Verde Clean Fuels, Inc. (VGAS) FY 2023 MD&A

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.”

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Overview

We
are a clean energy technology company specializing in the conversion of synthesis gas, or syngas, derived from diverse feedstocks, such
as biomass or natural gas and other feedstocks, into liquid hydrocarbons that can be used as gasoline through an innovative and proprietary
liquid fuels technology, the STG+® process. Through our STG+® process, we convert syngas into RBOB gasoline. We are focused on
the development of technology and commercial facilities aimed at turning waste and other bio-feedstocks into a usable stream of syngas
which is then transformed into a single finished fuel, such as gasoline, without any additional refining steps. The availability of biogenic
MSW and the economic and environmental drivers that divert these materials from landfills will enable us to utilize these waste streams
to produce renewable gasoline from modular production facilities with expected capacity to produce between approximately seven million
to 30 million gallons of renewable gasoline per year.

We
are redefining liquid fuels technology through our proprietary and innovative STG+® process to deliver scalable and cost-effective
renewable gasoline. We acquired our STG+® technology from Primus, who developed the patented STG+® technology to convert syngas
into gasoline or methanol. Since acquiring the technology, we have adapted the application of our STG+® technology to focus on the
renewable energy industry. This adaptation requires a third-party gasification system to produce acceptable synthesis gas from renewable
feedstocks. Our proprietary STG+® system converts the syngas into gasoline.

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.

Successful
Implementation of the first commercial facility

A
critical step in our success will be the successful construction and operation of the first commercial production facility using our
patented STG+® technology. We believe our commercialization activities are being completed at a pace that can support first commercial
production of gasoline as early as 2026.

Protection
and Continuous Development of Our Patented Technology

Our
ability to compete successfully will depend on our ability to protect, commercialize, and further develop our proprietary process technology
and commercial facilities in a timely manner, and in a manner technologically superior to and/or are less expensive than competing processes.

Key Components
of Results of Operations

We
are an early-stage company and our historical results may not be indicative of our future results. Accordingly, the drivers of our
future financial results, as well as the components of such results, 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 the sale of renewable
RBOB grade gasoline or gasoline derived from natural gas.

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Expenses

General
and Administrative Expense

G&A
expenses consist of compensation costs including salaries, benefits and stock-based compensation expense for personnel in executive,
finance, accounting, and other administrative functions. General and administrative expenses also include legal fees, professional fees
paid for accounting, auditing and consulting services, and insurance costs. Following the Business Combination, we incurred higher general
and administrative expenses for public registrant costs for compliance with the regulations of the SEC and the Nasdaq Capital Market.

Research
and Development Expense

Our
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 have been 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, the Company had an arrangement payable to the Company’s CEO and a consultant whereby a contingent
payment would become payable if certain return on investment hurdles are met within five years of an asset purchase arrangement. The
contingent consideration was forfeited when the Company closed on the Business Combination.

Results
of Operations

Comparison
of the years ended December 31, 2023 and December 31, 2022

Comparison
for the years ended December 31, 2023 and 2022

General
and Administrative

General
and administrative expenses increased approximately $7.0 million, or 155%, from $4.5 million for the year ended December 31, 2022 to
$11.5 million for the year ended December 31, 2023. The increase was primarily due to higher professional fees of $3.0 million primarily
due to the Business Combination, higher share-based compensation expense of $1.5 million due to the acceleration of vesting of equity
awards as a result of the consummation of the Business Combination, higher insurance expense of $1.4 million, and higher employee compensation
and benefit costs of $0.4 million. Rent and depreciation expense and other general and administrative expenses also increased by $0.4
million and $0.3 million, respectively.

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Contingent
Consideration

The
$1.3 million reduction to operating expenses associated with contingent consideration for the year ended December 31, 2023 reflects the
reversal of the remaining accrual made by Holdings for certain contingent payments due to the contractual forfeiture of the payments
following the close of the Business Combination on February 15, 2023. The reduction to operating expenses associated with contingent
consideration of $7.6 million for the year ended December 31, 2022 was primarily due to a reduction in the probability of payment
following an amendment to the terms and conditions of this arrangement during the third quarter of 2022, and due to the increased likelihood
of closing the Business Combination with the SPAC, at which time the contingent payment would be forfeited. See Note 2 to the Consolidated
Financial Statements.

Research
and Development

R&D
expense for the year ended December 31, 2023 was consistent with the prior year.

Other
Income

Other
income of $447 thousand for the year ended December 31, 2023 was primarily attributable to interest earned on our cash and cash equivalents.

Interest
Expense

Interest
expense was $237 thousand for the year ended December 31, 2023, which was primarily attributable to our land lease in Maricopa, Arizona,
which was classified as a finance lease until the third quarter of 2023. See Note 5 to the Consolidated Financial Statements.

