Verde Clean Fuels, Inc. 10-K

ITEM 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations. Unless the context indicates otherwise, references in this Item to “Intermediate,” “we,” “us,” “our” and similar terms refer to Bluescape Clean Fuels Intermediate Holdings, LLC and its subsidiaries prior to the consummation of the Business Combination and Verde Clean Fuels, Inc. (f/k/a CENAQ Energy Corp.) and its subsidiaries after the consummation of the Business Combination. References to “CENAQ” refer to the predecessor registrant prior to the consummation of the Business Combination. The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of CENAQ’s results of operations and financial condition. This discussion and analysis should be read together with the audited consolidated financial statements and related notes of CENAQ that are included elsewhere in this Report. In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. See the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors” elsewhere in this Report. Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A. “Risk Factors.” Overview During the year ended December 31, 2022 and prior to the Business Combination, CENAQ was a blank check company incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. For more information on the Business Combination, see the section entitled “Explanatory Note” elsewhere in this Report. Our Business After the Business Combination Following the Business Combination, Verde Clean Fuels is a renewable energy company specializing in the conversion of synthesis gas, or syngas, derived from diverse feedstocks, such as biomass, municipal solid waste (“MSW”) and mixed plastics, as well as natural gas (including synthetic natural gas) and other feedstocks, into liquid hydrocarbons that can be used as gasoline through an innovative and proprietary liquid fuels technology, the STG+® process. Through our STG+® process, we convert syngas into Reformulated Blend-stock for Oxygenate Blending (“RBOB”) gasoline. We are focused on the development of technology and commercial facilities aimed at turning waste and other bio-feedstocks into a usable stream of syngas which is then transformed into a single finished fuel, such as gasoline, without any additional refining steps. The availability of biogenic MSW and the economic and environmental drivers that divert these materials from landfills will enable us to utilize these waste streams to produce renewable gasoline from modular production facilities with expected capacity to produce between approximately seven million to 30 million gallons of renewable gasoline per year. We are redefining liquid fuels technology through our proprietary and innovative STG+® process to deliver scalable and cost-effective renewable gasoline. We acquired our STG+® technology from Primus Green Energy (“Primus”), a company established in 2007 that developed the patented STG+® technology to convert syngas into gasoline or methanol. Since acquiring the technology, we have adapted the application of our STG+® technology to focus on the renewable energy industry. This adaptation requires a third-party gasification system to produce acceptable synthesis gas from these renewable feedstocks. Our proprietary STG+® system converts the syngas into gasoline. We have made significant progress towards commercializing the first STG+® based commercial production facility in the United States. Our first commercial production facility, which we expect to be operational by the first half of 2025, will be in Maricopa, Arizona. In the first phase we expect this facility to produce approximately 7 million gallons of renewable gasoline in the first full year of operations. In the second phase, which we expect to be operational in 2026, we anticipate producing approximately 30 million gallons per year of renewable gasoline. Additionally, we have several additional renewable gasoline projects, and flare mitigating natural gas to gasoline project, in various early stages of development. 39 Over $110 million has been invested in our technology, including our demonstration facility in New Jersey, which has completed over 10,500 hours of operation producing gasoline or methanol. Our demonstration facility represents the scalable nature of our operational modular commercial design which has fully integrated reactors and recycle lines and is designed with key variables, like gas velocity and catalyst bed length, at a 1-to-1 scale with our commercial design. We have also participated in carbon lifecycle studies to validate the CI score and reduced lifecycle emissions of our renewable gasoline as well as fuel, blending and engine testing to validate the specification and performance of our gasoline product. We believe our renewable gasoline exhibits a significant lifecycle carbon emissions reduction compared to traditional petroleum-based gasoline. As a result, we believe our gasoline produced from renewable feedstock, such as biomass, will qualify under the RFS for the D3 RIN (a carbon credit), which can have significant value. Similarly, gasoline produced from our process may also qualify for various state carbon programs, including California’s LCFS. Unlike many other