Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.
The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion and analysis should be read together with the audited consolidated financial statements and related notes that are included elsewhere in this Report, as well as with “Item 1. Business – Formation, Business Combination and Related Transactions.” 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
We are a clean fuels company focused on the deployment of our innovative and proprietary liquid fuels processing technology through development of commercial production plants. Verde’s syngas-to-gasoline plus (STG+®) process converts syngas, derived from diverse feedstocks, into fully finished liquid fuels that require no additional refining. Verde is currently focused on identifying and evaluating opportunities to convert associated natural gas into gasoline, which is expected to provide a market for such natural gas with the added potential benefits of flare mitigation and production of gasoline with a lower carbon intensity than conventional gasoline.
As of December 31, 2024, the Company is still in the process of developing its first commercial production facility and has not derived revenue from its principal business activities. The Company is managed as an integrated business and there is only one reportable segment.
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Development
We acquired our STG+ ® technology from Primus in 2020, which was originally founded in 2007 and invested over $110 million in developing and demonstrating such technology, including the construction and operation of the demonstration plant. The demonstration plant began operations in 2013, completed over 10,500 hours of operation and is currently maintained in an idle state.
Recent Developments
PIPE Investment
On December 18, 2024, the Company entered into the Purchase Agreement with Cottonmouth, a subsidiary of Diamondback, pursuant to which the Company agreed to issue and sell the PIPE Shares to Cottonmouth in a private placement. The Company consummated the transactions contemplated by the Purchase Agreement on January 29, 2025.
In connection with the closing of the PIPE Investment, on January 29, 2025, (i) Cottonmouth and the Company amended that certain equity participation right agreement, dated February 13, 2023 (the “Existing Equity Participation Right Agreement”), to remove certain preemptive rights with respect to the Company’s equity securities granted to Cottonmouth under the Existing Equity Participation Right Agreement and (ii) the Company entered into that certain Second Amended and Restated Registration Rights Agreement with Cottonmouth and the other parties thereto, which amended and restated that certain Amended and Restated Registration Rights Agreement, dated February 15, 2023, by and among the Company and certain stockholders named therein (the “Existing Registration Rights Agreement”), to add Cottonmouth as a party to the Existing Registration Rights Agreement.
Restated Charter
On December 18, 2024, the holder of a majority of the issued and outstanding shares of Class A Common Stock and Class C Common Stock, adopted resolutions by written consent, in lieu of a meeting of stockholders to, among other things, amend and restate, immediately prior to and contingent upon the consummation of the closing of the PIPE Investment, our Fourth A&R Charter to (A) increase the amount of authorized shares of Class C Common Stock from 25,000,000 to 26,000,000 and (B) increase the size of our Board from seven to eight and to provide Cottonmouth with certain director designation and board observer rights. The Restated Charter was approved and recommended by the Board prior to the stockholder action by written consent.
Immediately prior to closing of the PIPE Investment, on January 29, 2025, the Company filed the Restated Charter with the Delaware Secretary of State.
Key Factors and Trends Influencing our Prospects and Future Results
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
A critical step in our business strategy will be the successful construction and operation of the first commercial production plant using our patented STG+® technology.
Concurrent with the Business Combination, Diamondback through its wholly-owned subsidiary, Cottonmouth, made a $20 million equity investment in Verde and entered into an equity participation right agreement pursuant to which Verde must grant Cottonmouth the right to participate and jointly develop facilities in the Permian Basin utilizing Verde’s STG+® technology for the production of gasoline derived from economically disadvantaged natural gas feedstocks. Diamondback is an independent oil and natural gas company headquartered in Midland, Texas, focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. The production of gasoline from natural gas sourced from the Permian Basin is designed to allow Diamondback to mitigate the flaring of natural gas while also producing a high-margin product from natural gas streams that are subject to being price disadvantaged compared to other natural gas basins.
In February 2024, Verde and Cottonmouth entered into the JDA, which provides a pathway forward for the parties to reach final definitive documents and FID. The JDA frames the contracts contemplated to be entered into between the parties,
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including an operating agreement, ground lease agreement, construction agreement, license agreement and financing agreements as well as conditions precedent to close such as FID. The expectation for the project is to produce approximately 3,000 barrels per day of fully-refined gasoline utilizing Verde’s patented STG+® process. We expect that the proposed facility, which is to be located in the Permian Basin, could serve as a template for additional natural gas-to-gasoline projects throughout the Permian Basin and other pipeline-constrained basins in the U.S., as well as addressing flared or stranded natural gas opportunities internationally.
