Verde Clean Fuels, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Verde is a development-stage renewable fuels company developing technology to convert syngas into gasoline. It has not commenced principal operations or generated revenue.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Prior comparable period / December 31, 2022 |
|---|---|---|
| Revenue | None | None |
| Consolidated net income (loss) | $(2.63) million for Q3; $(8.30) million for nine months | $4.35 million for Q3 2022; $3.60 million for nine months 2022 |
| Net loss attributable to Verde | $(0.77) million for Q3; $(2.10) million for nine months | Not separately presented for 2022 |
| General and administrative expense | $2.51 million for Q3; $9.23 million for nine months | $0.87 million for Q3 2022; $3.34 million for nine months 2022 |
| Operating cash flow | $(6.79) million for nine months | $(2.31) million for nine months 2022 |
| Cash and restricted cash | $31.25 million, including $0.10 million restricted | $0.46 million cash at December 31, 2022 |
| Total assets / liabilities | $34.57 million / $3.82 million | $6.36 million / $5.25 million |
There are no revenue-based margins to report. The nine-month consolidated loss includes losses attributable to noncontrolling interests. The company reported a Class A loss per share of $0.13 for Q3 and $0.34 for the nine months; 2022 per-share data was not presented as management considered it not meaningful.
Cash increased principally because of the February 2023 business combination and PIPE financing. Financing cash flow was $37.50 million for the nine months, including $32.0 million of PIPE proceeds and $19.03 million released from the trust, offset by transaction expenses and other uses. Cash used in investing was minimal.
The balance sheet reports a $409,612 non-interest-bearing related-party promissory note, due by February 15, 2024 and payable in cash or Class A shares at the company’s election. Operating lease liabilities were $255,078. No substantial conventional debt balance is reported.
Changes versus prior periods
- Q3 G&A rose approximately 189% year over year; nine-month G&A rose approximately 177%. Management cited higher professional, legal and director fees, insurance, stock compensation and other public-company costs.
- Nine-month operating cash use increased by approximately $4.48 million, primarily due to business-combination-related professional fees and higher directors’ and officers’ insurance costs.
- Reported 2022 profits benefited materially from reversals of contingent-consideration accruals: $5.29 million in Q3 and $7.18 million for the nine months. In 2023, the remaining $1.30 million accrual was reversed after the business combination closed. These nonrecurring reversals make reported year-over-year earnings comparisons less representative of underlying operating performance.
- Share-based compensation was $2.62 million for the nine months, including $2.15 million from accelerated vesting of legacy awards upon the business combination.
Outlook, risks and unusual items
- Management said available cash should fund operations and R&D through 2024 at the then-current expense level, but expects future funding may be needed. It expects transaction proceeds to contribute to capital requirements through 2025 and says approximately 70% of project capital needs are expected to come from project or other debt financing; discussions have produced indications, not committed financing.
- Project timing varies within the filing: one passage says first commercial production could be as early as 2025, while another describes commercialization supporting production as early as 2026. For a potential Permian project, FID is targeted for late 2024 and operations for mid-2026. A non-binding California carbon-management agreement describes FID targeted for mid-2025 and operations in the second half of 2027.
- The company has refocused from the Maricopa, Arizona project toward opportunities it believes may reach commercial operation sooner, but has not abandoned Maricopa. It terminated the Maricopa land lease in August; lease obligations continue through December 31, 2023, with a termination fee.
- Key risks include permitting and regulatory approvals, successful construction and operation of commercial facilities, access to financing, feedstock and commodity economics, competition, and the availability or value of renewable-fuel and carbon credits. Management cautions that the company has no meaningful revenue and expects operating losses and negative cash flows may increase.
- Material weaknesses in internal control over financial reporting have not been fully remediated. Management cited prior errors involving unit-based compensation and accounting-standard adoption; remediation work is ongoing, and the timing of full remediation is uncertain.
- The company reported no material pending litigation and no off-balance-sheet arrangements. It has a tax receivable agreement requiring payment to Holdings of 85% of qualifying realized or deemed tax savings; a $50 million cap applies to certain change-of-control payments.
Investor verification priorities
- Confirm the project-by-project schedule and resolve the filing’s differing 2025 versus 2026 first-production expectations.
- Assess the cash runway against development costs, potential capital needs, and whether indicated project financing becomes committed financing.
- Track commercialization milestones, including permits, feedstock arrangements, credit eligibility, engineering, construction costs and final investment decisions.
- Review the status and potential effects of remediation of the disclosed material weaknesses.
- Evaluate dilution and governance implications: 9,387,836 Class A and 22,500,000 Class C shares were outstanding at September 30; 15,383,263 warrants, 1,236,016 options and other awards were also disclosed. Class C shares carry voting rights but no economic rights.