| SIGNIFICANT ACCOUNTING POLICIES | NOTE 3 — SIGNIFICANT
ACCOUNTING POLICIES Basis
of Presentation The
accompanying financial statement is presented in conformity with GAAP and pursuant to the rules and regulations of the SEC. Principles
of Consolidation The
accompanying audited consolidated financial statements include the accounts of the Company and its subsidiaries for which the Company
controls by ownership interest or other contractual rights giving the Company control over the most significant activities of an investee.
The consolidated financial statements include the accounts of Verde Clean Fuels, and its subsidiaries OpCo, Intermediate, Bluescape Clean
Fuels Employee Holdings, LLC, Bluescape Clean Fuels EmployeeCo., LLC, Bluescape Clean Fuels, LLC, and Maricopa Renewable Fuels I, LLC. All
intercompany balances and transactions have been eliminated in consolidation. Risks
and uncertainties The
Company is currently in the development stage and has not yet commenced principal operations or generated revenue. The development of
the Company’s projects are subject to a number of risks and uncertainties including, but not limited to, the receipt of the necessary
permits and regulatory approvals, commodity price risk impacting the decision to go forward with the projects, the availability and ability
to obtain the necessary financing for the construction and development of projects. The
Company’s ability to develop and operate commercial production facilities, as well as expand production at future commercial production
facilities, is subject to many risks beyond its control, including regulatory developments, construction risks, and global and regional
macroeconomic developments. Inflation
Reduction Act of 2022 On
August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for,
among other things, a new U.S. federal 1% excise tax on certain repurchases of stock, in which the cumulative fair market value is greater
than $1 million in a calendar year, by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly
traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself,
not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the
shares repurchased at the time of the repurchase. The amount of repurchases applicable to the excise tax can be reduced by the fair market
value of any issuances at the time of issuance that occurred during the year, as well as certain exceptions provided by the U.S. Department
of the Treasury (the “Treasury”). The Treasury and the IRS released interim guidance on December 27, 2022, which can be relied
upon until the issuance of proposed regulations. In
connection with the Business Combination, the Company incurred an excise tax of $1.59 million based on the redemption of $158.9 million
at the request of the Common A shareholders. The excise tax is payable in the second quarter of 2024 and is recorded within accrued liabilities
on the Consolidated Balance Sheet as of December 31, 2023. Other than the 1% excise tax, the IR Act has not had a material impact on
the Company’s consolidated financial statements. Emerging
Growth Company The
Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities
Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. Additionally,
section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides
that a company can elect not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended transition period is irrevocable. The Company expects to
be an emerging growth company through 2026. Prior to the Business Combination, CENAQ elected to irrevocably opt out of the extended transition
period, which means that when a standard is issued or revised and it has different application dates for public or private companies,
the Company will adopt the new or revised standard when those standards are effective for public registrants. Use
of Estimates The
preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of
a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered
in formulating its estimate, could change in the near term due to one or more future confirming events. The most significant estimates
pertain to the calculations of the fair values of equity instruments, contingent consideration, impairment of intangible and long-lived
assets and income taxes. Such estimates may be subject to change as more current information becomes available. Accordingly, the actual
results could differ significantly from those estimates. Cash,
Cash Equivalents and Restricted Cash As
of December 31, 2023 and December 31, 2022, the Company had cash and cash equivalents of $28,779,177 and $463,475, respectively. The
Company also had a restricted cash balance of $100,000 and $0 The
Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
As of December 31, 2023, the Company had cash equivalents of $26,155,789, which were comprised of funds held in a short-term money market
fund having investments in high-quality short-term securities that are issued or guaranteed by the U.S. government or by U.S. government
agencies and instrumentalities. There were no cash equivalents as of December 31, 2022. Concentration
of Credit Risk Financial
instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution,
which, at times, may exceed the Federal Deposit Insurance Corporation coverage limit of $250,000. As of December 31, 2023, the Company
has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts. Fair
