Notes to Consolidated Financial
Statements
(unaudited)
Note 1: Organization
Bluescape Clean Fuels Intermediate Holdings, LLC
(the “Company” or “BCF”), a Delaware Limited Liability Company, was formed on July 31, 2020. The Company had no
operations prior to the purchase of intellectual property and patented technology on August 7, 2020.
The Company is wholly-owned by its sole member
and immediate parent, Bluescape Clean Fuels Holdings, LLC (“BCF Holdings”). BCF Holdings is controlled by Bluescape Energy
Recapitalization and Restructuring Fund IV LP (“BERR”) through a series of intermediate entities.
The Company is a developer of a proprietary liquid
fuel’s technology, the STG+ process, which is designed to produce liquid hydrocarbons from synthesis gas, or syngas, derived from
renewable feedstocks such as biomass and municipal solid waste (“MSW”) as well as natural gas (including synthetic natural
gas) and other feedstocks. BCF’s STG+ process converts syngas into Reformulated Blend-stock for Oxygenate Blending (“RBOB”)
gasoline, methanol, or a stream miscible with crude oil (“synthetic crude”). The availability biogenic MSW and the economic
and environmental drivers to divert these materials from landfills enables BCF to utilize these waste streams to produce renewable gasoline.
The Company is focused on the development of technology used in 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 refining steps. Planned principal operations have
not yet commenced. As of September 30, 2022 and December 31, 2021, the Company has not derived revenue from its principal business activities.
The Company is managed as an integrated business; consequently, there is only one reportable segment.
The Company entered into a non-binding Business
Combination Term Sheet dated December 15, 2021 (the “Term Sheet”) to combine with an existing Special Purpose Acquisition
Company (SPAC). The Term Sheet indicates that the current equity holders of the Company would receive ownership interests in the merged
entity implying an estimated fair value of $225,000,000 at closing and an earn out amount. Subsequently, the Company entered into a revised
non-binding Business Combination Term sheet with the same Special Purpose Acquisition Company dated July 20, 2022. Such transaction is
subject to a number of closing conditions including the successful completion of a private investment in public entity offering (PIPE
offering).
On August 12, 2022, the Company signed a Business
Combination Agreement with the SPAC. The implied value that the current equity holders of the Company would receive at closing remained
unchanged ($225,000,000). The PIPE offering, related transactions and conditions needed to close such combination have not occurred as
of the date these financial statements were issued.
On August 5, 2022, BCF Holdings entered into an
agreement with the Company’s management and CEO whereby, if the Business Combination discussed above reaches closing, the Contingent
Consideration as discussed in Note 2 will be forfeited. Further, all outstanding unvested Series A Incentive Units and Founders Units
of BCF Holdings (as discussed in Note 5) will become fully vested. As part of the agreement, the priority of distributions under the Series
A Incentive Units and Founders Units was also revised such that participants receive 10% of distributions after a specified return to
BCF Holdings’ Series A Preferred Unit holders (instead of 20%). The modifications to the Series A Incentive Units and Founders Units
did not result in any incremental unit-based compensation expense.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
Note 2: Summary of Significant Accounting
Policies
Basis of Presentation
The Company’s consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).
These unaudited consolidated financial statements
should be read in conjunction with the audited financial statements and related notes included elsewhere in this proxy statement. In the
opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations
and financial position have been made. All appropriate intercompany items and transactions have been eliminated in consolidation. The
results of operations for an interim period may not give a true indication of results for a full year.
The Company has reclassified certain prior period
amounts to conform to the current period’s presentation.
Going Concern
The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company is currently in the development stage
and has not yet commenced principal operations or generated revenue. As such, the Company is dependent upon BERR for additional capital
to continue the development of its technology and operations. The Company does not have sufficient cash on hand or available liquidity
to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In response to these conditions, BERR has committed
to provide funding to enable the Company to meet its obligations as they become due for at least one year after the date that the financial
statements are issued. As a result, the Company has concluded that management’s plans are probable of being achieved to alleviate
substantial doubt about the Company’s ability to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities.