In June 2024, the Company entered into a contract with Chemex for a FEED study related to the Permian Basin Project. In connection with entering into the JDA and the commencement of FEED, we began to incur development costs with respect to the project. Under the terms of the JDA, 65% of the approved development costs that we incur (which includes the FEED costs) are reimbursed by Cottonmouth. The construction in progress balance as of December 31, 2024 is comprised of capitalized FEED costs of $2,937,528 and is net of $1,908,628 of cost reimbursements from Cottonmouth. Upon FEED completion and reaching FID, it is anticipated that engineering, procurement and construction work will then commence. It is expected that commercial operations will be achieved with 18-24 months from commencement of engineering, procurement and construction work.
Key Components of Results of Operations
We are an early-stage company with no revenues, and our historical results may not be indicative of our future results. Accordingly, the drivers of any future financial results, as well as any components thereof, 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 activities related to the proposed Permian Basin Project, which will produce RBOB grade gasoline. These revenues are currently expected to be comprised of distributions from our share of ownership of the Permian Basin Project as well as fees from our role as operator of such project.
Expenses
General and Administrative Expense
General and administrative expenses consist of compensation costs including salaries, benefits and share-based compensation expense, for personnel in executive, finance, accounting and other administrative functions. General and administrative expenses also include outside service costs, such as legal fees, professional fees paid for accounting, auditing and consulting services, and insurance costs. Following the Business Combination, we incurred and expect to continue to incur higher general and administrative expenses for public company costs such as compliance with the regulations of the SEC and Nasdaq.
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 are 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.
Contingent consideration
Prior to the Business Combination, we had an arrangement payable to our Chief Executive Officer and a consultant whereby a contingent payment would become payable if certain return on investment hurdles were met within five years of an asset purchase arrangement. The contingent consideration was forfeited in connection with the Closing.
Other Income
Other income primarily consists of interest and dividend income earned on our cash and cash equivalents balances.
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Income Tax Effects
We hold 29.8% of the economic interest in OpCo, which is treated as a partnership for U.S. federal income tax purposes. As a partnership, OpCo generally is not subject to U.S. federal income tax under current U.S. tax laws. We are subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to our distributive share of the net taxable income (loss) and any related tax credits of OpCo.
Intermediate was historically and remains a disregarded subsidiary of a partnership for U.S. Federal income tax purposes. As a direct result of the Business Combination, OpCo became the sole member of Intermediate. As such, OpCo’s distributive share of any net taxable income or loss and any related tax credits of Intermediate are then distributed to us.
Results of Operations
Comparison of the years ended December 31, 2024 and 2023
For the
Year Ended
December 31,
2024 December 31,
2023
General and administrative expenses $ 11,205,770 $ 11,515,192
Contingent consideration - (1,299,000)
Research and development expenses 451,072 329,194
Total Operating loss 11,656,842 10,545,386
Other (income) (1,193,273) (447,074)
Interest expense - 236,699
Loss before income taxes 10,463,569 10,335,011
Provision for income taxes 51,465 166,265
Net loss $ 10,515,034 $ 10,501,276
General and Administrative
General and administrative expenses decreased approximately $0.3 million, or 3%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease was primarily due to $2.1 million of unit-based compensation expense recorded in the year ended December 31, 2023 associated with the accelerated vesting of all the outstanding Series A Incentive Units and Founder Incentive Units (each as defined in Note 9 in the accompanying Consolidated Financial Statements) as a result of the Business Combination, as well as decreases in miscellaneous general and administrative expenses of $0.4 million. These decreases were partially offset by higher employee compensation-related expense of $0.9 million attributable to an increase in headcount, higher outside services expense of $0.7 million and higher share-based compensation expense of $0.6 million associated with restricted stock units and stock options granted in 2023 and stock options granted in 2024.
Contingent Consideration
The $1.3 million decrease in contingent consideration for the year ended December 31, 2024 as compared to the prior year reflects the reversal during the year ended December 31, 2023 of the remaining accrual made by Holdings for certain contingent payments due to a contractual forfeiture of the payments following the close of the Business Combination on February 15, 2023. See Note 3 in the accompanying Consolidated Financial Statements for further information.
Research and Development
R&D expenses for the year ended December 31, 2024 increased approximately $0.1 million, or 37%, as compared to the prior year. The increase was primarily due to higher employee compensation-related expense attributable to an increase in headcount, partially offset by lower outside services expense.
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Other Income
Other income increased approximately $0.7 million for the year ended December 31, 2024 as compared to the prior year. The increase was primarily attributable to higher interest and dividend income earned as a result of our money market investment.
