this Agreement, Merchant shall pay to Purchaser: 

a.An Origination Fee of $17,577.00 upon entering into this Agreement as reimbursement of Purchaser’s costs associated with entering into this Agreement (the cost of due diligence on the Merchant’s business, financial and legal due diligence, etc.) 

b.A Non-Sufficient Funds (“NSF”) fee of $35 in each and every instance when delivery of the Weekly Delivery Amount to Purchaser has failed due to insufficient funds in the Merchant’s Approved Bank Account or Lockbox Account, as applicable; provided, however, that no NSF fee shall be due when the delivery failed because Merchant’s business did not generate sufficient Future Receipts to cover the Weekly Delivery Amount and Merchant promptly requested Reconciliation and/or Adjustment. 

c.$100 in each and every instance when Merchant blocks Purchaser’s access (or otherwise prevents Purchaser from accessing) Merchant’s bank accounts. 

d.$2,500 in each and every instance when, upon occurrence of an Event of Default, Purchaser shall have agreed to waive Merchant’s default. 

29.Financial Condition. Merchant and its Guarantor(s) authorize Purchaser and its agents to investigate their financial responsibility and history and will provide to Purchaser any bank or financial statements, tax returns, etc., as deems necessary prior to or at any time after execution of this Agreement. A photocopy or electronic image of this authorization will be deemed as acceptable for release of financial information. Purchaser is authorized to update such information and financial profiles from time to time as it deems appropriate. 

30.Transactional History. Merchant shall execute written authorization(s) to their bank(s) to provide Purchaser with Merchant’s banking and/or credit-card processing history. 

31.No Liability. In no event shall Purchaser be liable for any claims asserted by Merchant or its Guarantor under any legal theory for lost profits, lost revenues, lost business opportunities, exemplary, punitive, special, incidental, indirect or consequential damages, each of which is waived by Merchant and Guarantor(s). 

32.Right to Cancel. 

i.Notwithstanding anything to the contrary set forth in this Agreement, Purchaser shall have the right to cancel this agreement any time prior to its delivery of the Purchase Price to Merchant and, upon such cancellation, this Agreement shall become null, and void and the parties shall have no obligation to, or rights against, each other, except that all sums delivered by Merchant to Purchaser on account of entering into this Agreement shall be promptly returned to Merchant. 

ii.Notwithstanding anything to the contrary set forth in this Agreement, in the event Merchant has not been in default under this Agreement, Merchant shall have the right to cancel this Agreement any time until the midnight of the second (2nd) Business Day following the date of its receipt of the Purchase Price by notifying Purchaser of such cancellation by notice sent in accordance with this Agreement. Upon timely delivering such cancellation notice to Purchaser, and further provided that Merchant has otherwise complied with the provisions of this Agreement, Merchant shall refund the entire amount of the Purchase Price back to Purchaser within five (5) Business Days following the date of Merchant’s receipt of the Purchase Price. Upon such refund of the Purchase Price back to Purchaser, this Agreement shall become null and void and the parties shall have no remaining obligations to or rights against each other except that Purchaser shall have the right keep, as fair and adequate compensation for its costs of entering into this Agreement with Merchant, the origination fee and all Weekly Delivery Amounts received by Purchaser prior to the date when this Agreement is terminated. 

 

IX.GUARANTY OF PERFORMANCE OF MERCHANTS OBLIGATIONS: 

 

33.Guarantors Representations. Guarantor represents and warrants to Purchaser that: 

 

a.Guarantor is an owner, officer, or manager of Merchant and will directly benefit from Purchaser and Merchant entering into the Agreement. 

b.Guarantor understands and acknowledges that Purchaser is not willing to enter into the Agreement unless Guarantor irrevocably, absolutely and unconditionally guarantees prompt and complete performance of any and all liabilities, obligations, covenants or agreements of Merchant under this Agreement, now or hereafter arising from, out of or relating to this Agreement, whether direct, indirect, contingent or otherwise (hereinafter referred to collectively as the “Merchant Obligations”). 

34.Guaranty of Merchants Obligations. Guarantor hereby irrevocably, absolutely and unconditionally guarantees to Purchaser prompt, full, faithful, and complete performance and observance of all Merchant Obligations; and Guarantor unconditionally covenants to Purchaser that if Merchant shall at any time breach any of the Merchant Obligations, Guarantor shall perform (or cause to be performed) the Merchant Obligations and pay all damages and other amounts stipulated in this Agreement with respect to the non-performance of the Merchant Obligations, or any of them. 

35.Guarantors Other Agreements. Guarantor will not dispose, convey, sell or otherwise transfer, or cause Merchant to dispose, convey, sell or otherwise transfer, any material business assets of Merchant without the prior written consent of Purchaser, which consent may be withheld for any reason, until Purchaser has received the Completion Amount. Guarantor shall pay to Purchaser upon demand all expenses (including,  


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without limitation, reasonable attorneys’ fees and disbursements) incurred as the result of, or incidental to, or relating to, the enforcement or protection of Purchaser’s rights against Merchant and Guarantor under the Agreement. This Guaranty is binding upon Guarantor and Guarantor’s heirs, legal representatives, successors and assigns and shall inure to the benefit of and may be enforced by the successors an assign of Purchaser. The obligation of Guarantor shall be unconditional and absolute, regardless of the unenforceability of any provision of any agreement between Merchant and Purchaser, or the existence of any defense, setoff or counterclaim, which Merchant may assert. Purchaser is hereby authorized, without notice or demand and without affecting the liability of Guarantor hereunder, to at any time renew or extend Merchant’s obligations under the Agreement or otherwise modify, amend or change the terms of the Agreement.

36.Two Or More Guarantors. If there is more than one Guarantor, “Guarantor” in this Agreement shall mean all Guarantors and the obligations of the Guarantors hereunder shall be joint and several. 

37.Waiver; Remedies. No failure on the part of Purchaser to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver, nor shall any single or partial exercise of any right under this Guaranty preclude any other or further exercise of any other right. The remedies provided in this Guaranty are cumulative and not exclusive of any remedies provided by law or equity. In the event that Merchant fails to perform any obligation under the Agreement, Purchaser may enforce its rights under this Guaranty without first seeking to obtain performance for such default from Merchant or any other guarantor. 

38.Acknowledgment of Purchase. Guarantor acknowledges and agrees that the Purchase Price paid by Purchaser to Merchant in exchange for the Amount Sold is adequate consideration for the purchase of the Amount Sold and is not a loan or financial accommodation from Purchaser to Merchant. Guarantor specifically acknowledges Purchaser is not a lender, bank, or credit card processor, and that Purchaser has not offered any loans to Merchant. Guarantor waives any claims or defenses of usury in any action arising out of this Agreement. 

39.Severability. If for any reason any court of competent jurisdiction finds any provisions of this Agreement applicable to the Guarantor to be void or voidable, the parties agree that the court may reform such provision(s) to render the provision(s) enforceable ensuring that the restrictions and prohibitions contained in those provisions shall be effective to the fullest extent allowed under applicable law. 

40.Opportunity for Attorney Review. Guarantor represents that he/she has carefully read this Agreement and has, or had an opportunity to, consult with his or her attorney. Guarantor understands the contents of this Agreement, signs it as his or her free act and deed and agrees to be bound by the provisions hereof. 

