Verde Clean Fuels, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References in this Quarterly Report on Form 10-Q (this “Quarterly Report”) to “we,” “our,” “us,” “Verde,” “Verde Clean Fuels” or the “Company” refer to Verde Clean Fuels, Inc. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Special note regarding forward-looking statements This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of present or historical fact, included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s expectations and any future financial performance, as well as the Company’s strategy, future operations, financial position, prospects, plans and objectives of management are forward-looking statements. The words “could,” “should,” "would," “will,” “aim,” “may,” “focus,” “believe,” “anticipate,” ”intend,” “estimate,” “expect,” "advance," ”project,” “plan,” “potential,” "goal,” “strategy,” “proposed,” "positions," the negative of such terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Such forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside the control of the Company, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Important factors, among others, that may affect actual results or outcomes include: • the financial and business performance of the Company; • the ability to maintain the listing of the Class A common stock and the Verde Clean Fuels Warrants on Nasdaq (each as defined below), and the potential liquidity and trading of such securities; • the failure to realize the anticipated benefits of the de-SPAC business transaction that the Company consummated in February 2023 (the "Business Combination"), which may be affected by, among other things, competition; • the Company’s ability to develop and operate anticipated and new projects; • the Company’s ability to obtain financing for any current or future projects; • the reduction or elimination of government economic incentives to the renewable energy market; • delays in acquisition, financing, construction and development of new or anticipated projects; • the length of development cycles for new or anticipated projects, including the design and construction processes for the Company’s projects; • the Company’s ability to identify suitable locations for new or anticipated projects; • the Company’s dependence on suppliers; • changes in local, state, and federal laws, regulations or policies that may affect our business or our industry (such as the effects of tax law changes, and changes in environmental, health, and safety regulations and regulations addressing climate change, and trade policy); • decline in public and governmental acceptance and support of renewable energy development and projects; • demand for renewable energy not being sustained; 22 • impacts of changing weather patterns and conditions, natural disasters and climate change; • the ability to secure necessary governmental and regulatory approvals; • the availability of, and our ability to qualify for, federal or state level low-carbon fuel credits or other carbon credits; • any decline in the value of federal or state level low-carbon fuel credits or other carbon credits and the development of the carbon credit markets; • risks relating to the Company’s status as a development stage company with a history of net losses and no revenue; • risks relating to the uncertainty of success, any commercial viability, or delays of the Company’s research and development efforts, including any study in which the Company participates that is funded by the Department of Energy or any other governmental agency; • significant developments in macroeconomic and political conditions beyond the Company’s control, including disruptions in the supply chain, increased costs due to inflation, the imposition of tariffs or trade disputes; • the Company’s success in retaining or recruiting, or changes required in, its officers, key employees or directors; • the ability of the Company to execute its business model, including market acceptance of gasoline derived from renewable feedstocks; • litigation and the ability to adequately protect intellectual property rights; • competition from companies with greater resources and financial strength in the industries in which the Company operates; and • other economic, competitive, governmental, legislative, regulatory, geopolitical, and technological factors that may negatively impact our businesses or operations. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors contained in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. 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 synthesis gas ("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 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 March 31, 2025, 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. Development We acquired our STG+ ® technology from Primus Green Energy 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 23 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 common stock purchase agreement (the "Purchase Agreement") with Cottonmouth Ventures, LLC ("Cottonmouth"), a subsidiary of Diamondback Energy, LLC ("Diamondback"), pursuant to which the Company agreed to issue and sell an aggregate of 12,500,000 shares of its Class A common stock, par value $0.0001 ("Class A common stock") to Cottonmouth at a price of $4.00 per share for an aggregate purchase price of $50 (the “PIPE Investment”) 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, par value $0.0001 ("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 amended and restated certificate of incorporation (the "Fourth A&R Charter"), and such amended Fourth A&R Charter is referred to as the “Restated 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 of Directors (the "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" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024. 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 the Existing 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 (the "Permian Basin Project"). 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. 24 In February 2024, Verde and Cottonmouth entered into a joint development agreement ("JDA"), which provides a pathway forward for the parties to reach final definitive documents and final investment decision ("FID"). The JDA frames the contracts contemplated to be entered into between the parties, 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 Global, LLC ("Chemex") for a front-end engineering and design ("FEED") study related to the Permian Basin Project. For the three months ended March 31, 2025, we continued to advance the FEED study related to the Permian Basin Project. During the three months ended March 31, 2025, a new site was identified for the Permian Basin Project with improved access to key utilities. Under the terms of the JDA, 65% of the approved development costs that we incur (which includes the FEED costs) are reimbursed by Cottonmouth. Our construction in progress assets as of March 31, 2025 are comprised of capitalized FEED costs of $4,301,267, net of amounts reimbursable by Cottonmouth of $2,783,228. 