The Company regularly assesses these estimates; however, actual amounts could differ from those estimates. The most significant items
involving management’s estimates include estimates of unit-based compensation and contingent consideration. The impact of changes
in estimates is recorded in the period in which they become known.
Principles of Consolidation
The Company’s policy is to consolidate all
entities that 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 Bluescape Clean Fuels Intermediate Holdings,
LLC and its wholly-owned subsidiaries Bluescape Clean Fuels, LLC, Bluescape Clean Fuels Employee Holdings, LLC, Bluescape Clean Fuels
EmployeeCo, LLC. All intercompany balances and transactions have been eliminated in consolidation.
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
Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account and management believes the Company
is not exposed to significant risks on such account.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term,
highly liquid investments with maturities of three months or less at the time of purchase. The Company did not have any cash equivalents
as of September 30, 2022 and December 31, 2021.
Financial Instruments
The carrying value of the Company’s financial
instruments, consisting of cash, accounts payable and insurance premium financing, approximates their fair value due to the short maturity
of such instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest
or currency risks arising from these financial instruments.
Fair Value Measurement
The Company applies fair value accounting for
all financial assets and liabilities measured on a recurring and nonrecurring basis. Fair value is defined as an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. The accounting guidance established a fair value hierarchy based on three levels
of inputs, of which the first two are considered observable and the last unobservable, used to determine the fair value of its financial
instruments. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement.
| Level 1 | Quoted
prices in active markets for identical assets or liabilities that the entity has the ability
to access. |
| Level 2 | Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. |
| Level 3 | Unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets and liabilities. |
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.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
Accrued Liabilities
Accrued liabilities consist of the following:
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Accrued bonuses | |
| 64,590 | | |
| 86,120 | |
| Accrued legal fees | |
| 1,862,568 | | |
| — | |
| Other accrued expenses | |
| 309,321 | | |
| 12,320 | |
| | |
$ | 2,236,479 | | |
$ | 98,440 | |
Leases
In February 2016, the (the “FASB”)
issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which has been clarified and amended by various subsequent
updates. 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 representing its right
to use the underlying asset for the lease term. In accordance with the guidance of Topic 842, leases are classified as finance or operating
leases, and both types of leases are recognized on the consolidated balance sheet.
The Company recognizes right-of-use assets and
lease liabilities for leases with terms greater than 12 months. Leases are classified as either finance or operating leases. This classification
dictates whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
As of September 30, 2022 and December 31, 2021, the Company has only operating leases.
The Company’s right-of-use asset relates
to an office facility, which includes an option to renew, with renewal terms that can extend the lease term up to 1 year. The exercise
of the lease renewal is at the Company’s discretion. Renewal periods are included in the expected lease term if they are reasonably
certain of being exercised by the Company. The Company’s lease agreement does not contain residual value guarantees or material
restrictions or covenants.
The Company’s lease is capitalized at the
present value of the minimum lease payments not yet paid. 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 Net Present Value of
the lease liability.
Short-term leases (leases with an initial term
of 12 months or less or leases that are cancelable by the lessee and lessor without significant penalties) are not capitalized but are
expensed on a straight-line basis over the lease term. (See note 4.)
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 September 30, 2022 and December 31, 2021, 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, the Company considers
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.
Based on the Company’s qualitative impairment
assessment, including the implied transaction value of the business combination discussed in Note 1, the fair value of its indefinite-lived
intangible asset is greater than its carrying amount, and no impairment charges were recognized in any of the periods presented.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
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. There were no impairment charges in any of the periods
presented.
Deferred Transaction Costs
Deferred transaction costs are expenses directly
related to the pending business combination with the SPAC. These costs consist primarily of legal and accounting fees that the Company
capitalized. The deferred transaction costs will be offset against the business combination proceeds and will be reclassified to additional
paid-in capital upon completion of the business combination with the SPAC.