 

X.MISCELLANEOUS: 

41.Modifications; Agreements. No modification, amendment, waiver or consent of any provision of this Agreement shall be effective unless the same shall be in writing and signed by all parties. 

42.Assignment. Purchaser may assign, transfer or sell its rights or delegate its duties hereunder, either in whole or in part without prior notice to the Merchant or the Guarantor. Neither Merchant nor Guarantor shall have the right to assign their respective rights or obligations under this Agreement without first obtaining Purchaser’s written consent. 

43.Notices. All notices, requests, consent, demands and other communications required or permitted to be given under this Agreement, other than service of process and legal notices (see section 27 above), shall be delivered by Certified mail, return receipt requested, to the respective parties to this Agreement at the addresses set forth in the Merchant Information and Owner Information sections on in the first page of this Agreement unless the Merchant and/or Guarantor(s) has received a Certified mail return receipt signed by Purchaser demonstrating that the Purchaser was provided with Merchant’s and/or Guarantors’(s’) notice of a change of address. Notices governed by this section shall become effective as of the date of the receipt. 

44.Waiver Remedies. No failure on the part of any party to exercise, and no delay in exercising, any right under this Agreement, shall operate as a waiver thereof, nor shall any single or partial exercise of any right under this Agreement preclude any other or further exercise thereof or the exercise of any other right. The remedies provided hereunder are cumulative and not exclusive of any remedies provided by law or equity. 

45.Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 

46.Governing Law, Venue and Jurisdiction. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of New York, without regard to any applicable principles of conflicts of law. Any lawsuit, action or proceeding arising out of or in connection with this Agreement shall be instituted exclusively in any court sitting in New York State (the “Acceptable Forums”). Each party signing this Agreement agrees that the Acceptable Forums are convenient, and irrevocably submits to the jurisdiction of the Acceptable Forums and waives any and all objections to inconvenience of the jurisdiction or venue. Should a proceeding be initiated in any other forum, the parties waive any right to oppose any motion or application made by either party to transfer such proceeding to an Acceptable Forum. 

47.Survival of Representation, etc. All representations, warranties and covenants herein shall survive the execution and delivery of this Agreement and shall continue in full force until all obligations under this Agreement shall have been complied with and satisfied in full and this Agreement shall have terminated. 

48.Severability. In case any of the provisions in this Agreement is found to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of any other provision contained herein shall not in any way be affected or impaired. 


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49.Waiver of Class Action; Waiver of Jury Trial. By entering into this agreement, the parties agree that they may bring claims against the other only in their individual capacity, and THE PARTIES ARE EACH EXPRESSLY WAIVING ANY AND ALL RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER IN ANY CLASS ACTION, PUTATIVE OR PURPORTED CLASS ACTION, REPRESENTATIVE ACTION, PRIVATE ATTORNEY GENERAL ACTION, OR SIMILAR ACTION RELATING TO ANY CLAIMS (AS HEREINAFTER DEFINED), WHETHER BROUGHT UNDER STATE OR FEDERAL LAW. The parties are each expressly waiving any and all right to join or consolidate claims in any proceeding with those of any other person (except any obligors and guarantors of the same agreement). Further, BY ENTERING INTO THIS AGREEMENT, THE PARTIES ARE EACH EXPRESSLY WAIVING THEIR RESPECTIVE RIGHTS TO A JURY TRIAL FOR ALL CLAIMS. The term “Claim” means any claim, dispute, or controversy (whether based on contract, tort, statute, or otherwise, and whether seeking monetary or any form of non-monetary relief) arising out of or relating to this Agreement or the relationship between or among the parties (collectively, “Claims”). The term Claims is to be given its broadest possible meaning, and includes pre-existing, present, and future Claims, and Claims regarding the enforceability or scope of this waiver. For purposes of this waiver only, the term “party” means that party and all of its respective parents, subsidiaries, affiliates, predecessors, successors, assigns, agents, vendors, employees, officers, and directors. THE PARTIES HERETO ACKNOWLEDGE THAT EACH MAKES THIS WAIVER KNOWINGLY, WILLINGLY AND VOLUNTARILY AND WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH THEIR ATTORNEYS. 

50.Captions. The captions in this Agreement are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this contract or any of the provisions hereof. 

51.Counterparts and Facsimile Signatures. This Agreement can be signed in one or more counterparts, each of which shall constitute an original and all of which when take together shall constitute one and the same agreement. Signatures delivered via facsimile and/or via Portable Digital Format (PDF) shall be deemed acceptable for all purposes, including without limitation the evidentially purposes. 

 

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MERCHANT NAME: FORELAND REFINING CORPORATION, et al.

(legal name of the business)

 

OWNER/GUARANTOR #1:

 

 

 

By:

/s/ David Sealock

 

/s/ David Sealock

 

 

 

Name: DAVID OWEN SEALOCK

 

Name: DAVID OWEN SEALOCK

Title: Chairman and CEO

 

SSN: [ REDACTED ]

FEIN: 742881250

 

 

 

 

 

 

 

 

OWNER/GUARANTOR #2:

 

 

 

 

 

 

 

/s/ Marcus Laun

 

 

 

 

 

 

 

Name: MARCUS GOETZ LAUN

 

 

 

SSN: [ REDACTED ]

 

 

 

 

 

 

 

 


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ESCROW AGREEMENT

This ESCROW AGREEMENT (this “Agreement”) dated as of this 25th day of August 2023 by and among Sky Quarry, Inc., a Delaware corporation (the “Company”), having an address at 222 South Main Street, Suite 500, Salt Lake City, UT 84101; Digital Offering, LLC, having an address at 1461 Glenneyre Street, Suite D, Laguna Beach, CA 92651 (“Placement Agent”),  and WILMINGTON TRUST, NATIONAL ASSOCIATION (the “Escrow Agent”), with its principal corporate trust office at 277 Park Avenue, 25th Floor, New York, NY 10172.  The Company and the Placement Agent, each a “Party,” are collectively referred to as “Parties” and individually, a “Party.”

 

All capitalized terms not herein defined shall have the meaning ascribed to them in that certain Purchase Agreement, dated as of or about August _, 2023 as amended or supplemented from time-to-time, including all attachments, schedules and exhibits thereto (the “Subscription Agreement”).