gas-to-liquids technologies, not only can our STG+® process produce renewable gasoline from syngas, but we expect it will be able to be applied at other production facilities to produce other end products including methanol. In addition to our initial focus on the production of renewable gasoline, there is opportunity to continue to develop additional process technology to produce middle distillates including sustainable diesel and sustainable aviation fuel. As of December 31, 2022, the Company has not derived revenue from its principal business activities. The Company is managed as an integrated business and consequently, there is only one reportable segment. However, as with other government programs the use requirements of the RFS program and similar state-level programs are subject to change, which could materially harm our ability to operate profitably. Recent Developments On February 15, 2023, we completed the proposed business combination as per the terms of the Business Combination Agreement. In addition, pursuant to Subscription Agreements entered into with certain accredited and institutional investors in connection with the Business Combination, concurrently with the Closing of the Business Combination, we received $32,000,000 in proceeds from the PIPE Investors, in exchange for which we issued 3,200,000 shares of our Class A Common Stock issued to the PIPE Investors. After giving effect to the Business Combination, the redemption of shares of CENAQ’s Class A common stock as described below, the consummation of the PIPE Investment, and the separation of the former CENAQ units, there are currently (i) 9,358,620 shares of our Class A Common Stock issued and outstanding, (ii) 22,500,000 shares of Class C Common Stock issued and outstanding (shares of Class C Common Stock do not have any economic value but entitle the holder thereof to one vote per share) and (iii) no shares of Preferred Stock issued and outstanding. The Class A Common Stock and Warrants commenced trading on Nasdaq under the symbols “VGAS” and “VGASW,” respectively, on February 16, 2023, subject to ongoing review of our satisfaction of all listing criteria following the Business Combination. An aggregate of approximately $158.8 million was paid from the trust account to holders that properly exercised their right to have their shares of CENAQ’s Class A common stock redeemed, and the remaining balance immediately prior to the Closing of approximately $19.0 million remained in the trust account. Key Factors and Trends Influencing our Results of Operations After the Business Combination We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including competition from other carbon-based and other non-carbon-based fuel producers, changes to existing federal and state level low-carbon fuel credit systems, and other factors discussed under the section titled “Risk Factors.” We believe the factors described below are key to our success. Commencing and Expanding Commercial Operations In April 2022, we commenced a pre-FEED study for our first commercial production facility, and we are actively engaged in activities associated with securing the location, feedstock, utility interconnections, and front-end gasification for our first commercial facility. We believe our commercialization activities are being completed at a pace that can support first commercial production of renewable gasoline as early as 2024. We have three additional production facilities planned and four additional identified potential production facility development opportunities. We believe the number of planned and identified potential production facilities bode well for our potential future success. 40 Successful Implementation of the first commercial facility A critical step in our success will be the successful construction and operation of the first commercial production facility using our patented STG+® technology. We expect that the first commercial production facility could be operational as early as 2024. Protection and Continuous Development Of Our Patented Technology Our ability to compete successfully will depend on our ability to protect, commercialize, and further develop our proprietary process technology and commercial facilities in a timely manner, and in a manner technologically superior to and/or are less expensive than competing processes. Key Components of Results of Operations We are an early-stage company and our historical results may not be indicative of our future results. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical or future results of operations. Revenue We have not generated any revenue to date. We expect to generate a significant portion of our future revenue from the sale of renewable RBOB grade gasoline primarily in markets with federal and state level low-carbon fuel credit systems. Expenses General and Administrative Expense G&A expenses consist of compensation costs for personnel in executive, finance, accounting, and other administrative functions. G&A expenses also include legal fees, professional fees paid for accounting, auditing and consulting services, and insurance costs. Following the Business Combination, we expect we will incur higher G&A expenses for public company costs such as compliance with the regulations of the SEC and the Nasdaq Capital Market. Research and Development Expense Our research and development (“R&D”) expenses consist primarily of internal and external expenses incurred in connection with our R&D activities. These expenses include labor directly performed on our projects and fees paid to third parties working on and testing specific aspects of our STG+ design and gasoline product output. R&D costs have been expensed as incurred. We expect R&D expenses to grow as we continue to develop the STG+ technology and develop market and strategic relationships with other businesses. Income Tax Effects We are a limited liability company that is treated as a partnership for tax purposes, with each of our members accounting for its share of tax attributes and liabilities. Accordingly, there are no current or deferred income tax amounts recorded in our financial statements. Results of Operations of CENAQ CENAQ’s entire activities since June 24, 2020 (inception) through December 31, 2022 related to its formation and Public Offering, and, since the completion of the IPO, searching for a target to consummate a Business Combination and consummating the Business Combination. As of December 31, 2022, CENAQ had neither engaged in any operations nor generated any revenues. CENAQ generated non-operating income in the form of interest income on cash and cash equivalents and on marketable securities held in a trust account (the “Trust Account”). CENAQ incurred expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence and merger and acquisition expenses in connection with completing the Business Combination. For the year ended December 31, 2022, CENAQ had a net loss of $3,698,144. CENAQ incurred $5,715,022 of general and administrative expenses, which includes $4,847,741 in costs related to identifying a target business. CENAQ also incurred $7,363 of interest expense on promissory note from related party and $431,632 of provision for income taxes. We earned interest income of $2,455,873. For the year ended December 31, 2021, CENAQ had a net loss of $474,585. CENAQ incurred $456,765 of formation and operating costs (not charged against stockholders’ equity), consisting mostly of general and administrative expenses. CENAQ earned interest income of $4,680 and recorded unrealized loss on fair value changes of over-allotment option liability of $22,500. 41 Liquidity and Capital Resources of CENAQ On August 17, 2021, CENAQ consummated its IPO of 15,000,000 units, at $10.00 per unit, generating total gross proceeds of $150.0 million and incurring offering costs of approximately $17.8 million, inclusive of approximately $6.0 million in deferred underwriting commissions. Subsequently, in connection with the Business Combination, the underwriters agreed to reduce the deferred underwriting discounts and commissions to approximately $4.3 million. Simultaneously with the closing of the IPO, pursuant to the securities subscription agreement that CENAQ entered into with the CENAQ Sponsor, CENAQ completed a private placement of 4,500,000 private placement warrants issued to the CENAQ Sponsor and 1,500,000 private placement warrants issued to CENAQ’s underwriters, generating gross proceeds of $6,000,000. In connection with the closing of the IPO, the CENAQ Sponsor sold membership interest reflecting an allocation of 75,000 founder shares, or an aggregate of 825,000 founder shares, to each anchor investor at their original purchase price of approximately $0.0058 per share. On August 19, 2021, the underwriters’ over-allotment option was exercised in full, and CENAQ consummated the sale of an additional 2,250,000 units, generating additional proceeds of $22,500,000. Simultaneously with the closing of the sale of additional units, CENAQ consummated the sale of an additional 675,000 private placement warrants, generating gross proceeds of $675,000. A total of $174,225,000 from the net proceeds from the IPO and the private placement were placed in the Trust Account, maintained by Continental Stock Transfer & Trust Company, acting as trustee, and approximately $0.6 million of such net proceeds were deposited in CENAQ’s operating account to pay expenses in connection with the closing of the IPO and for working capital following IPO. As of December 31, 2022, CENAQ had $127,965 in its operating bank account, and working capital deficit of $7,072,012. Subsequent to December 31, 2022, CENAQ used such funds not held in the Trust Account structuring, negotiating and consummating the Business Combination. Prior to the Business Combination, CENAQ’s liquidity needs were satisfied through (i) receipt of a $25,000 capital contribution from the CENAQ Sponsor in exchange for the issuance of Founder Shares to the CENAQ Sponsor, (ii) the loan under a promissory note with the CENAQ Sponsor of approximately $88,333, (iii) the unsecured promissory note with the CENAQ Sponsor of $125,000 and (iv) the net proceeds of $600,000 from the private placement of private placement warrants held outside of the Trust Account. CENAQ fully repaid the promissory notes on August 17, 2021 and February 15, 2023. On May 31, 2022, the