Interest Expense
Interest expense decreased approximately $0.2 million for the year ended December 31, 2024 as compared to the prior year. The decrease was primarily due to our former land lease in Maricopa, Arizona, which was classified as a finance lease until the third quarter of 2023, at which time the lease was modified and reclassified to an operating lease. The lease was exited on December 31, 2023.
Provision for Income Taxes
The provision for income taxes decreased approximately $0.1 million for the year ended December 31, 2024 as compared to the prior year. The decrease was primarily due to changes in estimations related to CENAQ’S fiscal year 2022 tax obligations. See Note 12 to the accompanying Consolidated Financial Statements for further information.
Liquidity and Capital Resources
As of December 31, 2024, we are in process of developing our first commercial production plant and have not derived revenue from our principal business activities. We do not expect to generate any meaningful revenue unless and until we are able to commercialize our first production plant. Since inception, we have incurred operating losses and generated negative operating cash flows primarily attributable to our ongoing general and administrative expenses and development activities.
We measure liquidity in terms of our ability to fund the cash requirements of our development activities and our near-term business operations, including our contractual obligations and other commitments. Our current liquidity needs primarily involve general and administrative expenses and activities related to the ongoing development of our first commercial production plant.
As of December 31, 2024, we had cash and cash equivalents of $19.0 million.
We expect that our cash and cash equivalents, including the net proceeds from the PIPE Investment received after December 31, 2024, will be sufficient to fund our cash requirements, including ongoing general and administrative expenses and planned development activities through the 2025 fiscal year. However, notwithstanding the PIPE Investment, we further expect that additional capital will be required in order to complete our first commercial production plant. The exact timing of these additional cash requirements will depend on the pacing of our development activities, which is uncertain and subject to a variety of factors, many of which are outside of our control.
Accordingly, we will likely be required to raise additional funds through the issuance of equity, equity-related or debt securities, through obtaining credit from government or financial institutions or by engaging in joint ventures or other alternative forms of financing. We cannot be certain that additional funds will be available on favorable terms when required, or at all. If we cannot raise additional funds when needed, our financial condition, results of operations, business and prospects could be materially and adversely affected. Our ability to raise funds through equity offerings may be limited by the significant number of shares that may be publicly sold as well as by the amount of publicly traded Class A Common Stock as well as outstanding Warrants, stock options, restricted stock units ("RSUs") or Earn Out Equity. As the exercise price of our Warrants is $11.50 per share of Class A Common Stock, we do not expect that Warrants will be exercised in the foreseeable future. In addition, to the extent we raise funds through the sale of additional equity securities, our stockholders would experience additional dilution. If we raise funds through the issuance of debt securities or through loan arrangements, the terms of such debt securities or loan arrangements could require significant interest payments, contain covenants that restrict our business, or contain other unfavorable terms. The current high interest rate environment adds additional risk and expense to the issuance of debt securities or loan arrangements to fund capital investment.
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Comparison of Cash Flows for the Years Ended December 31, 2024 and 2023
The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for the periods presented below:
For the Year Ended
December 31,
2024 2023
Net cash used in operating activities $ (8,880,184) $ (9,112,666)
Net cash used in investing activities (854,926) (58,588)
Net cash provided by financing activities - 37,495,502
Net increase in cash, cash equivalents and restricted cash $ (9,735,110) $ 28,324,248
Cash Flows Used in Operating Activities
Net cash used in operating activities decreased $0.2 million during the year ended December 31, 2024 as compared to the prior year. The decrease was primarily due to higher operating cash flows from interest and dividend income, partially offset by higher operating expenses, including employee compensation-related and outside services.
Cash Flows Used In Investing Activities
Net cash used in investing activities increased $0.8 million during the year ended December 31, 2024 as compared to the prior year. The increase was primarily attributable to development costs incurred in connection with the JDA upon commencement of FEED study in June 2024, partially offset by cash reimbursements for certain capital expenditures received from Cottonmouth. See Notes 4, 7 and 13 in the accompanying Consolidated Financial Statements for further information.
Cash Flows From Financing Activities
Net cash provided by financing activities was zero for the year ended December 31, 2024 as compared to $37.5 million for the prior year. Net cash provided by financing activities for the year ended December 31, 2023 consisted of the net proceeds received from the closing of the Business Combination and PIPE Financing. Following the Business Combination and the closing of the PIPE Financing, we received approximately $37.3 million in cash, net of approximately $10.0 million of transaction expenses and the repayment of approximately $3.8 million of capital contributions made by Holdings since December 2021. The gross amount, before expenses, was composed of approximately $19.0 million release from CENAQ’s trust account, after payment of approximately $158.8 million to public stockholders who exercised Redemption Rights (representing a redemption rate of approximately 89.3%), and $32.0 million of proceeds from the PIPE Financing. We also received $0.1 million from the CENAQ operating account.