 

W I T N E S S E T H:

WHEREAS, the Company proposes to sell (the “Financing Transaction”) a maximum of 4,000,000 shares of our preferred stock, par value $0.001 (“Common Stock”), at an offering price of $2.50 per share (the “Shares”) for an offering amount of up to $10,000,000 in a private placement offering (the “Offering”) to investors (each, an “Investor”); and

WHEREAS,  subject to all conditions to closing being satisfied or waived, the closing(s) of the Offering shall take place from time to time until the earlier of (a) the date which is one year after this Offering commences or (b) the date on which this Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”) (the earlier of (a) or (b), the “Final Termination Date”); and

WHEREAS, there is no minimum offering amount and all funds shall only be returned to the potential Investors in the event the Offering is not consummated or if the Company, in its sole discretion, rejects all or a part of a particular potential Investor’s subscription; and

WHEREAS, in connection with the Financing Transaction contemplated by the Subscription Agreement, the Company entered into a Placement Agent Agreement between the Company and the Placement Agent, and certain other agreements, documents, instruments and certificates necessary to carry out the purposes thereof, including without limitation the Subscription Agreement (collectively, the “Transaction Documents”); and

WHEREAS, the Company and Placement Agent desire to establish an escrow account with the Escrow Agent into which the Company and Placement Agent shall instruct the Investors to deposit checks or make a wire transfer for the payment of money made payable to the order of “WILMINGTON TRUST, N.A. as Escrow Agent for Sky Quarry, Inc.,” and the Escrow Agent is willing to accept said checks and other instruments for the payment of money in accordance with the terms hereinafter set forth; and


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


WHEREAS, the Company and Placement Agent represent and warrant to the Escrow Agent that they have not stated to any individual or entity that the Escrow Agent’s duties will include anything other than those duties stated in this Agreement; and

WHEREAS, THE ISSUER AND THE PLACEMENT AGENT UNDERSTAND THAT THE ESCROW AGENT, BY ACCEPTING THE APPOINMTMENT AND DESIGNATION AS ESCROW AGENT HEREUNDER, IN NO WAY ENDORSES THE MERITS OF THE OFFERING OF THE SECURITIES.  THE ISSUER AND THE PLACEMENT AGENT AGREE TO NOTIFY ANY PERSON ACTING ON ITS BEHALF THAT THE ESCROW AGENT’S POSITION AS ESCROW AGENT DOES NOT CONSTITUTE SUCH AN ENDORSEMENT, AND TO PROHIBIT SAID PERSONS FROM THE USE OF THE ESCROW AGENT’S NAME AS AN ENDORSER OF SUCH OFFERING. The Issuer and the Placement Agent further agree to include with any sales literature, in which the Escrow Agent’s name appears and which is used in connection with such offering, a statement to the effect that the Escrow Agent in no way endorses the merits of the offering; and

WHEREAS, the Company and Placement Agent represent and warrant to the Escrow Agent that a copy of each document that has been delivered to the Investor and third parties that include Escrow Agent’s name and duties, has been attached hereto as Schedule I.

NOW, THEREFORE, IT IS AGREED as follows:

ARTICLE 1

ESCROW DEPOSIT

 

Section 1.1 Delivery of Escrow Funds. 

(a) Placement Agent and the Company shall instruct the Investor to deliver to Escrow Agent checks made payable to the order of “WILMINGTON TRUST, N.A. as Escrow Agent for Sky Quarry Inc.”, or wire transfer to: 

Wilmington Trust Company

ABA #: 031100092

A/C #: 165471-000

A/C Name: Sky Quarry Escrow

Attn: Ellen Jean-Baptiste

 

International Wires:

 

M&T

Buffalo, New York

ABA: 022000046

SWIFT: MANTUS33

Beneficiary Bank: Wilmington Trust

Beneficiary ABA: 031100092


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


A/C #: 165471-000

A/C Name: Sky Quarry Escrow

 

All such checks and wire transfers remitted to the Escrow Agent shall be accompanied by information identifying each Investor, subscription, the Investor’s social security or taxpayer identification number and address. In the event the Investor’s address and/or social security number or taxpayer identification number are not provided to Escrow Agent by the Investor, then Placement Agent and/or the Company agree to promptly upon request provide Escrow Agent with such information in writing.  The checks or wire transfers shall be deposited into a non interest-bearing account at WILMINGTON TRUST, NATIONAL ASSOCIATION entitled “WILMINGTON TRUST, N.A. as Escrow Agent for Sky Quarry, Inc.” (the “Escrow Account”).

Checks should be mailed to the following address:

Sky Quarry Escrow

c/o Wilmington Trust

1100 North Market Street

Wilmington, DE 19890

Attn: Workflow Management

 

(b)The collected funds deposited into the Escrow Account are referred to as the “Escrow Funds.” 

(c)The Escrow Agent shall have no duty or responsibility to enforce the collection or demand payment of any funds deposited into the Escrow Account.  If, for any reason, any check deposited into the Escrow Account shall be returned unpaid to the Escrow Agent, the sole duty of the Escrow Agent shall be to return the check to the Investor and advise the Company and Placement Agent promptly thereof. 

(d)All funds received by the Escrow Agent shall be held only in non-interest bearing bank accounts at WILMINGTON TRUST, NATIONAL ASSOCIATION. 

(e) In the event that market conditions are such that negative interest applies to amounts deposited with the Escrow Agent, the Company and Placement Agent  [jointly and severally] shall be responsible for the payment of such interest and the Escrow Agent shall be entitled to deduct from amounts on deposit with it an amount necessary to pay such negative interest. For the avoidance of doubt, the indemnification protections afforded to the Escrow Agent under Section 2.2 of this Agreement shall cover any interest-related expenses (including, but not limited to, negative interest) incurred by the Escrow Agent in the performance of its duties hereunder.

Section 1.2Release of Escrow Funds.  The Escrow Funds shall be paid by the Escrow Agent in accordance with the following: 

(a)In the event that the Company advises the Escrow Agent in writing that the Offering has been terminated (the “Termination Notice”), the Escrow Agent shall promptly return the funds paid by each Investor to such Investor without interest or offset. 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


(b)At each Closing, the Company and the Placement Agent shall provide the Escrow Agent with written instructions regarding the disbursement of the Escrow Funds in accordance with Exhibit A attached hereto and made a part hereof and signed by the Company and the Placement Agent (the “Written Direction”).   

(c)If by 5:00 P.M. Eastern time on the Final Termination Date, the Escrow Agent has not received Written Direction from the Company and Placement Agent regarding the disbursement of the Escrow Funds in the Escrow Account, if any, then the Escrow Agent shall promptly return such Escrow Funds, if any, to the Investors without interest or offset.  The Escrow Funds returned to the Investors shall be free and clear of any and all claims of the Escrow Agent. 

(d)The Escrow Agent shall not be required to pay any uncollected funds or any funds that are not available for withdrawal. 

(e) The Placement Agent or the Company will provide the Escrow Agent with the payment instructions for each Investor, to whom the funds should be returned in accordance with this section. 

(f) In the event that Escrow Agent makes any payment to any other party pursuant to this Escrow Agreement and for any reason such payment (or any portion thereof) is required to be returned to the Escrow Account or another party or is subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a receiver, trustee or other party under any bankruptcy or insolvency law, other federal or state law, common law or equitable doctrine, then the recipient party shall repay to the Escrow Agent upon written request the amount so paid to it. 

 

(g)The Escrow Agent shall, in its sole discretion, comply with judgments or orders issued or process entered by any court with respect to the Escrow Amount, including without limitation any attachment, levy or garnishment, without any obligation to determine such court's jurisdiction in the matter and in accordance with its normal business practices.  If the Escrow Agent complies with any such judgment, order or process, then it shall not be liable to any of the Parties or any other person by reason of such compliance, regardless of the final disposition of any such judgment, order or process. 

 

(h)Each Party understands and agrees that Escrow Agent shall have no obligation or duty to act upon a written direction delivered to Escrow Agent for the disbursement of all or part of the Escrow Amount under this Agreement (a “Written Direction”) if such Written Direction is not  

 

(i) in writing,

 

(ii) signed by, in the case of Company, any individual designated by Company on Exhibit B hereto or, in the case of Placement Agent, any individual designated by Placement Agent on Exhibit C hereto (in each case, each such individual an “Authorized Representative” of such Party), and


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


(iii) delivered to, and able to be authenticated by, Escrow Agent in accordance with Section 1.4 below.