Sponsor agreed to loan the Company $125,000 pursuant to a promissory note (the “Promissory Note”). The Promissory Note bears an interest of 10% per annum, payable on the earlier of (i) February 17, 2023 or (ii) the closing date on which the Company consummates an initial business combination. There was $125,000 and $0 outstanding under the Promissory Note as of December 31, 2022 and 2021, respectively. Such amounts are included in Proceeds from note payable-related party on the Consolidated Balance Sheets. As described in Note 5 to the December 31, 2022 audited Consolidated Financial Statements, in connection with the $1,725,000 extension deposit previously noted, on November 15, 2022, CENAQ issued an unsecured promissory note (the “Extension Note”) in the principal amount of $1,725,000 to CENAQ Sponsor in connection with the Extension. The Extension Note was non-interest bearing and was due and payable at the Closing with the amount to be repaid dependent on the amount of redemptions from the Trust Account at Closing. The amount to be repaid was to be reduced by an amount equal to the percentage of redemptions multiplied by $1,725,000. There was $1,725,000 and $0 outstanding under the Extension Note as of December 31, 2022 and 2021, respectively. Such amounts are included in Proceeds from note payable-related party on the Consolidated Balance Sheets. 42 On November 15, 2022, CENAQ issued an unsecured promissory note (the “Sponsor Note”) allowing the Company to borrow from the CENAQ Sponsor up to $467,500. Amounts drawn under the Sponsor Note bear no interest and are due and payable upon the earlier to occur of (i) the date on which CENAQ’s initial business combination is consummated and (ii) the liquidation of the Company on or before February 16, 2023 or such later liquidation date as may be approved by the Company’s stockholders. On November 15, 2022, the Company requested and received $100,000 under the Sponsor Note. There was $100,000 and $0 outstanding under the Sponsor Note as of December 31, 2022 and 2021, respectively. Such amounts are included in Proceeds from note payable-related party on the Consolidated Balance Sheets. In order to finance transaction costs in connection with a Business Combination, the CENAQ Sponsor or an affiliate of the CENAQ Sponsor or certain of CENAQ’s officers and directors committed to provide CENAQ with Working Capital Loans up to $1,500,000, as defined later (see Note 5). This commitment extends through February 16, 2023. As of December 31, 2022 and 2021, there were no amounts outstanding under any Working Capital Loans. In connection with the Closing, and based on the $158,797,476 of redemptions, CENAQ Sponsor was due $184,612 under the Extension Note. At closing, CENAQ Sponsor was also due $100,000 under the Sponsor Note and $125,000 under the Promissory Note. However, on February 15, 2023, in lieu of repayment of the Extension Note and repayment of the Sponsor Note and Promissory Note, CENAQ entered into a new promissory note with the Sponsor totaling $409,612 (“New Promissory Note”). The New Promissory Note, cancels and supersedes the Extension Note and the Sponsor Note. The New Promissory note is non-interest bearing and the entire principal balance of the New Promissory Note is payable on or before February 15, 2024. The New Promissory Note is payable at Verde Clean Fuel’s election in cash or in Class A Common Stock at a conversion price of $10.00 per share. CENAQ also obtained additional transaction expense reductions leading up to the Closing including a reduction to the deferred underwriting fees and a reduction to legal expenses. In connection with the execution of the Business Combination Agreement, on August 12, 2022, the Company, Intermediate and Holdings entered into a letter agreement with the underwriters, pursuant to which, among other things, (i) Imperial Capital, LLC agreed to forfeit all of its 1,423,125 Private Placement Warrants and all of its 156,543 Representative Shares, (ii) I-Bankers Securities, Inc. agreed to forfeit all of its 301,875 Private Placement Warrants and all of its 33,207 Representative Shares and (iii) the underwriters agreed to reduce their deferred underwriting fees related to the IPO from $6,037,500 to $4,312,500. As part of the Closing, the underwriters agreed to further reduce their deferred underwriting fees related to the IPO from $4,312,500 to $1,700,000. Additionally, as of December 31, 2022, CENAQ had $4,110,755 of accrued legal expenses related to the Closing (included in Accounts payable and accrued expenses) and $511,760 of legal expenses recorded to Deferred financing costs related to the PIPE capital raise. In connection with the Closing, CENAQ received an invoice for actual legal expenses of $3,250,000. The underwriter’s counsel involved in the PIPE capital raise also agreed, in connection with Closing, to reduce total legal expenses included in deferred financing costs to $325,000. The Company’s future liquidity requirements are satisfied by the net $37,329,178 of cash proceeds received on February 15, 2023 in connection with the Closing. In connection with the Company’s assessment of going concern considerations in accordance with FASB’s Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that the Company is able to meet its financial obligations for at least the next year as a result of capital raised in connection with completing the Business Combination with Verde Clean Fuels on February 15, 2023. 