Unit-Based Compensation
The Company applies 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 on a straight-line basis 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 Performance-Based
units are estimated at the grant date based on historical rates of stock award activity and reduce the unit-based compensation expense
recognized.
Contingent Consideration
BCF Holdings has 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 are met within 5 years of the closing date of the asset purchase described in Note 1. The Company remeasures this liability each
reporting period and records any associated change in such obligation to the statement of operations.
In measuring the estimated amount payable under
this arrangement as of September 30, 2022, the Company took into consideration the business valuation implied by the transaction entered
into by the Company as described in Note 1 (Transaction approach to valuation) and a discounted cash flow analysis, which implied a value
to existing equity holders of $225,000,000. Such implied value underpinned a Monte Carlo Simulation valuation model utilized in the determination
of the contingent consideration liability balance.
The contingent consideration liability determination
using Monte Carlo Simulation is 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, and a specified contractual return hurdle (based on internal
rate of return).
The Company reduced its probability of payment
of the contingent consideration due to the likelihood of closing the Business Combination with the SPAC, at which time the contingent
payment would be forfeited. It also updated its expected timing of transaction closing to occur in the fourth quarter of 2022 or approximately
one quarter later than originally assumed as part of the December 31, 2021 valuation. The incremental time added to the expected transaction
closing resulted in a higher threshold for achievement based on the internal rate of return hurdle. The Company also updated its volatility
assumption and discount rate (including risk free rate) used in the valuation. Accordingly, the Company recorded a reduction in contingent
consideration totaling $7,181,000 during the nine months ended September 30, 2022, resulting in a contingent consideration liability balance
of $1,669,000 as of September 30, 2022. The measurement of this contingent consideration liability was a classified as a recurring Level
3 fair value measurement. Between July 31, 2020 (inception) and September 30, 2021, the Company determined that the contingent consideration
liability did not significantly change due to the low likelihood of achieving the return on investment hurdles associated with the contingent
payment. The contingent payment was remeasured as of December 31, 2021, upon entering into the Term Sheet with the SPAC in December 2021.
There were no transfers into or out of Level 3
during the nine months ended September 30, 2022 and 2021.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
Income Taxes
The Company is not directly subject to federal
income taxes under the provisions of the Internal Revenue Code and applicable state laws; however, the Company is subject to state income
taxes within certain states under the provisions of the Internal Revenue Code and applicable state laws. Therefore, taxable income or
loss is reported to the individual partners for inclusion in their respective tax returns and no provision for federal and state income
taxes has been included in the accompanying consolidated financial statements.
Impact of COVID-19 Pandemic
The Company is monitoring the ongoing COVID-19
pandemic, which has disrupted the global economy and financial markets. There is a significant amount of uncertainty about the length
and severity of the consequences caused by the pandemic. While governmental and non-governmental organizations are engaging in efforts
to combat the spread and severity of the COVID-19 pandemic and related public health issues, the full extent to which the outbreak of
COVID-19 could impact the Company’s business, results of operations and financial condition is still unknown and will depend on
future developments, which are highly uncertain and cannot be predicted. The Company has considered information available to it as of
the date of issuance of these financial statements and has not currently experienced significant negative impact to its operations, liquidity
or capital resources as a result of the COVID-19 pandemic.
Note 3: Property, Equipment, and Improvements
Major classes of property, equipment, and improvements
are as follows:
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Computers, office equipment and hardware | |
$ | 11,461 | | |
$ | 7,050 | |
| Furniture and fixtures | |
| 1,914 | | |
| 1,914 | |
| Machinery and equipment | |
| 36,048 | | |
| 36,048 | |
| Property, equipment, and improvements | |
| 49,423 | | |
| 45,012 | |
| Less: accumulated depreciation | |
| 40,052 | | |
| 31,975 | |
| Property, equipment and improvements, net | |
$ | 9,371 | | |
$ | 13,037 | |
Depreciation of property, equipment, and improvements
amounted to $8,076 and $17,092 for the nine months ended September 30, 2022 and 2021, respectively.