Provision
for Income Taxes

The
provision for income taxes of $166 thousand for the year ended December 31, 2023 was attributable to changes in estimates related to
CENAQ’S 2022 tax obligation. There was no income tax provision recorded for the year ended December 31, 2022, as Intermediate was
a limited liability company treated as a partnership for tax purposes, with each of its members accounting for its share of tax attributes
and liabilities. See Note 9 to the Consolidated Financial Statements.

Liquidity
and Capital Resources

We
measure liquidity in terms of our ability to fund the cash requirements of our R&D activities and our near-term business operations,
including our contractual obligations and other commitments. Our current liquidity needs primarily involve general and administrative
and R&D activities for the ongoing commercialization of our first production facility and associated plant design.

To
date, we have not generated any revenue, and as of December 31, 2023, we had cash and cash equivalents of $28.8 million. We do not expect
to generate any meaningful revenue unless and until we are able to commercialize our first production facility. Since inception, we have
incurred significant operating losses, have an accumulated deficit of $23.9 million as of December 31, 2023 and negative operating cash
flow in both the years ended December 31, 2023 and December 31, 2022. Management expects that operating losses and negative cash flows
may increase because of additional costs and expenses related to the development of technology and the development of market and strategic
relationships with other companies. Our continued solvency is dependent upon our ability to obtain additional working capital to complete
our product development and to successfully achieve commerciality of our projects.

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In
connection with entering into the JDA with Cottonmouth Ventures, a subsidiary of Diamondback, we will begin to incur development costs
with respect to the project, prior to reaching a FID and entering into final definitive agreements, irrespective of whether these events
occur. We are currently evaluating the impact that the JDA will have on our consolidated financial statements and liquidity. See Note
12 to the Consolidated Financial Statements.

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 $3.75 million of capital contributions made by Holdings since
December 2021. We expect to use such proceeds to fund our ongoing operations and R&D activities. The gross amount, before expenses,
was composed of approximately $19.0 million released 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 raised from the PIPE Financing. We also received $91 thousand from the CENAQ operating account. We believe that based on our
current level of operating expenses and currently available cash on hand, we will have sufficient funds available to cover R&D activities
and operating cash needs for at least the next 12 months. However, as we have not yet developed a commercial production facility and
have no meaningful revenue to date, we may require additional funds in future years. Our ability to raise funds through equity offerings
may be limited by the significant number of shares that may be publicly sold. As the exercise price of our Public Warrants is $11.50
per share of Class A Common Stock, we do not expect that Public Warrants will be exercised in the foreseeable future. Our ability to
fund R&D activities and our operating cash needs for several years does not depend on the proceeds we may receive as the result of
exercises of outstanding Warrants.

As
our transaction with CENAQ only resulted in $37.3 million of net proceeds, we expect that we will only be able to construct one
of our first four originally planned production facilities with these proceeds. The $37.3 million of net proceeds raised at closing
of the transaction with CENAQ will contribute to the equity capital portion of our capital expenditure requirements through 2025. We
also expect to earn interest income on the net proceeds raised at closing during the ongoing development and construction of our facilities
through 2025, and that such interest income will be utilized towards capital expenditures or for general and administrative expenses.
We also expect 70% of our total project capital requirements will be met with project financing, industrial revenue bonds, or pollution
control bonds, or some combination of debt financing. While we have been in discussions with banks and other credit counterparties regarding
project financing, industrial revenue bonds, or pollution control bonds, and these discussions have led to indications of debt financing
equivalent to 70% of our capital expenditure requirements, there can be no assurance that we will be successful in obtaining such financing.
The inability to obtain debt financing will adversely impact our ability to implement our business plan.

In
connection with the Closing, Sponsor was due $409,612 under existing promissory notes with CENAQ. On February 15, 2023, in lieu of repayment
of the existing promissory notes with Sponsor, the Company entered into the New Promissory Note with the Sponsor totaling $409,612. The
New Promissory Note canceled and superseded the existing promissory notes. The New Promissory note was non-interest bearing and the entire
principal balance of the New Promissory Note was payable on or before February 15, 2024 in cash or shares at our election. On February
15, 2024, we settled the New Promissory Note through the issuance of 40,961 shares of Class A Common Stock at a conversion price of $10.00
per share and recorded an increase to additional paid-in capital of $409,608.

Comparison
of Cash Flows for the Years Ended December 31, 2023 and 2022

The
following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for the periods presented below:

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Cash
Flows Used in Operating Activities

Net
cash used in operating activities increased $5.8 million to $9.1 million during the year ended December 31, 2023, as compared with net
cash used in operating activities of $3.3 million during the year ended December 31, 2022. The increase primarily was due to a higher
net loss of $13.2 million and higher payments for prepaid expenses of $0.3 million and income taxes of $0.3 million. These increases
were partially offset by a lower non-cash impact for the change in the liability for contingent consideration of $6.3 million and stock-based
compensation expense of $1.5 million, and other operating cash flows of $0.2 million.

Cash
Flows Used In Investing Activities

Net
cash used in investing activities for the year ended December 31, 2023 was consistent with the prior year.

