References to "we", "us", "our" or the "Company" are to Flame Acquisition Corp.,
except where the context requires otherwise. The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and related notes thereto included
elsewhere in this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Such statements include, but are not limited
to, possible business combinations and the financing thereof, and related
matters, as well as all other statements other than statements of historical
fact included in this Form 10-K. Factors that might cause or contribute to such
a discrepancy include, but are not limited to, those set forth under "Item 1A.
Risk Factors" and elsewhere in this Annual Report on Form 10-K, and those
described in our other Securities and Exchange Commission filings.
Overview
We are a blank check company incorporated in Delaware on October 16, 2020 for
the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more
businesses. We are an emerging growth company and, as such, we are subject to
all of the risks associated with emerging growth companies. Our sponsor is Flame
Acquisition Sponsor LLC, a Delaware limited liability and an affiliate of
certain of our officers and directors.
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Potential Business Combination
Merger Agreement
On November 2, 2022, we entered into an agreement and plan of merger, dated as
of November 2, 2022 (as it may be amended, supplemented, or otherwise modified
from time to time, the "Merger Agreement"), with Sable Offshore Corp., a Texas
corporation ("SOC"), and Sable Offshore Holdings, LLC, a Delaware limited
liability company and the parent company of SOC ("Holdco" and, together with
SOC, "Sable"). The Merger Agreement provides for, among other things, the
following transactions at the closing: (i) Holdco will merge with and into the
Company, with the Company surviving the merger (the "Holdco Merger"), and
(ii) immediately following the effective time of the Holdco Merger, SOC will
merge with and into the Company, with the Company surviving the merger (the "SOC
Merger"). The Holdco Merger together with the SOC Merger are referred to as the
"Merger," and the Merger and other transactions contemplated by the Merger
Agreement are referred to as the "Business Combination." In connection with the
Business Combination, the Company will change its name to Sable Offshore Corp.
The independent members of the board of directors of the Company (the "Board")
approved, and recommended that the Board approve, the Merger Agreement and the
transactions contemplated thereby. Subsequently, the Board approved the Merger
Agreement and the transactions contemplated thereby.
The obligations of the parties to consummate the Business Combination are
subject to the satisfaction or waiver of certain customary closing conditions.
The closing of the Merger is expected to occur on the third business day after
the satisfaction or waiver (if legally permissible) of the conditions set forth
in the Merger Agreement, except as otherwise mutually agreed by the parties. The
Merger Agreement may be terminated under certain customary and limited
circumstances at any time prior to the Closing and the Company can provide no
assurance that the Business Combination will be consummated at the expected
time, or at all.
On November 10, 2022, we filed a preliminary proxy statement relating to the
Business Combination (as amended, the "Proxy Statement"), which included a
recommendation of the Board to the Company's stockholders that they approve the
proposals included in the Proxy Statement. For more information on the Business
Combination and the transactions contemplated thereby, please refer to the
Company's Current Report on Form 8-K, filed with the SEC on November 2, 2022 and
the Company's preliminary proxy statement on Schedule 14A filed with the SEC on
November 10, 2022 (as amended from time to time, including on December 23, 2022
and January 27, 2023).
PIPE Subscription Agreements
In connection the Business Combination, Holdco entered into subscription
agreements (the "Sable PIPE Subscription Agreements") with certain investors
(such investors, the "Sable PIPE Investors"), pursuant to which the Sable PIPE
Investors agreed to purchase, in the aggregate, 7,450,000 limited liability
company membership interests in Holdco designated as Class B shares at $10.00
per share, for an aggregate commitment amount of approximately $74,500,000 (the
"Sable PIPE Investment").
The Sable PIPE Subscription Agreements provide that, in the event the Merger is
consummated, the Sable PIPE Investors will be deemed to have subscribed for and
will purchase our Class A common stock at the same price per share and, by
operation of law pursuant to the Merger, we will have succeeded to Holdco's
obligations under the Sable PIPE Subscription Agreements. The Sable PIPE
Subscription Agreements provide that, if the Merger is consummated, we must file
a registration statement within 30 calendar days after consummation of the
Merger registering the resale of the shares of our Class A common stock issued
to the Sable PIPE Investors, and must use our commercially reasonable efforts to
have the registration statement declared effective by the SEC by the earlier of
(i) the 90th calendar day (or 120th calendar day if the SEC notifies us that it
will review the registration statement) following the closing of the Merger and
(ii) the 10th business day after the date we are notified (orally or in writing,
whichever is earlier) by the SEC that the registration statement will not be
reviewed or will not be subject to further review. We thereafter will be
required to maintain a registration statement that is continuously effective and
to cause the registration statement to regain effectiveness in the event that it
ceases to be effective.