 

(i)Upon request by any Party, the Escrow Agent set up each Party with on-line access to the account(s) established pursuant to this Agreement, which each Party can use to view and verify transaction on such account(s). 

 

(j)A Party may specify in a Written Direction whether such Escrow Amount shall be disbursed by way of wire transfer or check.  If the written notice for the disbursement of funds does not so specify the disbursement means, Escrow Agent may disburse the Escrow Amount by wire transfer. 

 

Section 1.3Written Direction and Other Instruction. 

(a)With respect to any Written Direction or any other notice, direction or other instruction required to be delivered by a Party to Escrow Agent under this Agreement, Escrow Agent is authorized to follow and rely upon any and all such instructions given to it from time to time if the Escrow Agent believes, in good faith, that such instruction is genuine and to have been signed by an Authorized Representative of such Party.  Escrow Agent shall have no duty or obligation to verify that the person who sent such instruction is, in fact, a person duly authorized to give instructions on behalf of a Party, other than to verify that the signature of the Authorized Representative on any such instruction appears to be the signature of such person. Each Party acknowledges and agrees that it is fully informed of the protections and risks associated with the various methods of transmitting instructions to Escrow Agent, and that there may be more secure methods of transmitting instructions other than the method selected by such Party. Escrow Agent shall have no responsibility or liability for any loss which may result from (i) any action taken or not taken by Escrow Agent in good faith reliance on any such signatures or instructions, (ii) as a result of a Party’s reliance upon or use of any particular method of delivering instructions to Escrow Agent, including the risk of interception of such instruction and misuse by third parties, or  

 

(iii) any officer or Authorized Representative of a Party named in an incumbency certificate, Exhibit B or Exhibit C delivered hereunder prior to actual receipt by the Escrow Agent of a more current incumbency certificate or an updated Exhibit B or Exhibit C and a reasonable time for the Escrow Agent to act upon such updated or more current certificate or Exhibit.  

 

(b)Company may, at any time, update Exhibit B and Placement Agent may, at any time, update Exhibit C by signing and submitting to the Escrow Agent an updated Exhibit.  Any updated Exhibit shall not be effective unless the Escrow Agent countersigns a copy thereof.  The Escrow Agent shall be entitled to a reasonable time to act to implement any changes on an updated Exhibit. 

 

Section 1.4Delivery and Authentication of Written Direction


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


(a)A Written Direction must be delivered to Escrow Agent by one of the delivery methods set forth in Section 3.3. 

 

(b)Each Party and Escrow Agent hereby agree that the following security procedures will be used to verify the authenticity of a Written Direction delivered by any Party to Escrow Agent under this Agreement: 

 

1.The Written Direction must include the name and signature of the person delivering the disbursement request to Escrow Agent.  Escrow Agent will check that the name and signature of the person identified on the Written Direction appears to be the same as the name and signature of an Authorized Representative of such Party;   

 

2.Escrow Agent will make a telephone call to an Authorized Representative of the Party purporting to deliver the Written Direction (which Authorized Representative may be the same as the Authorized Representative who delivered the Written Direction) at any telephone number for such Authorized Representative as set forth on Exhibit B or Exhibit C to obtain oral confirmation of delivery of the Written Direction.  If the Written Direction is a joint written notice of the Parties, the Escrow Agent shall call back an Authorized Representative of both of those Parties;  and  

 

3.If the Written Direction is sent by email to Escrow Agent, Escrow Agent also shall review such email address to verify that it appears to have been sent from an email address for an Authorized Representative of one of the Parties as set forth on Exhibit B and Exhibit C, as applicable, or from an email address for a person authorized under Exhibit B or Exhibit C, as applicable, to email a Written Direction to Escrow Agent on behalf of the Authorized Representative).  

 

(c)Each Party acknowledges and agrees that given its particular circumstances, including the nature of its business, the size, type and frequency of its instructions, transactions and files, internal procedures and systems, the alternative security procedures offered by Escrow Agent and the security procedures in general use by other customers and banks similarly situated, the security procedures set forth in this Section 1.4 are a commercially reasonable method of verifying the authenticity of a payment order in a Written Direction.   

 

(d)Escrow Agent is authorized to execute, and each Party expressly agrees to be bound by any payment order in a Written Direction issued in its name (and associated funds transfer) (i) that is accepted by Escrow Agent in accordance with the security procedures set forth in this Section 1.4 , whether or not authorized by such Party and/or (ii) that is authorized by or on behalf of such Party or for which such Party is otherwise bound under the law of agency, whether or not the security procedures set forth in this Section 1.4 were followed, and to debit the Escrow Account for the amount of the payment order.  Notwithstanding anything else, Escrow Agent shall be deemed to have acted in good faith and without negligence, gross negligence or misconduct if Escrow Agent is authorized to execute the payment order under this Section 1.4. Any action taken by Escrow Agent pursuant to this paragraph prior to Escrow Agent’s actual receipt and acknowledgement of  


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


a notice of revocation, cancellation or amendment of a Written Direction shall not be affected by such notice.

 

(e)The security procedures set forth in this Section 1.4 are intended to verify the authenticity of payment orders provided to Escrow Agent and are not designed to, and do not, detect errors in the transmission or content of any payment order.  Escrow Agent is not responsible for detecting an error in the payment order, regardless of whether any of the Parties believes the error was apparent, and Escrow Agent is not liable for any damages arising from any failure to detect an error. 

 

(f)When instructed to credit or pay a party by both name and a unique numeric or alpha-numeric identifier (e.g. ABA number or account number), Escrow Agent, and any other banks participating in the funds transfer, may rely solely on the unique identifier, even if it identifies a party different than the party named. Each Party agrees to be bound by the rules of any funds transfer network used in connection with any payment order accepted by Escrow Agent hereunder.   

 

(g)Escrow Agent shall not be obliged to make any payment requested under this Escrow Agreement if it is unable to validate the authenticity of the request by the security procedures set forth in this Section 1.4.  Escrow Agent’s inability to confirm a payment order may result in a delay or failure to act on that payment order. Notwithstanding anything else in this Agreement, Escrow Agent shall not be required to treat a payment order as having been received until Escrow Agent has authenticated it pursuant to the security procedures in this Section 1.4 and shall not be liable or responsible for any losses arising in relation to such delay or failure to act. 

 

ARTICLE 2

PROVISIONS CONCERNING THE ESCROW AGENT

 

Section 2.1 Acceptance by Escrow Agent.  The Escrow Agent hereby accepts and agrees to perform its obligations hereunder, provided that: 

(a)The Escrow Agent shall be entitled to rely upon any order, judgment, opinion, or other writing delivered to it in compliance with the provisions of this Agreement without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of service thereof. 