Value of Financial Instruments The
fair value of the Company’s assets and liabilities which qualify as financial instruments under ASC 820, “Fair Value
Measurements and Disclosures” (“ASC 820”) approximates the carrying amounts represented in the balance sheet. The fair
values of cash, restricted cash, cash equivalents, prepaid expenses, and accrued expenses are estimated to approximate their respective
carrying values as of December 31, 2023 and December 31, 2022 due to the short-term maturities of such instruments. In
determining fair value, the valuation techniques consistent with the market approach, income approach and cost approach shall be used
to measure fair value. ASC 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer
and seller in pricing the asset or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs
are those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent of
the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use in pricing
the asset or liability developed based on the best information available in the circumstances. The
fair value hierarchy is categorized into three levels based on the inputs as follows: Level
1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that
are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment. Level 2
— Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets
that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs
that are derived principally from or corroborated by market through correlation or other means. Level 3
— Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Net
Loss Per Common Stock Subsequent
to the Business Combination, the Company’s capital structure is comprised of shares of Class A common stock, par value $0.0001
per share (the “Class A common stock”) and shares of Class C common stock, par value $0.0001 per share (the “Class
C common stock”). Public shareholders, the Sponsor, and the investors in the private offering of securities of Verde Clean Fuels
in connection with the Business Combination (the PIPE Financing) hold shares of Class A common stock and warrants, and Holdings owns
shares of Class C common stock and Class C units of OpCo (the “Class C OpCo Units”). Class C common stock represents the
right to cast one vote per share at the Verde Clean Fuels level, and carry no economic rights, including rights to dividends and distributions
upon liquidation. Thus, Class C common stock are not participating securities per ASC 260, “Earnings Per Share” (“ASC
260”). As the Class A common stock represent the only participating securities, the application of the two-class method is not
required. Antidilutive
instruments including outstanding warrants, stock options, restricted stock units (“RSUs”) and Sponsor earnout shares were
excluded from diluted earnings per share for the year ended December 31, 2023 because the inclusion of such instruments would be anti-dilutive.
As a result, diluted net loss per common stock is the same as basic net loss per common stock. Warrants The
Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC
480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”). Management’s assessment considers
whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant
to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants
are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement”
in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires
the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period-end date while
the warrants are outstanding. For
issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in
capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, they are
recorded at their initial fair value on the date of issuance and subject to remeasurement each balance sheet date with changes in the
estimated fair value of the warrants to be recognized as a non-cash gain or loss in the statement of operations. See Note 8 for further
information. Segments Operating
segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed
by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing
performance. The Company’s CODM is its Chief Executive Officer (“CEO”). The Company has determined that it operates
in one operating segment, as the CODM reviews financial information presented on a combined basis for purposes of making operating decisions,
allocating resources, and evaluating financial performance. Reverse
recapitalization The
Business Combination was accounted for according to a common control reverse recapitalization, with no goodwill or other intangible assets
recorded, in accordance with GAAP. This determination reflects Holdings holding a majority of the voting power of Intermediate’s
pre and post Business Combination operations and Intermediate’s management team retaining similar roles at Verde Clean Fuels. Further,
Holdings continues to have control of the Board of Directors through its majority voting rights. Under
the guidance in ASC 805, for transactions between entities under common control, the assets, liabilities and noncontrolling interests
of CENAQ and Intermediate are recognized at their carrying amounts on the date of the business combination. Under this method of accounting,
CENAQ is treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the business
combination is treated as the equivalent of Intermediate issuing stock for the net assets of CENAQ, accompanied by a recapitalization.