43 Off-Balance Sheet Arrangements; Commitments and Contractual Obligations of CENAQ Registration Rights The holders of the Founder Shares and Private Placement Warrants (and any shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants and upon conversion of the Founder Shares) will be entitled to registration rights pursuant to that certain Registration Rights Agreement, dated August 17, 2021 (the “IPO Registration Rights Agreement”) requiring us to register such securities for resale (in the case of the Founder Shares, only after conversion to our Class A Common Stock). The holders of the majority of these securities were entitled to make up to three demands, excluding short form demands, that CENAQ register such securities. In addition, the holders had certain “piggy-back” registration rights with respect to registration statements filed after the completion of the Business Combination and rights to require CENAQ to register for resale such securities pursuant to Rule 415 under the Securities Act. In connection with the Closing, the IPO Registration Rights Agreement, was amended and restated by Verde Clean Fuels, certain persons and entities holding securities of CENAQ prior to the Closing (the “Initial Holders”) and certain persons and entities receiving Class A Common Stock and Class C Common Stock pursuant to the Business Combination (together with the Initial Holders, the “Reg Rights Holders”) (as amended and restated, the “A&R Registration Rights Agreement”). Pursuant to the A&R Registration Rights Agreement, within 60 days after Closing, Verde Clean Fuels shall use its commercially reasonable efforts to file with the SEC (at Verde Clean Fuels’ sole cost and expense) a registration statement registering the resale of certain securities held by or issuable to the Reg Rights Holders (the “Resale Registration Statement”), and Verde Clean Fuels will use its commercially reasonable efforts to have the Resale Registration Statement declared effective as soon as reasonably practicable after the filing thereof. In certain circumstances, the Reg Rights Holders can demand Verde Clean Fuels’ assistance with underwritten offerings and block trades, and the Reg Rights Holders are entitled to certain piggyback registration rights. The A&R Registration Rights Agreement does not provide for the payment of any cash penalties by Verde Clean Fuels if it fails to satisfy any of its obligations under the A&R Registration Rights Agreement. Underwriters’ Agreement CENAQ granted the underwriters a 45-day option from the date of the Initial Public Offering to purchase up to an additional 2,250,000 units to cover over-allotments, if any. On August 19, 2021, the over-allotments were exercised in full. Simultaneously with the closing of the Initial Public Offering and the over-allotment, the underwriters were paid an underwriting discount of 2% of the gross proceeds of the Initial Public Offering and the over-allotment, or $3,450,000. Additionally, the underwriters were entitled to a deferred underwriting discount of 3.5% of the gross proceeds of the Initial Public Offering and the over-allotment upon the completion of the Business Combination. Subsequently, in connection with the Business Combination, the underwriters agreed to reduce the deferred underwriting discount from 3.5% to 2.5%. On the Closing Date, the deferred fee was paid from the amounts held in the Trust Account. Underwriters Letter In connection with the execution of the Business Combination Agreement, on August 12, 2022, CENAQ, Intermediate, Holdings and the underwriters entered into the Underwriters Letter, pursuant to which, among other things, (i) Imperial Capital, LLC agreed to forfeit all of Its 1,423,125 Underwriters Forfeited Warrants and all of its 156,543 Underwriters Forfeited Shares, (ii) I-Bankers Securities, Inc agreed to forfeit all of its 301,875 Underwriters Forfeited Warrants and all of its 33,207 Underwriters Forfeited Shares and (iii) the underwriters agreed to reduce their deferred underwriting fees related to the IPO from $6,037,500 to $4,312,500. 44 Critical Accounting Policies Before the Business Combination The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and income and expenses during the periods reported. Making estimates requires management to exercise significant judgment. It is possible that the estimates management considered could possibly change due to one or more future events. The most significant estimates that affected the consolidated financial statements as of December 31, 2022 are the calculations of the fair values of the over-allotment option, fair values of the representative shares and the fair values of the anchor shares. These estimates are uncertain due to the assumptions used in the stock valuations. These estimates and assumptions have not changed significantly during the year. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies: Offering Costs associated with the Initial Public Offering Offering costs consist of underwriting, legal, accounting and other expenses incurred through the balance sheet date that are directly related to the IPO. We comply with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A “Expenses of Offering”. Offering costs are allocated to the separable financial instruments, if any, issued in the IPO based on a relative fair value basis compared to total proceeds received. Class A Common Stock Subject to Possible Redemption We account for the Class A common stock subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption (if any) are classified as a liability instrument and measured at fair value. Conditionally redeemable common stock (including common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. We recognize changes in redemption value immediately as they occur. Immediately upon the closing of the IPO, we recognized the subsequent re-measurement under ASC 480-10-S99 from initial carrying amount to redemption value. The change in the carrying value of redeemable common stock resulted in charges against additional paid-in capital and accumulated deficit. Net Loss Per Common stock CENAQ had two classes of common stock, which are referred to as Class A common stock and Class B common stock. Income and losses are allocated on pro rata basis between redeemable and non-redeemable common stock. The 19,612,500 potential common shares for outstanding warrants to purchase our stock were excluded from diluted earnings per share for the year ended December 31, 2022 and 2021 because the warrants are contingently exercisable, and the contingencies have not yet been met. As a result, diluted net loss per common share is the same as basic net loss per common share for the periods. Recent Accounting Pronouncements In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt —debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity’ Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’ Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The guidance was adopted starting January 1, 2022. Adoption of the ASU did not impact the Company’s financial position, results of operations or cash flows. 45 In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This guidance clarifies certain aspects of the current guidance to promote consistency among reporting of an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for all entities, including adoption in an interim period. The guidance was adopted starting January 1, 2022. Adoption of the ASU did not impact the Company’s financial position, results of operations or cash flows. Our management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statement. Critical Accounting Policies After the Business Combination Our consolidated financial statements have been prepared in conformity with U.S. GAAP as determined by the FASB. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses and allocated charges during the reporting period. The following is a summary of certain critical accounting policies and estimates that are impacted by judgments and uncertainties and under which different amounts might be reported using different assumptions or estimation methodologies. Asset Acquisition In August 2020, we acquired a demonstration facility, a laboratory, office space, and intellectual property including the patented STG+® process technology under the terms of a purchase agreement with Primus Green Energy, Inc. (“Primus”). Upon acquiring the assets of Primus from the Founders, we performed an assessment as to whether the acquisition should be accounted for as a business combination (under ASC Topic 805) or whether the acquisition should be accounted for as an asset acquisition under ASC Topic 805-50. We determined that substantially all of the fair value of the assets acquired was concentrated in a single identifiable intangible asset representing intellectual property and patented technology and therefore, the acquisition was not considered the acquisition of a business but rather an asset acquisition. Certain other ancillary assets were acquired including a property lease and the related leasehold improvements. After allocating the acquisition cost to physical assets which were deemed immaterial, the remaining value was recorded to a single intangible asset which we referred to as Intellectual Property and Patented Technology. We further assessed whether the intangible asset would be used in Research and Development activities and whether the intangible asset should be capitalized or expensed. Under ASC Topic 730-10, assets that have alternative future uses should be capitalized. An alternative use includes adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity. Another alternative use includes activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than facilities or equipment whose sole use is for a particular research and development project. 