 

(b)The Escrow Agent shall be entitled to rely on and shall not be liable for any action taken or omitted to be taken by the Escrow Agent in accordance with the advice of counsel or other professionals retained or consulted by the Escrow Agent.  The Escrow Agent shall be reimbursed as set forth in Section 2.2 for any and all compensation (fees, expenses and other costs) paid and/or reimbursed to such counsel and/or professionals.  The Escrow Agent may perform any and all of its duties through its agents, representatives, attorneys, custodians, and/or nominees and shall not be responsible for the acts or omissions of such agents, representatives, attorneys, custodians or nominees appointed with due care. 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


(c)In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking any action other than to keep safely the Escrow Funds until it shall be directed otherwise by a court of competent jurisdiction, or (ii) deliver the Escrow Funds to a court of competent jurisdiction. 

(d)The Escrow Agent shall have no duty, responsibility or obligation to interpret or enforce the terms of any agreement other than Escrow Agent’s obligations hereunder, and the Escrow Agent shall not be required to make a request that any monies be delivered to the Escrow Account The Escrow Agent makes no representation as to the validity, value, genuineness or collectability of any security or other document or instrument held by or delivered to it.  

(e)The Escrow Agent shall be obligated to perform only such duties as are expressly set forth in this Agreement.  No implied covenants or obligations shall be inferred from this Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by the provisions of any agreement by the Company beyond the specific terms hereof. Without limiting the foregoing, the Escrow Agent shall dispose of the Escrow Funds in accordance with the express provisions of this Agreement, and has not reviewed and shall not make, be required to make or be liable in any manner for its failure to make, any determination under any other document, or any other agreement.  

(f)No term or provision of this Agreement is intended to create, nor shall any such term or provision be deemed to have created, any trust, joint venture, partnership, between or among the Escrow Agent and any of the Parties. 

 

 

Section 2.2.Indemnification.  Placement Agent and the Company agree, jointly and severally, to indemnify and hold the Escrow Agent and its employees, officers, directors and agents (the “Indemnified Parties”) the “Indemnified Parties”) harmless from any and against all liabilities, losses, actions, suits or proceedings at law or in equity, and any other expenses, fees or charges of any character or nature, (including, without limitation, negative interest, attorney's fees and expenses and the costs of enforcement of this Escrow Agreement or any provision thereof), which an Indemnified Party may incur or with which it may be threatened by reason of acting as or on behalf of the Escrow Agent under this Escrow Agreement or arising out of the existence of the Escrow Account, except to the extent the same shall be have been finally adjudicated to have been directly caused by the Escrow Agent's gross negligence or willful misconduct.     Placement Agent and the Company agree, jointly and severally, to pay or reimburse the Escrow Agent upon request for any transfer taxes or other taxes relating to the Escrow Funds incurred in connection herewith and shall indemnify and hold harmless the Escrow Agent with respect to any amounts that it is obligated to pay in the way of such taxes. The terms of this paragraph shall survive termination of this Agreement. 

 

Section 2.3.Limitation of Liability.  THE ESCROW AGENT SHALL NOT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (I) DAMAGES, LOSSES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN DAMAGES, LOSSES OR EXPENSES WHICH HAVE BEEN FINALLY ADJUDICATED TO HAVE DIRECTLY RESULTED FROM THE ESCROW AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (II) SPECIAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND WHATSOEVER (INCLUDING WITHOUT  


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


LIMITATION LOST PROFITS), EVEN IF THE ESCROW AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES AND REGARDLESS OF THE FORM OF ACTION, OR (III) AMOUNT IN EXCESS OF THE ESCROW FUNDS.

 

Section 2.4.Resignation and Termination of the Escrow Agent.  The Escrow Agent may resign at any time by giving 30 days’ prior written notice of such resignation to Placement Agent and the Company.  Upon providing such notice, the Escrow Agent shall have no further obligation hereunder except to hold as depositary the Escrow Funds that it receives until the end of such 30-day period.  In such event, the Escrow Agent shall not take any action, other than receiving and depositing the Investor’s checks and wire transfers in accordance with this Agreement, until the Company has designated a banking corporation, trust company, attorney or other person as successor.  Upon receipt of such written designation signed by Placement Agent and the Company, the Escrow Agent shall promptly deliver the Escrow Funds to such successor and shall thereafter have no further obligations hereunder.  If the Company and Placement Agent have failed to appoint a successor escrow agent prior to the expiration of thirty (30) days following the delivery of such notice of resignation or removal, the Escrow Agent shall be entitled, at its sole discretion and at the expense of the Company and/or Placement Agent, to (a) return the Escrow Funds to the Company, or (b) petition any court of competent jurisdiction for the appointment of a successor escrow agent or for other appropriate relief, and any such resulting appointment shall be binding upon the parties. In either case provided for in this paragraph, the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds. 

Section 2.5Termination.  The Company and Placement Agent may terminate the appointment of the Escrow Agent hereunder upon written notice specifying the date upon which such termination shall take effect, which date shall be at least 30 days from the date of such notice.  In the event of such termination, the Company and Placement Agent shall, within 30 days of such notice, appoint a successor escrow agent and the Escrow Agent shall, upon receipt of written instructions signed by the Company and Placement Agent, turn over to such successor escrow agent all of the Escrow Funds  Upon receipt of the Escrow Funds, the successor escrow agent shall become the escrow agent hereunder and shall be bound by all of the provisions hereof and the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds and under this Agreement. If the Company has failed to appoint a successor escrow agent prior to the expiration of thirty (30) days following the delivery of the notice of termination, the Escrow Agent shall be entitled, at its sole discretion and at the expense of the Company, to (a) return the Escrow Funds to the Company, or (b) petition any court of competent jurisdiction for the appointment of a successor escrow agent or for other appropriate relief, and any such resulting appointment shall be binding upon the parties. 

Section 2.6Compensation.  Escrow Agent shall be entitled, for the duties to be performed by it hereunder, to compensation as stated in the schedule attached hereto as Schedule III, which fee shall be paid by the Company upon the signing of this Agreement. In addition, the Company shall be obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or that become due in connection with this Agreement or the Escrow Account, including attorney’s fees. Neither the modification, cancellation, termination, resignation or rescission of this Agreement nor the resignation or termination of the Escrow Agent shall affect the right of Escrow Agent to retain the  


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


amount of any fee which has been paid, or to be reimbursed or paid any amount which has been incurred or becomes due, prior to the effective date of any such modification, cancellation, termination, resignation or rescission.  To the extent the Escrow Agent has incurred any such expenses, or any such fee becomes due, prior to any closing, the Escrow Agent shall advise the Company and the Company shall direct all such amounts to be paid directly at any such closing. As security for the due and punctual performance of any and all of the Company’s obligations to the Escrow Agent hereunder, now or hereafter arising, the Company, hereby pledges, assigns and grants to the Escrow Agent a continuing security interest in, and a lien on and right of setoff against, the Escrow Funds and all distributions thereon, investments thereof or additions thereto. If any fees, expenses or costs incurred by, or any obligations owed to, the Escrow Agent hereunder are not promptly paid when due, the Escrow Agent may reimburse itself therefor from the Escrow Funds, and may sell, convey or otherwise dispose of any Escrow Funds for such purpose.  The security interest and setoff rights of the Escrow Agent shall at all times be valid, perfected and enforceable by the Escrow Agent against the Parties and all third parties in accordance with the terms of this Escrow Agreement. The terms of this paragraph shall survive termination of this Agreement.