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 within 18-24 months from commencement of engineering, procurement and construction work. In addition to the Permian Basin Project, we also continue to identify and evaluate other potential opportunities to deploy our technology while remaining disciplined with our resources. 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 is expected to produce reformulated blendstock for oxygenate blending 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 Expenses General and administrative expenses primarily 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 business development costs, 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 U.S. Securities and Exchange Commission (the “SEC”) and Nasdaq. Research and Development Expenses Research and development expenses consist primarily of activities related to the Company’s technology that are not capitalized, including labor (engineers and consultants), engineering software costs, and demonstration plant operations and maintenance costs. 25 Other Income Other income primarily consists of interest and dividend income earned on our cash and cash equivalents balances. Income Tax Effects We hold 49.49% 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 three months ended March 31, 2025 and March 31, 2024 Three Months Ended March 31, 2025 2024 General and administrative expenses $ 2,997,522 $ 2,789,376 Research and development expenses 183,306 85,835 Total operating loss 3,180,828 2,875,211 Other (income) (530,243) (346,128) Loss before income taxes 2,650,585 2,529,083 Income tax expense 53,000 — Net loss $ 2,703,585 $ 2,529,083 General and Administrative General and administrative expenses increased approximately $0.2 million, or 8%, for the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily due to additional headcount. Of our general and administrative expenses for the three months ended March 31, 2025 and 2024, $65,829 and $222,407, respectively, were business development costs. The decrease was primarily due to development costs associated with the Permian Basin Project incurred in the comparative period prior to our entry into the JDA. Research and Development Research and development expenses increased approximately $0.1 million, or 114%, for the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily due to additional headcount and higher software costs. Other Income Other income increased approximately $0.2 million, or 53%, for the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily attributable to higher interest and dividend income earned on our cash and cash equivalents, which increased due to proceeds received from the closing of the PIPE Investment in January 2025. 26 Income Taxes Income tax expense increased approximately $0.1 million for the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily due to higher interest and dividend income earning on our cash and cash equivalents, which increased due to proceeds received from the closing of the PIPE Investment in January 2025. Liquidity and Capital Resources Liquidity As of March 31, 2025, we are still in the 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 March 31, 2025, we had cash and cash equivalents of $65.3 million. We expect that our cash and cash equivalents 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 publicly traded warrants ("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. Summary Statement of Cash Flows for the Three Months Ended March 31, 2025 and March 31, 2024 The following table sets forth the primary sources and uses of cash and cash equivalents for the periods presented below: Three Months Ended March 31, 2025 2024 Net cash used in operating activities $ (3,701,761) $ (2,829,250) Net cash used in investing activities (11,946) (8,323) Net cash provided by financing activities 49,950,000 - Net change in cash, cash equivalents and restricted cash $ 46,236,293 $ (2,837,573) 27 Cash Flows Used in Operating Activities Net cash used in operating activities increased approximately $0.9 million during the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily due to cash paid for D&O insurance and excise taxes, partially offset by an increase in interest and dividend income. Cash Flows Used in Investing Activities Net cash used in investing activities increased marginally during the three months ended March 31, 2025 as compared to the same period in 2024. The increase was primarily attributable to development costs incurred in connection with the JDA, partially offset by cash reimbursements for such capital expenditures received from Cottonmouth. See Note 4 in the accompanying unaudited consolidated financial statements for further information. Cash Flows Provided by Financing Activities Net cash provided by financing activities was $49.9 million for the three months ended March 31, 2025 as compared to $0 for the same period in 2024. The increase was due to the net proceeds from the closing of the PIPE Investment in January 2025. Commitments and Contractual Obligations The Company had a restricted cash balance of $100,000 as of both March 31, 2025 and December 31, 2024. The restricted cash balance is maintained in support of a letter of credit. Off-Balance Sheet Arrangements As of March 31, 2025, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Critical Accounting Policies and Estimates Our unaudited consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited 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 at the date of the unaudited consolidated financial statements and the reported amounts of expenses and allocated charges during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results. We describe our significant accounting policies in Note 2 – Significant Accounting Policies, of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024. We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024. Recent Accounting Pronouncements See Note 2 in the accompanying unaudited consolidated financial statements for information regarding recent accounting pronouncements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item. 28