Commitments and Contractual Obligations
In October 2022, we entered into a 25-year land lease in Maricopa, Arizona with the intent of building a biofuel processing facility. The commencement date of the lease occurred in February 2023 contemporaneous with us obtaining control of the identified asset. The lease was modified during the third quarter of 2023, resulting in a reclassification of the lease from finance to operating. We exited the lease as of December 31, 2023. See Note 8 to the accompanying Consolidated Financial Statements for further information.
The Company had a restricted cash balance of $100,000 as of both December 31, 2024 and December 31, 2023. The restricted cash balance is maintained in support of a letter of credit.
Off-Balance Sheet Arrangements
As of December 31, 2024 and during the year ended December 31, 2024, we had not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. GAAP as determined by the Financial Accounting Standards Board. The preparation of consolidated financial statements in conformity with U.S. GAAP requires
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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.
Income taxes
The Company follows the asset and liability method of accounting for income taxes under ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. The Company has elected to use the outside basis approach to measure the deferred tax assets or liabilities based on its investment in its subsidiaries without regard to the underlying assets or liabilities.
In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2024 and December 31, 2023. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Impairment of Long-Lived 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.
Impairment of Intangible Assets
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 its acquisition and we have continued to develop such technology and expand its application to other feedstocks.
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. Following our analysis of qualitative impairment indicators, intellectual property is tested for impairment using certain valuation methods, such as the discounted cash flow or relief-from-royalty methods. 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.
The Company also considered market transactions (such as the PIPE Investment and Business Combination) in qualitatively assessing impairment. We further determined our estimated enterprise value utilizing a mix of market approach, discounted cash flow and relief from royalty methods (obtained from various analyses including the determination of the grant date fair value of our securities in connection with the share-based compensation awarded in 2024 and 2023), and the estimated enterprise value exceeded the carrying amount of this intangible asset by a substantial amount.
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During the years ended December 31, 2024 and 2023, we placed the most weight on the PIPE Investment and Business Combination, respectively, in concluding that no impairment testing was required. Such transactions 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. Additionally, during the year ended December 31, 2024, there were no events or changes in circumstances noted that would indicate that the carrying amount of the indefinite-lived intangible asset may not be recoverable.
Unit-Based Compensation
We apply the fair value method under ASC 718, “Compensation — Stock Compensation” (“ASC 718”), in accounting for unit-based compensation to employees. Service-based units compensation cost is measured at the grant date based on the fair value of the equity instruments awarded and is recognized over the period during which an employee is required to provide service in exchange for the award, or the requisite service period, which is usually the vesting period. The fair value of the equity award granted is estimated on the date of the grant. Performance-based units are expensed over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no unit-based compensation expense is recognized. We accelerated the unvested service and performance-based units during the year ended December 31, 2023 in connection with the Business Combination. No service-based or performance-based incentive units were granted during the year ended December 31, 2024.
Share-Based Compensation
We apply ASC 718 in accounting for share-based compensation to employees. We estimate the fair value of stock options on the date of grant using the Black-Scholes model. The fair value of RSUs granted is determined based on the value of our stock price on the date of the award subject to a discount for lack of marketability. Share-based compensation expense is recorded over the period during which the grantee is required to provide service in exchange for the award. Forfeitures are recognized as they occur.
The determination of fair value requires significant judgment and the use of estimates, particularly with regard to Black-Scholes assumptions such as stock price volatility and expected option term. We estimate the expected term of options granted based on peer benchmarking and expectations. We use the treasury yield curve rates for the risk-free interest rate in the option valuation model with maturities similar to the expected term of the options. Volatility is determined by reference to the actual volatility of several publicly traded peer companies that are similar to us in our industry sector. We do not anticipate paying cash dividends and therefore use an expected dividend yield of zero in the option valuation model. We assess whether a discount for lack of marketability is applied based on certain liquidity factors. All equity-based payment awards subject to graded vesting based only on a service condition are amortized on a straight-line basis over the requisite service periods.
There is substantial judgment in selecting the assumptions which we use to determine the fair value of such equity awards, and other companies could use similar market inputs and arrive at different conclusions.
Recent Accounting Pronouncements
See Note 2 in the accompanying Consolidated Financial Statements for information regarding accounting pronouncements.
JOBS Act
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 not required to, among other things, provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.
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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).
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