Section 2.7.Merger or Consolidation.  Any corporation or association into which the Escrow Agent may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer all or substantially all of its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which the Escrow Agent is a party, shall be and become the successor escrow agent under this Agreement and shall have and succeed to the rights, powers, duties, immunities and privileges as its predecessor, without the execution or filing of any instrument or paper or the performance of any further act. 

 

Section 2.8.Attachment of Escrow Funds; Compliance with Legal Orders.  In the event that any Escrow Amount shall be attached, garnished or levied upon by any court order, or the delivery thereof shall be stayed or enjoined by an order of a court, or any order, judgment or decree shall be made or entered by any court order affecting the Escrow Funds , the Escrow Agent is hereby expressly authorized, in its sole discretion, to respond as it deems appropriate or to comply with all writs, orders or decrees so entered or issued, or which it is advised by legal counsel of its own choosing is binding upon it, whether with or without jurisdiction.  In the event that the Escrow Agent obeys or complies with any such writ, order or decree it shall not be liable to any Party or to any other person, firm or corporation, should, by reason of such compliance notwithstanding, such writ, order or decree be subsequently reversed, modified, annulled, set aside or vacated. 

 

Section 2.9Force Majeure.  The Escrow Agent shall not be responsible or liable for any failure or delay in the performance of its obligation under this Escrow Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fire; flood; wars; acts of terrorism; civil or military disturbances; sabotage; epidemic; pandemics; riots; interruptions; loss or malfunctions of utilities including but not limited to, computer (hardware or software), payment systems, or communications services; accidents; labor disputes; acts of civil or military authority or governmental action; hacking, cyber-attacks or other unauthorized infiltration of Escrow Agent’s information technology infrastructure; it being understood that the Escrow Agent shall use  


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


commercially reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as reasonably practicable under the circumstances.

 

Section 2.10 No Financial Obligation.  Escrow Agent shall not be required to use its own funds in the performance of any of its obligations or duties or the exercise of any of its rights or powers, and shall not be required to take any action which, in Escrow Agent's sole and absolute judgment, could involve it in expense or liability unless furnished with security and indemnity which it deems, in its sole and absolute discretion, to be satisfactory.

 

ARTICLE 3
MISCELLANEOUS

 

Section 3.1.Successors and Assigns.  This Agreement shall be binding on and inure to the benefit of each Party and the Escrow Agent and their respective successors and permitted assigns. No other persons shall have any rights under this Agreement.  No assignment of the interest of any of the Parties shall be binding unless and until written notice of such assignment shall be delivered to the other Parties and Escrow Agent and shall require the prior written consent of the other Parties and Escrow Agent (such consent not to be unreasonably withheld). 

 

Section 3.2.Escheat.  Each Party is aware that under applicable state law, property which is presumed abandoned may under certain circumstances escheat to the applicable state. The Escrow Agent shall have no liability to any of the Parties, their respective heirs, legal representatives, successors and assigns, or any other party, should any or all of the Escrow Funds escheat by operation of law. 

 

Section 3.3.Notices.  All notices, requests, demands, and other communications required under this Escrow Agreement shall be in writing, in English, and shall be deemed to have been duly given if delivered (i) personally, (ii) by facsimile transmission with written confirmation of receipt, (iii) by overnight delivery with a reputable national overnight delivery service, (iv) by mail or by certified mail, return receipt requested, and postage prepaid, or (v) by electronic transmission; including by way of e-mail (as long as such email is accompanied by a PDF or similar version of the relevant document bearing the signature of an Authorized Representative for the Party sending the notice) with email confirmation of receipt.  If any notice is mailed, it shall be deemed given five business days after the date such notice is deposited in the United States mail.  If notice is given to a party, it shall be given at the address for such party set forth below.  It shall be the responsibility of the Company to notify the Escrow Agent in writing of any name or address changes.  In the case of communications delivered to the Escrow Agent, such communications shall be deemed to have been given on the date received by the Escrow Agent. : 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

If to Placement Agent:

           

Digital Offering, LLC

Gordon McBean

CEO 

1461 Glenneyre St., Suite D

gmcbean@digitaloffering.com 

 

           

        If to the Company: 

            

Sky Quarry, Inc.

Darryl Delwo

VP Finance

222 South Main Street, Suite 500

Salt Lake City, UT 84101

ddelwo@skyquarry.com 

 

If to Escrow Agent:

Wilmington Trust, National Association

277 Park Avenue, 25th Floor

New York, NY 10172

Attn: Ellen Jean-Baptiste

Telephone:(212)941-4425 

Email Address: ejean-baptiste@wilmingtontrust.com

 

Section 3.4.Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. Each Party and Escrow Agent hereby consents to the exclusive personal jurisdiction of the courts located in the State of Delaware in the event of a dispute arising out of or under this Agreement. Each Party and Escrow Agent hereby irrevocably waives any objection to the laying of the venue of any suit, action or proceeding and irrevocably submits to the exclusive jurisdiction of such court in such suit, action or proceeding.   

 

Section 3.5.Entire Agreement.  This Agreement and the Exhibits attached hereto (as updated from time to time in accordance herewith) set forth the entire agreement and understanding of the parties related to the Escrow Amount.  If a court of competent jurisdiction declares a provision invalid, it will be ineffective only to the extent of the invalidity, so that the remainder of the provision and Escrow Agreement will continue in full force and effect. 

 

Section 3.6.Amendment.  This Agreement may be amended, modified, superseded, rescinded, or canceled only by a written instrument executed by each of the Parties and the Escrow Agent. 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


Section 3.7.Waivers.  The failure of any party to this Agreement at any time or times to require performance of any provision under this Agreement shall in no manner affect the right at a later time to enforce the same performance.  A waiver by any party to this Agreement of any such condition or breach of any term, covenant, representation, or warranty contained in this Agreement, in any one or more instances, shall neither be construed as a further or continuing waiver of any such condition or breach nor a waiver of any other condition or breach of any other term, covenant, representation, or warranty contained in this Agreement. 

 

Section 3.8.Headings.  Section headings of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions of this Escrow Agreement. 

 

Section 3.9.Electronic Signatures; Facsimile Signatures; Counterparts.  This Escrow Agreement may be executed in one or more counterparts.  Such execution of counterparts may occur by manual signature, electronic signature, facsimile signature, manual signature transmitted by means of facsimile transmission or manual signature contained in an imaged document attached to an email transmission, and any such execution that is not by manual signature shall have the same legal effect, validity and enforceability as a manual signature. Each such counterpart executed in accordance with the foregoing shall be deemed an original, with all such counterparts together constituting one and the same instrument.  The exchange of executed copies of this Escrow Agreement or of executed signature pages to this Escrow Agreement by electronic transmission, facsimile transmission or as an imaged document attached to an email transmission shall constitute effective execution and delivery hereof. Any copy of this Escrow Agreement which is fully executed and transmitted in accordance with the terms hereof may be used for all purposes in lieu of a manually executed copy of this Escrow Agreement and shall have the same legal effect, validity and enforceability as if executed by manual signature. 

 

Section 3.10. Waiver of Jury Trial. EACH OF THE PARTIES HERETO AND THE ESCROW AGENT EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN RESOLVING ANY CLAIM OR COUNTERCLAIM RELATING TO OR ARISING OUT OF THIS AGREEMENT.