Cash
Flows From Financing Activities

Net
cash provided by financing activities increased approximately $33.8 million to $37.5 million for the year ended December 31, 2023,
as compared with net cash provided of $3.7 million in the year ended December 31, 2022. The increase was primarily due to the closing
of the Business Combination on February 15, 2023, which raised $37.3 million in cash proceeds, partially offset by cash used for the
payment of notes payable, the principal portion of finance lease liabilities, and deferred financing costs.

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 5 to the Consolidated Financial Statements.

Off-Balance
Sheet Arrangements

As
of December 31, 2023 and during the year ended December 31, 2023, 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 GAAP as determined by the FASB. The preparation of consolidated
financial statements in conformity with GAAP requires 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.

Contingent
Consideration

Prior
to the Business Combination, our parent entity (Holdings), on Intermediate’s behalf, had an arrangement payable to our Chief Executive
Officer and a consultant whereby a contingent payment could become payable in the event that certain return on investment hurdles are
met within five years of the closing date of the Primus asset purchase. We recognized the liability for such contingent payment
on our balance sheet and remeasured the estimated payments under this arrangement and recorded our best estimate of amounts payable under
such arrangement.

Our
contingent consideration liability was measured at fair value and based on significant inputs not observable in the market. As such,
our contingent consideration liability was classified as a Level 3 fair value measurement within the fair value hierarchy. The valuation
of contingent consideration used assumptions we believe would be made by a market participant. We assessed these estimates on an ongoing
basis as additional data impacting the assumptions was obtained. Changes in the fair value of contingent consideration related to updated
assumptions and estimates were recognized within the consolidated statements of operations.

In
evaluating the fair value information, considerable judgment was required to interpret the market data used to develop the estimates.

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The
fair value of the contingent consideration as of the asset acquisition date was estimated using a concluded Enterprise Value of Intermediate’s
business based on a weighting of derived value from the combination of two Income approaches to business valuation (Discounted Cash Flows
and Relief from Royalty). Such business value underpinned a Monte Carlo Simulation valuation model to determine the ultimate contingent
consideration liability balance.

In
measuring the estimated amount payable under this arrangement as of December 31, 2022, we took into consideration a discounted cash
flow valuation of the business based on internal projections as well as the business valuation implied by the proposed business combination
transaction with CENAQ, which implied a value to existing equity holders of $225,000,000, and also considered the expected timing of
the transaction closing which was assumed to occur in the first quarter of 2023. Such implied value and timing underpinned a Monte Carlo
Simulation valuation model utilized in the determination of the contingent consideration liability balance (as similarly used in the
prior periods). We also updated the probability of payment due to the increased likelihood of forfeiture of the contingent consideration
payment as a result of an amendment to the terms and conditions of this contingent payment during the quarter ended September 30,
2022, as discussed further below. Accordingly, we recorded a reduction in contingent consideration totaling $7,551,000 during the year
ended December 31, 2022, resulting in a contingent consideration liability balance of $1,299,000 as of December 31, 2022.

The
contingent consideration liability determination using Monte Carlo Simulation was based on a number of assumptions including expected
term, expected volatility, expected dividends, the risk-free interest rate, a discount rate (WACC), and probability of success,
a specified contractual return hurdle (based on internal rate of return), and a contractual proportion of excess gain allocable to the
contingent payment above the contractual return hurdle. See Note 10 to the Consolidated Financial Statements for further information.

On
August 5, 2022, Holdings entered into an agreement with our management and CEO whereby, upon closing of the business combination
with CENAQ, the contingent consideration would be forfeited. Following the closing on February 15, 2023, the contingent consideration
was forfeited, and this arrangement was terminated and no payments were made. Thus, we reversed the entire $1,299,000 during the three
months ended March 31, 2023. There were no contingent consideration arrangements as of December 31, 2023.

Impairment
of Intangible Assets

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 under the quantitative
analysis, intellectual property and patents are tested for impairment using a discounted cash flow approach and tested for impairment
using the relief-from-royalty method. 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.

We
have considered a mix of information in monitoring the risks associated with impairment through the use of various valuation analyses
which were used to measure the estimated fair value of our stock-based incentive awards. In addition, the Company considered market transactions
(such as the Business Combination). As discussed above, 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 our acquisition and we have continued
to develop such technology and expand its application to other feedstocks.

In
connection with our valuation of our stock-based incentive units granted to management, we determined our estimated enterprise value
utilizing a mix of market approach, discounted cash flow and relief from royalty methods in the determination and such estimated enterprise
value exceeded the carrying amount of this intangible asset by a substantial amount.

During
the years ended December 31, 2023 and December 31, 2022, we placed the most weight to the Business Combination in concluding that no
impairment testing was required. We also leveraged the valuation analyses prepared in the measurement of our contingent consideration
as discussed in detail above. Such transaction 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, 2023, 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.

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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.

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, 2023
and December 31, 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.

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, 2023.

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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 3 – Significant Accounting Policies 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.