The net assets of Intermediate are stated at their historical value within the financial statements with no goodwill or other intangible
assets recorded. Property,
Equipment, and Improvements Property,
equipment, and improvements are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method
over the estimated useful life of the related asset. The estimated useful lives of assets are as follows:
Computers, office equipment and
hardware 3 – 5 years
Furniture and fixtures 7 years
Machinery and equipment 7 years
Leasehold improvements Shorter of the lease term (including estimated renewals) or the estimated useful lives of the improvement Maintenance
and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the accompanying statements
of operations in the period realized. Accrued
Liabilities Accrued liabilities
consist of the following:
As
of As
of
Accrued bonuses $ - $ 86,120
Accrued legal fees 237,839 558,860
Accrued professional fees 143,900 107,022
Other accrued expenses 1,595,073 10,117
Total accrued liabilities $ 1,976,812 $ 762,119 Leases The
Company accounts for leases under ASC 842, “Leases” (“ASC 842)”. The core principle of this standard is that
a lessee should recognize the assets and liabilities that arise from leases, by recognizing in the consolidated balance sheet a liability
to make lease payments (the lease liability) and a right-of-use asset (“ROU asset”) representing its right to use the underlying
asset for the lease term. In accordance with the guidance of ASC 842, leases are classified as finance or operating leases, and both
types of leases are recognized on the consolidated balance sheet. Certain
lease arrangements may contain renewal options. Renewal options are included in the expected lease term only if they are reasonably certain
of being exercised by the Company. The
Company elected the practical expedient to not separate non-lease components from lease components for real-estate lease arrangements.
The Company combines the lease and non-lease component into a single accounting unit and accounts for the unit under ASC 842 where lease
and non-lease services are included in the classification of the lease and the calculation of the right-of-use asset and lease liability.
In addition, the Company has elected the practical expedient to not apply lease recognition requirements to leases with a term of one
year or less. Under this expedient, lease costs are not capitalized; rather, are expensed on a straight-line basis over the lease term.
The Company’s leases do not contain residual value guarantees or material restrictions or covenants. The
Company uses either the rate implicit in the lease, if readily determinable, or the Company’s incremental borrowing rate for a
period comparable to the lease term in order to calculate the net present value of the lease liability. The incremental borrowing rate
represents the rate that would approximate the rate to borrow funds on a collateralized basis over a similar term and in a similar economic
environment. Impairment
of Intangible Assets The
Company’s intangible asset consists of its intellectual property and patented technology and is considered an indefinite-lived
intangible and is not subject to amortization. As of December 31, 2023 and December 31, 2022, the gross and carrying amount of this intangible
asset was $1,925,151. A
qualitative assessment of indefinite-lived intangible assets is performed in order to determine whether further impairment testing is
necessary. In performing this analysis, macroeconomic conditions, industry and market conditions are considered in addition to 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. During
the years ended December 31, 2023 and December 31, 2022, the Company did not record any impairment charges. Impairment
of Long-Term Assets The
Company evaluates 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.
During the years ended December 31, 2023 and December 31, 2022, the Company did not record any impairment charges. Equity-Based
Compensation The
Company applies ASC 718, “Compensation — Stock Compensation” (“ASC 718”), in accounting
for its share-based compensation arrangements. Unit-Based
Compensation 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. Performance-based unit compensation cost is measured at the grant date based on the fair value of the
equity instruments awarded and is 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 and any previously recognized unit-based compensation expense is reversed. Forfeitures
of service-based and performance-based units are recognized upon the time of occurrence. 2023 Equity-Based
Awards In
March 2023, the Company authorized and approved the Verde Clean Fuels, Inc. 2023 Omnibus Incentive Plan (the “2023 Plan”)
which authorizes 4,727,112 shares. On April 25, 2023, the Company granted stock options to certain employees and officers and RSUs to
non-employee directors, consistent with the terms of the 2023 Plan. The Company estimates the fair value of stock options on the date
of grant using the Black-Scholes model and the fair value of RSUs granted were determined by the value of the stock price on the date
of the award subject to a discount for lack of marketability. Equity-based
compensation is measured using a fair value-based method for all equity-based awards. The cost of awarded equity instruments is recognized
based on each instrument’s grant-date fair value over the period during which the grantee is required to provide service in exchange
for the award. 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. Equity-based compensation is recorded as a general and administrative