Section 3.11Termination.  This Agreement will terminate upon the Final Termination Date. 

 

Section 3.12Anti-Terrorism/Anti-Money Laundering Laws

 

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT - To help the United States government fight the funding of terrorism or money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens a new account.  What this means for the parties to this Agreement:  the Escrow Agent will ask for your name, address, date of birth, and other information that will allow the Escrow Agent to identify you (e.g., your social security number or tax identification number.)  The Escrow Agent may also ask to see your driver’s license or other identifying documents (e.g., passport, evidence of formation of corporation, limited liability company, limited partnership, etc., certificate of good standing.)


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

 

[The balance of this page intentionally left blank – signature page follows]


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first set forth above.

Company             Placement Agent 

 

By: /s/ David Sealock________________     By: /s/ Gordon McBean_________ 

Name:David Sealock                                Name: Gordon McBean 

Title:  CEO                                         Title:  CEO 

 

 

 

WILMINGTON TRUST, NATIONAL ASSOCIATION

as Escrow Agent

 

 

By: /s/ Ellen Jean-Baptiste_____________ 

Name: Ellen Jean-Baptiste    

Title:  Assistant Vice President    


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


Schedule I


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)



Exhibit A

 

Form of Written Direction

 

 

Date:

 

Wilmington Trust, National Association

Corporate Client Services

277 Park Avenue, 25th Floor

New York, NY 10172

Attention: Ellen Jean-Baptiste

 

Ladies and Gentlemen:

 

In accordance with the terms of paragraph 1.2(b) of the Escrow Agreement dated as of August 25, 2023 (the "Escrow Agreement"), by and between Sky Quarry, Inc. (the “Company”), Digital Offering, LLC (“Placement Agent”) and WILMINGTON TRUST, NATIONAL ASSOCIATION (the "Escrow Agent"), the Company and Placement Agent hereby direct the Escrow Agent to release the funds in the Escrow Account, account number 165471-000, in the amounts, and to the account(s), as follows:

 

Amount:

 

Beneficiary Bank Name:

 

Beneficiary Bank Address

Line 1:

 

Beneficiary Bank Address

Line 2:

 

Beneficiary Bank Address

Line 3:

 

ABA#:

 

SWIFT#:

 

Beneficiary Account Title:

 

Beneficiary Account No./IBAN:

 

Beneficiary Address

Line 1:

 

Beneficiary Address

Line 2:

 

Beneficiary Address

Line 3:

 

Additional Information:

 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

Very truly yours,

 

Company               

 

By:__________________

Name: _________________

Title: ________________

 

Placement Agent

 

By:__________________

Name: _______________

Title: ________________


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

EXHIBIT B

CERTIFICATE AS TO AUTHORIZED SIGNATURES

OF COMPANY

 

Company hereby designates each of the following persons as its Authorized Representative for purposes of this Agreement, and confirms that the title, contact information and specimen signature of each such person as set forth below is true and correct.  Each such Authorized Representative is authorized to initiate and approve transactions of all types for the Escrow Account[s] established under the Agreement to which this Exhibit B is attached, on behalf of Company.

 

Name (print):

David Sealock

Specimen Signature:

 

 

Title:

CEO

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:

 

 

Name (print):

 

Specimen Signature:

 

 

Title:

 

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

 

Name (print):

 

Specimen Signature:

 

 

Title:

 

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:

 

Additional Email Addresses:

The following additional email addresses also may be used by Escrow Agent to verify the email address used to send any Payment Notice to Escrow Agent:  

Email 1:   

Email 2:   

Email 3:   

 

 

COMPLETE BELOW TO UPDATE EXHIBIT B

If Company wishes to update this Exhibit B, Company must complete, sign and send to Escrow Agent an updated copy of this Exhibit B with such changes.  Any updated Exhibit B shall be effective once signed by Company and Escrow Agent and shall entirely supersede and replace any prior Exhibit B to this Agreement.  

 

Company

 

By:_________________________

Name:

Title:

Date:

 

 

WILMINGTON TRUST, NATIONAL ASSOCIATION (as Escrow Agent)

 

By:_________________________

Name:

Title:

Date:


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


EXHIBIT C

CERTIFICATE AS TO AUTHORIZED SIGNATURES

OF PLACEMENT AGENT

 

Placement Agent hereby designates each of the following persons as its Authorized Representative for purposes of this Agreement, and confirms that the title, contact information and specimen signature of each such person as set forth below is true and correct.  Each such Authorized Representative is authorized to initiate and approve transactions of all types for the Escrow Account[s] established under the Agreement to which this Exhibit C is attached, on behalf of Placement Agent.

 

Name (print):

Gordon McBean

Specimen Signature:

 

 

Title:

CEO

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:

 

 

Name (print):

 

Specimen Signature:

 

 

Title:

 

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

 

Name (print):

 

Specimen Signature:

 

 

Title:

 

Telephone Number (required):

If more than one, list all applicable telephone numbers.

Office:

Cell:

 

E-mail (required):

If more than one, list all applicable email addresses.

Email 1:

Email 2:

 

Additional Email Addresses:

The following additional email addresses also may be used by Escrow Agent to verify the email address used to send any Payment Notice to Escrow Agent:  

Email 1:   

Email 2:   

Email 3:   

 

 

COMPLETE BELOW TO UPDATE EXHIBIT C

If PLACEMENT AGENT wishes to update this Exhibit C, PLACEMENT AGENT must complete, sign and send to Escrow Agent an updated copy of this Exhibit C with such changes.  Any updated Exhibit C shall be effective once signed by PLACEMENT AGENT and Escrow Agent and shall entirely supersede and replace any prior Exhibit C to this Agreement.  

 

PLACEMENT AGENT

 

By:_________________________

Name:

Title:

Date:

 

 

WILMINGTON TRUST, NATIONAL ASSOCIATION (as Escrow Agent)

 

By:_________________________

Name:

Title:

Date:


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

 

 

 

 

Schedule III

 

Fees of Escrow Agent

 

Acceptance Fee:

                                                                                              Waived

Initial Fees as they relate to Wilmington Trust acting in the capacity of Escrow Agent – includes review of the Escrow Agreement; acceptance of the Escrow appointment; setting up of Escrow Account(s) and accounting records; and coordination of receipt of Escrow Information for deposit to the Escrow Account(s). Acceptance Fee payable at time of Escrow Agreement execution.

 

Escrow Agent Administration Fee:

$4,500

For ordinary administrative services by Escrow Agent – includes daily routine account management; monitoring claim notices pursuant to the agreement; and disbursement of Escrow Information in accordance with the agreement.  This fee is due and payable by 90 days after closing.  

 

Wilmington Trust’s bid is based on the following assumptions:

1.Number of Escrow Accounts to be established: 1 

2.Est. Term: Under 12 months 

3.Escrow funds remain un-invested 

 

 

 

Out-of-Pocket Expenses:Billed At Cost 


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

ESCROW AGREEMENT AMENDMENT

This ESCROW AGREEMENT AMENDMENT (this “Agreement”) dated as of this 14th day of December 2023 is entered into by and among Sky Quarry Inc., a Delaware corporation (the “Company”), having an address at 222 South Main Street, Suite 500, Salt Lake City, UT 84101, Digital Offering, LLC, having an address at 1461 Glenneyre Street, Suite D, Laguna Beach, CA 92651 (the “Placement Agent”), and WILMINGTON TRUST, NATIONAL ASSOCIATION (the “Escrow Agent”), with its principal corporate trust office at 166 Mercer Street, Suite 2R, New York, NY 10012.  The Company, the Placement Agent and the Escrow Agent are referred to herein collectively as the “Parties” and each, individually, as a “Party.”    

