Filing summary: Flame Acquisition Corp. (proposed Sable Offshore Corp.)
Important entity context: This September 30, 2022 Form 10-Q is filed by Flame Acquisition Corp., a blank-check company, not by Sable Offshore Corp. Flame announced its proposed business combination with Sable on November 2, 2022 and said it would change its name to Sable Offshore Corp. upon closing. The transaction remained subject to customary conditions and stockholder approval.
Business context and reporting period
The unaudited quarter and nine-month periods ended September 30, 2022. Flame had not begun operating activities or generated revenue; its activity was formation, public-company costs, and searching for and negotiating a business combination. The report was signed November 14, 2022.
Financial results and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | None | None |
| Formation and operating costs | $1.282 million (2021: $0.307 million) | $2.012 million (2021: $0.836 million) |
| Net income (loss) | $(0.192) million (2021: $10.131 million) | $9.055 million (2021: $4.943 million) |
| Trust interest income | $1.246 million (2021: $0.004 million) | $1.615 million (2021: $0.010 million) |
| Gain from decrease in warrant liabilities | $0.373 million (2021: $10.434 million) | $10.003 million (2021: $6.051 million) |
The nine-month profit was primarily driven by a non-cash gain from the reduced fair value of warrant liabilities, rather than operating revenue. Third-quarter results included $0.530 million of income tax expense, contributing to the quarterly loss. Margins are not meaningful because the company had no revenue.
- Cash and liquidity: Cash outside the Trust Account was $140,238 at September 30, versus $322,768 at year-end 2021. Working capital deficit was approximately $2.500 million. Trust Account investments were $288.811 million, generally restricted until a business combination, redemptions, or permitted tax payments; $1.311 million was reported as available for tax withdrawals.
- Cash flow: Operating activities used $837,530 in the first nine months of 2022, compared with $1.235 million used in 2021. Investing activities provided $320,000, reflecting Trust Account withdrawals for taxes. Financing activities provided $335,000 from related-party notes. Ending cash was $140,238.
- Liabilities and equity: Total liabilities were $5.523 million, including $2.644 million of warrant liabilities and $1.260 million fair value of related-party convertible promissory notes. The $1.260 million carrying value is not the same as principal borrowed. The $1.5 million principal of the first three working-capital loans was fully drawn by quarter-end; stockholders’ deficit was $4.583 million. Redeemable Class A shares were recorded at $288.250 million.
Material changes versus prior comparable periods
- Third-quarter net results shifted from $10.131 million of income in 2021 to a $191,750 loss in 2022, as the warrant fair-value gain was much smaller and operating costs and tax expense were higher.
- Nine-month net income rose to $9.055 million from $4.943 million, largely reflecting a larger warrant fair-value gain and higher Trust Account interest. These fair-value gains are not operating performance.
- Operating costs increased year over year, while cash outside the Trust Account declined from year-end 2021. Accumulated Trust Account interest increased the reported Trust balance.
Outlook, risks, contingencies, and unusual items
- Business combination and deadline: The merger agreement with Sable was signed after quarter-end. Flame faced a March 1, 2023 deadline to complete a business combination, absent an approved extension; otherwise, it was required to redeem public shares and liquidate. Closing was not assured.
- Going concern: Management reported substantial doubt about Flame’s ability to continue as a going concern, citing limited unrestricted cash, the working-capital deficit, expenses to pursue a transaction, and the deadline. Additional funding was not assured; Trust funds were generally unavailable for ordinary expenses.
- Subsequent funding: The $170,000 Q3 2022 Sponsor note was undrawn at September 30 and fully drawn October 5. A separate $200,000 Q4 note was issued and fully drawn October 31. Both were non-interest-bearing and non-convertible into post-combination warrants.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of material weaknesses in accounting for complex financial instruments, which had resulted in restatements of certain prior-period financial statements. No material control changes were reported during the quarter.
- Other exposures: The filing noted uncertain potential effects from COVID-19 and the conflict in Ukraine. It also described possible exposure to a new 1% federal excise tax on certain stock repurchases after 2022, which could reduce cash available for a transaction. No legal proceedings were reported.
- No operating guidance: The filing provided no revenue, earnings, or operating outlook for Sable; Flame had no operating business at the reporting date.
Investor facts to verify
- Review the merger agreement, transaction financing, redemption levels, closing conditions, and subsequent proxy materials; the merger had not closed as of this 10-Q.
- Confirm the SPAC deadline, any extension, and the latest unrestricted cash and Sponsor-funding availability.
- Distinguish reported net income from cash generation and operating performance; the warrant remeasurement gain materially affected earnings.
- Assess remediation of the disclosed material weaknesses and any implications of the prior-period restatements.
- Verify the amount and terms of outstanding related-party notes, potential warrant dilution, and any excise-tax effect on transaction proceeds.