expense in the Consolidated Statements of Operations. The
Company estimates the expected term of options granted based on peer benchmarking and expectations. The Company uses U.S. 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 the Company
in its industry sector. The Company does not anticipate paying cash dividends and therefore use an expected dividend yield of zero in
the option valuation model. Forfeitures are recognized as they occur. The Company assesses 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 used to determine the fair value of such equity awards and other companies could
use similar market inputs and experience and arrive at different conclusions. See Note 7 for further information. Contingent
Consideration Holdings
had an arrangement payable to the Company’s CEO and a consultant whereby a contingent payment could become payable in the event
that certain return on investment hurdles were met within 5 years of the closing date of the Primus asset purchase. On August 5, 2022,
Holdings entered into an agreement with the Company’s management and CEO whereby, if the Business Combination reaches closing,
the contingent consideration will be forfeited. As
of December 31, 2022, the Company remeasured the liability of this arrangement, and reassessed the probability of the completion of the
Business Combination and reversed $7,551,000 of the accrued expense through earnings resulting in a contingent consideration liability
of $1,299,000. The
Business Combination closed on February 15, 2023, and therefore the contingent consideration arrangement was terminated and no payments
were made. Thus, the remaining $1,299,000 of accrued contingent consideration was reversed through earnings for the year ended December
31, 2023. See Note 10 for further information. Deferred
Transaction Costs Deferred
transaction costs are expenses directly related to the business combination with the SPAC. These costs consist primarily of legal and
accounting fees that the Company capitalized. The deferred transaction costs were offset against the business combination proceeds and
were reclassified to additional paid-in capital in the period of the completion of the business combination. As of December 31, 2023
and December 31, 2022, deferred transaction costs were $0 Income
Taxes The
Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax
assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated
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. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. 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, 2023
and 2022. 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. Recent
Accounting Standards In
November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements
to Reportable Segment Disclosures”. ASU 2023-07 enhances segment reporting under Topic 280 by expanding the breadth and frequency
of segment disclosures. ASU 2023-07 requires disclosure of significant expenses that are regularly provided to an entity’s
CODM and included in the reported measure(s) of a segment’s profit or loss. When applying this disclosure requirement, an entity
identifies the segment expenses that are regularly provided to the CODM or easily computable from information that is regularly provided
to the CODM. Entities are also required to disclose other segment items, i.e., the difference between reported segment revenue
less the significant segment expenses and the reported measure(s) of a segment’s profit or loss. ASU 2023-07 also clarifies that
single reportable segment entities are subject to Topic 280 in its entirety. ASU 2023-07 is effective for public entities for fiscal
years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. The amendments
in ASU 2023-07 should be adopted retrospectively unless impracticable. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2023-07 will have on its consolidated financial statements. In
December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. ASU
2023-09 requires public entities, on an annual basis, to provide: a tabular rate reconciliation (using both percentages and reporting
currency amounts) of (1) the reported income tax expense (or benefit) from continuing operations, to (2) the product of the income (or
loss) from continuing operations before income taxes and the applicable statutory federal (national) income tax rate of the jurisdiction
(country) of domicile using specific categories, and separate disclosure for any reconciling items within certain categories that are
equal to or greater than a specified quantitative threshold. For each annual period presented, ASU 2023-09 also requires all reporting
entities to disclose the year-to-date amount of income taxes paid (net of refunds received) disaggregated by federal (national), state,
and foreign. It also requires additional disaggregated information on income taxes paid (net of refunds received) to an individual jurisdiction
equal to or greater than 5% of total income taxes paid (net of refunds received). ASU 2023-09 is effective for public entities for
fiscal years beginning after December 15, 2024. ASU 2023-09 is to be applied on a prospective basis with the option to apply the standard
retrospectively. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2023-09 will have on
its consolidated financial statements. The
Company considers the applicability and impact of all ASUs issued by the FASB. There are no other accounting pronouncements which
have been issued but are not yet effective that would have a material impact on the consolidated financial statements when adopted. |