 

 

W I T N E S S E T H:

WHEREAS, the Company, the Placement Agent and the Escrow Agent currently are parties to that certain escrow agreement dated August 25, 2023 (the “Escrow Agreement”) relating to the Company’s private placement offering (the “Financing Transaction”) of up to a maximum of 4,000,000 shares of the Company’s preferred stock, par value $0.001 per share, at an offering price of $2.50 per share for a maximum offering amount of up to $10,000,000; and

WHEREAS, the Company proposes to sell in a new public offering (the “Public Offering”) up to a maximum of 3,333,333 shares of its common stock, par value $.0001 per share, at an offering price of $6.00 per share (the “Shares”) for a maximum offering amount of $19,999,998; and

WHEREAS,  subject to all conditions to closing being satisfied or waived, the closing(s) of the Public Offering shall take place from time to time until the earlier of (a) the date which is one year after the Public Offering is qualified by the U.S. Securities and Exchange Commission, and (b) the date on which the Public Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”) (the earlier of (a) and (b), the “Final Termination Date”); and

WHEREAS, there is no minimum offering amount in the Public Offering and all funds shall only be returned to the potential Investors in the event the Public Offering is not consummated or if the Company, in its sole discretion, rejects all or a part of a particular potential investor’s subscription; and

WHEREAS, in connection with the Financing Transaction, the Company and the Placement Agent established an escrow account (the “Escrow Account”) with the Escrow Agent into which the Company and the Placement Agent have instructed the investors in the Financing Transaction to deposit checks or make a wire transfer for the payment of money to the Company in connection with the Financing Transaction; and

WHEREAS, the Company and Placement Agent desire to utilize the Escrow Account with the Escrow Agent in connection with the Public Offering for purposes of depositing funds to be received from investors in the Public Offering into escrow; and


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


WHEREAS, THE COMPANY AND THE PLACEMENT AGENT UNDERSTAND THAT THE ESCROW AGENT, BY ACCEPTING THE APPOINMTMENT AND DESIGNATION AS ESCROW AGENT WITH RESPECT TO THE PUBLIC OFFERING, IN NO WAY ENDORSES THE MERITS OF THE PUBLIC OFFERING OF THE SHARES.  THE COMPANY AND THE PLACEMENT AGENT AGREE TO NOTIFY ANY PERSON ACTING ON ITS BEHALF THAT THE ESCROW AGENT’S POSITION AS ESCROW AGENT DOES NOT CONSTITUTE SUCH AN ENDORSEMENT, AND TO PROHIBIT SAID PERSONS FROM THE USE OF THE ESCROW AGENT’S NAME AS AN ENDORSER OF SUCH PUBLIC OFFERING. The Company and the Placement Agent further agree to include with any sales literature, in which the Escrow Agent’s name appears and which is used in connection with the Public Offering, a statement to the effect that the Escrow Agent in no way endorses the merits of the Public Offering; and

NOW, THEREFORE, for good and valuable consideration the sufficiency of which are hereby acknowledged,

IT IS AGREED, that the Escrow Account shall also be utilized for the Public Offering and that, in connection therewith, an Escrow Administration fee for this purpose in the amount of $4,500 shall be due and payable to the Escrow Agent by the Company.

Effect of Amendment.  References in the Escrow Agreement to Termination Date and Final Termination Date shall have the meanings given to them in this Agreement. Except as amended as set forth above, the Escrow Agreement shall continue in full force and effect and all terms and conditions in the Escrow Agreement relating to the Financing Transaction shall also apply, as applicable, to the Public Offering.

 

Modification. This Amendment may not be modified or amended except in writing duly executed by the Parties.

 

Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and will become effective and binding upon the Parties  at such time as all of the signatories hereto have signed a counterpart of this Amendment. All counterparts so executed shall constitute one Amendment binding on all of the Parties, notwithstanding that all of the Parties are not signatory to the same counterpart. Each of the Parties shall sign a sufficient number of counterparts so that each Party will receive a fully executed original of this Amendment.

[The balance of this page intentionally left blank – signature page follows]


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)


 

IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the date first set forth above.

Company             Placement Agent 

 

By: _/s/ David Sealock______________     By: _/s/ Gordon McBean______ 

Name:David Sealock             Name: Gordon McBean 

Title:  CEO                                         Title:   CEO 

 

 

 

WILMINGTON TRUST, NATIONAL ASSOCIATION

as Escrow Agent

 

 

By: _/s/ Neumann Marlett____________ 

Name: Neumann Marlett    

Title:  Assistant Vice President    


WTNA -- Subscription Escrow Agreement (with Placement Agent) (05/2021)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Stockholders and the Board of Directors of

Sky Quarry Inc.

 

We hereby consent to the inclusion in the Regulation A Offering of our report dated August 25, 2023, with respect to the consolidated financial statements of Sky Quarry Inc. and subsidiaries as of December 31, 2022 and 2021, and for each of the years then ended

We also consent to the reference to us under the caption “Experts” in the Prospectus.

 

/s/ Tanner LLC

Lehi, Utah

December 19, 2023

 

 

 

 

Picture 38 


 

 

 

 

 

December 19, 2023

 

 

Sky Quarry Inc.

707 W. 700 S. Suite 101

Woods Cross, UT 84087

 

Re:Sky Quarry Inc. Registration Statement on Form 1-A for an offering by the Company of up to 3,333,333 shares of Common Stock 

 

Ladies and Gentlemen:

 

We have acted as counsel to Sky Quarry Inc., a Delaware corporation (the “Company”), in connection with the proposed offering by the Company of up to 3,333,333 shares of the Company’s Common Stock (the “Securities”) pursuant to the Company's Offering Statement on Form 1-A (the “Offering Statement”) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Act”). 

 

We have reviewed the Company's charter documents, the Offering Statement and the corporate proceedings taken by the Company in connection with the offer, issuance and sale of the Securities.  In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies and the authenticity of the original of such copies.  

 

Based on such review, we are of the opinion that the Securities and the common stock into which the Securities may convert have been duly authorized and will be, when issued in the manner described in the Offering Statement, legally issued, fully paid and nonassessable. No opinion is being rendered hereby with respect to the truthfulness, accuracy or completeness of the Offering Statement or any portion thereof.

 

We consent to the filing of this opinion letter as an exhibit to the Offering Statement.   


ONE UTAH CENTER • 201 SOUTH MAIN STREET, SUITE 2200

SALT LAKE CITY, UT 84111-2216 •TEL & FAX (801) 322-2516


Sky Quarry Inc.

December 19, 2023

Page 2


This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein.  Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Securities. 

 

 

Very truly yours, 

 

CLYDE SNOW & SESSIONS 

 

/s/ Brian A. Lebrecht 

 

Brian A. Lebrecht