Sable Offshore Corp. quarterly report, Q3 FY2023

Business context and reporting period

This is Flame Acquisition Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2023, not an operating-company filing by Sable Offshore Corp. Flame was a SPAC pursuing a merger with Sable Offshore Corp. and its parent, Sable Offshore Holdings, LLC. Flame had not begun operations or generated revenue; its reported activity principally related to the proposed business combination and SPAC administration.

The merger agreement was extended to March 1, 2024. The merger remained subject to customary closing conditions, and the filing gives no assurance it would close. Sable’s separate purchase agreement with Exxon Mobil Corporation and Mobil Pacific Pipeline Company had a reduced minimum cash threshold of $150 million and a closing deadline no later than December 31, 2023, subject to the agreement’s terms.

Financial results and position

The Q3 2023 loss chiefly reflected a $9.3 million noncash increase in warrant-liability fair value, alongside $1.0 million of operating costs and $0.7 million of trust-account interest income. For the nine-month period, the loss compared with prior-year income largely because the prior period recorded a $10.0 million gain from a decline in warrant-liability fair value; 2023 recorded a $3.0 million expense from an increase in that fair value. These valuation changes are not operating results.

At September 30, 2023, Flame reported $709,450 in cash outside the trust account, $63.9 million in trust-account funds, total assets of $64.9 million, total liabilities of $28.2 million, and a $26.4 million stockholders’ deficit. Working capital deficit was $12.1 million. The trust funds were generally unavailable for operations before a business combination; $816,118 was reported as available for tax withdrawals.

Related-party notes payable were $1.13 million, and related-party convertible notes had $3.31 million principal and $2.65 million fair value. The balance sheet also included $15.2 million of warrant liabilities. The filing describes the notes as generally non-interest-bearing and payable upon completion of the business combination; certain lenders could elect to convert eligible amounts into warrants. Nine-month investing cash inflows and financing outflows largely reflected trust withdrawals and matching shareholder redemption payments, rather than operating liquidity generation.

Material changes and unusual items

• Two extension votes led to redemptions of 22.65 million public shares for approximately $230.1 million in total, reducing redeemable public shares from 28.75 million at year-end 2022 to 6.10 million at September 30, 2023.
• Flame recorded a $2.31 million excise-tax payable related to the 2023 redemptions, charged to accumulated deficit.
• On August 22, 2023, 7.19 million founder shares converted from Class A to Class B; the converted shares retained transfer restrictions, voting commitments and redemption-right waivers.
• The trust investments were liquidated into cash in February 2023. Trust-account interest income for the first nine months of 2023 was $3.84 million, compared with $1.62 million in 2022.
• Operating costs rose to $3.49 million for the first nine months from $2.01 million in 2022; the filing attributes costs in part to transaction and public-company expenses. Flame also reported $3.62 million of unbilled legal costs deferred pending completion of the business combination.

Outlook, risks and controls

Management stated that Flame would not earn operating revenue until after a business combination, at the earliest, and expected continued transaction, due-diligence and public-company costs. The company said it might need further sponsor, insider or third-party funding; such parties were generally not obligated to provide additional funds. Management identified substantial doubt about Flame’s ability to continue as a going concern, citing its limited available cash, working capital deficit and March 1, 2024 deadline to complete a business combination. Failure to complete a deal by that date would generally require liquidation and redemption of public shares; warrants could expire worthless.

Disclosure controls were deemed ineffective as of September 30, 2023 because of material weaknesses in internal control over financial reporting concerning complex financial instruments, which had resulted in restatements of certain prior-period financial statements. Management said it performed additional analysis for this filing. The filing reported no material changes to previously disclosed risk factors and no legal proceedings.

Important facts for investors to verify

• Whether all merger and Sable-Exxon transaction conditions were satisfied, including applicable timing, approvals and minimum-cash requirements.
• Whether Flame secured sufficient funding to meet obligations and transaction costs, given its cash outside the trust, working capital deficit and reliance on related-party loans.
• The status and effect of further redemptions, the remaining trust balance and the excise-tax liability.
• The potential dilution from founder shares, public and private warrants, and lender conversion rights, including the warrant terms after any completed transaction.
• Remediation of the disclosed material weaknesses and any further restatements or changes to reported financial information.