Verde Clean Fuels, Inc. — 2022 Q3 Form 10-Q Summary
Reporting entity: CENAQ Energy Corp., a special purpose acquisition company (SPAC), for the quarter ended September 30, 2022. It had not begun operations or generated revenue; it expected to change its name to Verde Clean Fuels, Inc. upon closing its proposed business combination with Bluescape Clean Fuels. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 | Comparison period |
|---|---|---|---|
| Revenue | $0 | $0 | No operating revenue in either 2021 comparison period |
| General and administrative expense | $3,013,729 | $4,408,361 | $68,294 and $73,646, respectively, in 2021 |
| Net loss | $2,387,015 | $3,566,151 | $67,295 and $72,647, respectively, in 2021 |
| Trust account interest income | $757,106 | $978,254 | $999 in each 2021 period |
| Net loss per share | $0.11 | $0.16 | $0.01 in each 2021 period |
Margins are not meaningful because the SPAC had no revenue. 2022 general and administrative expense included $2,501,501 of target-identification costs for the quarter and $3,410,564 year to date.
- Cash and liquidity at September 30: Cash outside the trust was $8,242, down from $505,518 at December 31, 2021. Working capital deficit was $3,600,490. The trust held $174,873,584 in U.S. Treasury bills, generally reserved for a business combination or shareholder redemptions.
- Cash flows, nine months: Operating activities used $956,626, versus $444,192 in 2021. Investing activities provided $334,350, primarily from trust withdrawals for taxes, versus $174,225,000 deposited in the trust in 2021. Financing activities provided $125,000, versus $175,197,682 in 2021, primarily reflecting IPO and private placement proceeds. Cash declined by $497,276.
- Debt and obligations: The company had a $125,000 related-party promissory note outstanding, bearing 10% interest. It reported no long-term debt or lease obligations. A deferred underwriting discount of $6,037,500 was shown on the balance sheet; under an agreement tied to the proposed combination, underwriters agreed to reduce the fee to $4,312,500.
Material changes and transaction developments
- Compared with 2021, quarterly and year-to-date losses increased substantially, principally because the company incurred business-combination search and transaction costs as it pursued a target.
- On August 12, 2022, CENAQ agreed to combine with Bluescape Clean Fuels Holdings and related entities. The proposed transaction contemplated that CENAQ would become Verde Clean Fuels, Inc. and operate through Verde Clean Fuels OpCo, LLC.
- The transaction included commitments for an $80 million PIPE at $10 per share. A sponsor-affiliated investor committed $70 million, subject to a reduction based on excess trust funds and other terms; the seller committed $8 million and another investor $2 million.
- As part of transaction agreements, the sponsor agreed to forfeit 2,475,000 private placement warrants. Underwriters agreed to forfeit their private placement warrants and representative shares and reduce their deferred fee.
Outlook, risks, and unusual items
- Going concern: Management said the low operating cash balance, working capital deficit, and risk of mandatory liquidation raised substantial doubt about the company’s ability to continue as a going concern. It had until February 16, 2023, after extensions, to complete a business combination; failure would require it to cease operations and liquidate, subject to applicable law.
- Subsequent extension funding: After quarter-end, the sponsor extended the deadline to February 16, 2023 and deposited $1,725,000 into the trust. CENAQ issued a $1,725,000 extension note and a separate $467,500 sponsor note, both interest-free and payable upon a business combination or liquidation, subject to the stated terms.
- Potential transaction costs and tax obligations: The proposed tax receivable agreement would generally allocate 85% of specified realized tax savings to the sellers. Early termination could trigger an accelerated payment, with a stated cap of $50 million for certain changes of control. The filing also warned that the 1% federal excise tax on certain post-2022 stock repurchases or redemptions could reduce cash available for a transaction or liquidation.
- Other risks: The company cited uncertainty from COVID-19 and the Russia-Ukraine conflict, including potential market volatility, inflation, commodity-price changes, and supply disruptions. It also warned that transaction financing could be insufficient, especially if shareholder redemptions were high.
- Controls: Management concluded disclosure controls were not effective because of material weaknesses involving accounting for complex financial instruments and improper recording of accrued liabilities. Remediation was underway, but the company gave no assurance it would be effective.
Most important facts for investors to verify
- Whether the proposed Bluescape transaction closed, and the final shareholder redemptions, PIPE proceeds, and resulting capitalization.
- Whether sponsor funding and available cash were sufficient to meet transaction costs through closing or liquidation.
- The final business-combination deadline and the consequences if another extension or closing did not occur by February 16, 2023.
- Progress in remediating the disclosed material weaknesses and any effect on the reliability of subsequent financial reporting.
- The final underwriting fee, any excise-tax exposure, and the terms and potential cost of the tax receivable agreement.