Note 4: Commitments and Contingencies
Leases
The Company maintains a lease for office and production
facilities under a lease that expires during 2023. The lease contains a renewal option for a period of one year from the current date
of expiration and requires the Company to pay all executory costs (property taxes, maintenance, and insurance).
Supplemental information related to the Company’s
leases is as follows:
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Right-of-use assets obtained in exchange for operating lease | |
$ | 137,907 | | |
$ | 304,094 | |
| Remaining lease term – operating lease | |
| 0.58 years | | |
| 1.33 years | |
| Discount rate – operating lease | |
| 7.5 | % | |
| 7.5 | % |
Future minimum lease commitments as of September
30, 2022, are as follows:
| 2022 | |
$ | 60,179 | |
| 2023 | |
$ | 80,238 | |
| Total | |
$ | 140,417 | |
| Less: Interest | |
$ | (2,510 | ) |
| Present value of lease liabilities | |
$ | 137,907 | |
Total operating lease expense for the nine months
ended September 30, 2022 and 2021 was $177,671 and $171,224, respectively.
Bluescape Clean Fuels
Intermediate Holdings, LLC
Notes to Consolidated Financial Statements
(unaudited) (continued)
Contingencies
The Company is not party to any litigation.
Note 5: Member’s Equity
During the nine months ended September 30, 2022
and 2021, the Company received capital contributions from BCF Holdings totaling $3,750,000 and $2,000,000, respectively.
The Company is a wholly-owned subsidiary of BCF
Holdings. BCF Holdings has entered into several compensation related arrangements with management of the Company. Compensation cost associated
with these arrangements has been allocated to the Company from BCF Holdings as the employees are rendering services to the Company. However,
the ultimate contractual obligation related to these awards, including any future settlement, rests with BCF Holdings.
Series A Incentive Units of BCF Holdings
BCF Holdings is authorized to issue 1,000 Series
A Incentive Units with such designations, voting and other rights and preferences as may be determined from time to time by the BCF Holdings’
Board of Managers. Series A Incentive Unit holders participate in earnings and distributions after a specified return to the Series A
Preferred Unit holders. There were 800 Series A Incentive Units issued on August 7, 2020, and outstanding at September 30, 2022 and December
31, 2021.
Founder Incentive Units of BCF Holdings
BCF Holdings is authorized to issue 1,000 Founder
Incentive Units with such designations, voting and other rights and preferences as may be determined from time to time by the BCF Holdings’
Board of Managers. Founder Incentive Unit Holders participate in distributions after a specified aggregate amount of distributions paid
to the Series A Preferred Unit holders. There were 1,000 Founder Incentive Units issued on August 7, 2020, and outstanding at September
30, 2022 and December 31, 2021.
The Company recorded unit-based compensation totaling
$1,081,614 and $982,412 during the nine months ended September 30, 2022 and 2021, respectively, attributed to its Series A Incentive Units.
Note 6: Related Party Transactions
The Company follows FASB ASC subtopic 850-10,
Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
There were no related party transactions entered
into with Green Energy Partners, Inc, our controlling owner BERR or its general partner, Bluescape Energy Partners IV GP LLC, and registered
investment advisor Bluescape Energy Partners LLC for the nine months ended September 30, 2022 and 2021.
Note 7: Subsequent Events
The Company evaluated subsequent events and transactions
that occurred after the balance sheet date up to December 19, 2022, the date that the financial statements were issued. On October 17,
2022, the Company entered into a ground lease, easement and operations agreement with an initial primary term of 25 years for the site
of its first production facility. The Company is currently assessing the impact of this lease on its financial position and results of
operations.
Based upon this review, the Company did not identify
any other subsequent events that would have required adjustment or disclosure in the financial statements.
14