46 We have utilized the intellectual property and patented technology, which is considered to be an adaption of an existing capability of the intellectual property and patented technology, to attempt to meet the contractual requirements of several potential licensing customers including modification to attach our STG+® process technology to existing customer owned methanol production facilities. Further, we have also utilized the intellectual property and patented technology acquired to perform additional modifications to the design and engineering of the commercially viable process island in order to validate the production of other commercially consumed fuels such as diesel and methanol with only minor modifications to the overall process. As a result of these alternative uses, we concluded the intellectual property and patented technology intangible asset has alternative future uses and therefore was capitalized. As a result, substantially all of the asset purchase price was attributed to the single intangible asset. Accordingly, we recorded $1,925,151 to the intellectual property and patented property intangible asset inclusive of direct transaction costs of $537,500 that were incurred. The intellectual property and patented technology is considered an indefinite lived intangible and is not subject to amortization. We expect to reassess the estimated useful life of the intangible asset following definitive decisions to proceed with the construction of our initial production facility. As of December 31, 2022 and 2021, the gross and carrying amount of the unamortized intellectual property and patented technology intangible asset was $1,925,151. Contingent Consideration Holdings, on Intermediate’s behalf, had an arrangement payable to our Chief Executive Officer and a consultant whereby a contingent payment could become payable in the event that certain return on investment hurdles are met within five years of the closing date of the Primus asset purchase. At the Closing of the Business Combination, the Contingent Consideration was forfeited, pursuant to an agreement, dated August 5, 2022, entered into by Holdings with Intermediate’s management and CEO. Impairment of Intangible Assets A qualitative assessment of indefinite-lived intangible assets is performed in order to determine whether further impairment testing is necessary. In performing this analysis, we consider macroeconomic conditions, industry and market considerations, current and forecasted financial performance, entity-specific events and changes in the composition or carrying amount of net assets under the quantitative analysis, intellectual property and patents are tested for impairment using a discounted cash flow approach and tested for impairment using the relief-from-royalty method. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, an impairment loss is recognized equal to the difference. We have considered a mix of information in monitoring the risks associated with impairment through the use of various valuation analyses which were used to measure the estimated fair value of our stock-based incentive awards. In addition, the Company considered market transactions (such as the Business Combination). As discussed above, substantially all of the value of the acquired assets from Primus was attributable to the intellectual property and patented technology. Such technology has remained our core asset since our acquisition and we have continued to develop such technology and expand its application to other feedstocks. 47 In connection with our valuation of our stock-based incentive units granted to management, we determined our estimated enterprise value utilizing a mix of market approach, discounted cash flow and relief from royalty methods in the determination and such estimated enterprise value exceeded the carrying amount of this intangible asset by a substantial amount. During the years ended December 31, 2022 and 2021, we placed the most weight to the Business Combination in concluding that no impairment testing was required. We also leveraged the valuation analyses prepared in the measurement of our contingent consideration as discussed in detail above. Such transaction served to support management’s conclusion that fair value of our indefinite-lived intangible asset is greater than its carrying amount by a substantial amount, and no impairment charges were recognized in any of the periods presented. Impairment of Long-Term Assets We evaluate the carrying value of long-lived assets when indicators of impairment exist. The carrying value of a long-lived asset is considered impaired when the estimated separately identifiable, undiscounted cash flows from such asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the estimated cash flows discounted at a rate commensurate with the risk involved. There were no impairment charges in any of the periods presented. JOBS Act On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. CENAQ previously elected to irrevocably opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. This may make comparison of our consolidated financial statements with another emerging growth company that has not opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used. Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of the IPO or until we are no longer an “emerging growth company,” whichever is earlier. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “ smaller reporting company, ” as defined by Rule 229.10(f)(1).