Business context and reporting period
This is Flame Acquisition Corp.’s unaudited Form 10-Q for the quarter ended June 30, 2023, filed August 14, 2023. Flame was a shell company/SPAC pursuing a merger with Sable Offshore Corp. and Sable Offshore Holdings; this filing reports Flame’s pre-combination financials, not Sable’s operating results.
Financial results and liquidity
- Revenue and margins: No operations or operating revenue; margins are not meaningful. The company said it would not generate operating revenue until after a business combination.
- Net income: Q2 2023 net income was $5.04 million, versus $2.82 million in Q2 2022. First-half net income was $7.08 million, versus $9.25 million. Earnings mainly reflected noncash warrant and related-party note fair-value gains, plus trust-account interest—not operating performance.
- Costs and taxes: Q2 operating costs were $1.35 million versus $306,338 a year earlier; first-half costs were $2.45 million versus $730,831. Q2 income tax expense was $165,042; first-half expense was $638,563.
- Cash flow: First-half cash used in operations was $1.89 million, versus $628,193 in 2022. Cash at June 30 was $93,605.
- Assets and liquidity: Total assets were $87.52 million, including $87.29 million in the trust account. Working capital deficit was $10.27 million. Only $659,138 of trust funds was reported available for tax withdrawals; trust funds were generally restricted before a transaction.
- Liabilities and debt: Total liabilities were $16.39 million, including $10.50 million current liabilities, $5.88 million warrant liabilities, $633,630 in related-party promissory notes, and $1.56 million in convertible related-party notes measured at fair value. Accounts payable and accrued expenses were $5.61 million, including $3.35 million of unbilled deferred legal costs.
Material changes versus the prior comparable period
- Following the February 2023 extension vote, holders redeemed 20,317,255 Class A shares—about 70.67% of the public shares—for $206.12 million, approximately $10.15 per share. Remaining redeemable Class A shares fell to 8,432,745; trust assets declined from $290.72 million at year-end 2022 to $87.29 million.
- Q2 operating costs rose substantially from the prior-year quarter. Q2 net income increased, while first-half net income decreased; both periods’ reported profit was heavily influenced by fair-value changes and trust interest.
- The company recognized a $2.07 million excise-tax liability associated with the redemptions.
- The trust investments were liquidated into cash in February 2023, which management said was intended to mitigate investment-company status risk.
Transaction, outlook and risks
- The merger agreement with Sable was amended June 30, 2023, extending its transaction deadline to March 1, 2024. The proposed merger remained subject to customary closing conditions, and completion was not assured.
- Sable, Exxon Mobil and Mobil Pacific Pipeline amended their purchase and sale agreement: the scheduled closing was June 30, 2023, subject to conditions and an outside date no later than December 31, 2023; the minimum cash threshold was reduced from $200 million to $150 million.
- Sable PIPE investors had committed $74.5 million. Subsequent to quarter-end, all investors extended their subscription deadlines to March 1, 2024.
- As of June 30, the SPAC’s charter deadline to complete a business combination was September 1, 2023. On August 9, it filed a proxy seeking stockholder approval to extend that deadline to March 1, 2024.
- Management said the limited unrestricted cash, working capital deficit, reliance on additional sponsor or affiliate loans, and risk of failing to complete a transaction raised substantial doubt about the company’s ability to continue as a going concern. Sponsor and management affiliates were not generally obligated to provide further funding.
- Disclosure controls were deemed ineffective at June 30 because of material weaknesses in accounting for complex financial instruments, which had resulted in restatements of prior-period financial statements. Management said additional analysis was performed for this filing.
- The filing reports no legal proceedings and no material changes to the previously disclosed risk factors. It identifies COVID-19 and the Ukraine conflict as uncertainties whose specific effects were not determinable.
Important facts for investors to verify
- Whether the Sable merger and Exxon-related asset transaction satisfy closing conditions, including the minimum cash threshold, and whether required financing is available.
- Whether stockholders approved the proposed extension beyond September 1, 2023, and the resulting transaction timetable and redemption levels.
- How the $74.5 million PIPE commitments and remaining trust funds translate into cash available at closing after redemptions, expenses, and liabilities.
- The ability and willingness of the sponsor or affiliates to fund ongoing costs, given $93,605 of cash and the disclosed going-concern uncertainty.
- The impact and remediation status of the material weaknesses in financial reporting controls.
- A discrepancy in the filing: the financial statements report first-half 2023 operating costs of $2,448,404, while MD&A states $2,488,404. Confirm the correct amount.