We intend to pursue additional private placement subscriptions under
substantially similar subscription agreements (with revisions to reflect that we
are entering into such subscription agreements and the subscribers will be
subscribing for our Class A common stock directly) prior to the closing of the
Business Combination (the "Flame PIPE Subscription Agreements"), provided that
such additional subscriptions, together with the Sable PIPE Investment, will not
exceed $400 million. The Sable PIPE Subscription Agreements and the Flame PIPE
Subscription Agreements are referred to collectively as the "PIPE Subscription
Agreements," and the Sable PIPE Investors and any investors who enter into Flame
PIPE Subscription Agreements are refereed to collectively as the "PIPE
Investors." The foregoing description of the Sable PIPE Subscription Agreements
does not purport to be complete and is qualified in its entirety by reference to
the full text of the form Sable PIPE Subscription Agreement filed as an exhibit
to our Current Report on Form 8-K, filed with the SEC on November 2, 2022.
Registration Rights Agreement
The Merger Agreement provides that, at the closing of the Business Combination,
the holders of Holdco Class A shares immediately prior to the effective time of
the Holdco Merger will enter into a registration rights agreement with us (the
"Registration Rights Agreement") pursuant to which the holders will be granted
certain registration rights with respect to the Flame Class A common stock to be
received as consideration in the Merger.
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Pursuant to the Registration Rights Agreement, we will agree to file a
registration statement within 30 calendar days after the consummation of the
Merger registering the resale of the registrable securities under the
Registration Rights Agreement, and we must use our commercially reasonable
efforts to have the registration statement declared effective by the SEC by the
earlier of (i) the 90th calendar day (or 120th calendar day if the SEC notifies
us that it will review the registration statement) following the closing of the
Merger and (ii) the 10th business day after the date we are notified (orally or
in writing, whichever is earlier) by the SEC that the registration statement
will not be reviewed or will not be subject to further review. We thereafter
will be required to maintain a registration statement that is continuously
effective and to cause the registration statement to regain effectiveness in the
event that it ceases to be effective. At any time the registration statement is
effective, any holder signatory to the Registration Rights Agreement may
request, one time in any 12-month period, to sell all or a portion of its
securities that are registrable in an underwritten offering pursuant to the
registration statement for a total offering price reasonably expected to exceed,
in the aggregate, $25 million. In addition, the holders will have certain
"piggyback" registration rights with respect to registrations initiated by us
and other Flame stockholders. We will bear the expenses incurred in connection
with the filing of any registration statements pursuant to the Registration
Rights Agreement, subject to limited exceptions.
Pursuant to the Registration Rights Agreement, the holders of Holdco Class A
shares immediately prior to the effective time of the Holdco Merger, subject to
limited exceptions, will agree to a lock-up on their shares of our Class A
common stock, pursuant to which such parties will agree to not transfer shares
of our Class A common stock held by such parties for a period of three years
following the closing of the Business Combination.
The foregoing description of the Registration Rights Agreement does not purport
to be complete and is qualified in its entirety by reference to the full text of
the form Registration Rights Agreement filed as an exhibit to our Current Report
on Form 8-K, filed with the SEC on November 2, 2022.
Recent Events
On February 21, 2023, to mitigate the risk of us being deemed to have been
operating as an unregistered investment company (including under the subjective
test of Section 3(a)(1)(A) of the Investment Company Act), the investments in
U.S. government securities or money market funds held in the Trust Account were
liquidated to thereafter be held in cash (which may include an interest bearing
demand deposit account at a national bank) until earlier of: (i) the completion
of a Business Combination and (ii) the distribution of the funds in the Trust
Account to the Company's stockholders.
On February 27, 2023, at a special meeting of stockholders, the Company's
stockholders voted to approve an amendment (the "Extension Amendment Proposal")
to the amended and restated certificate of incorporation to extend the date by
which the Company must complete a business combination (the "Extension") from
March 1, 2023, to September 1, 2023 (the "Extended Date"). In connection with
the Extension, stockholders holding 20,317,255 shares of Class A Common Stock
exercised their right to redeem such shares for a pro rata portion of the funds
in the Trust Account, representing approximately 70.67% of our issued and
outstanding Class A ordinary shares. As a result, $206,121,060 (approximately
$10.15 per share) was removed from the Trust Account to pay such redeeming
holders on March 2, 2023.
On February 27, 2023, in connection with the Extension, we filed an amendment
(the "Extension Amendment") to our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware. The
Extension Amendment extends the date by which we must consummate our initial
business combination from March 1, 2023 to September 1, 2023.
Liquidity and Capital Resources
As of December 31, 2022, we had cash of $100,256. Until the consummation of our
initial public offering, our only sources of liquidity were an initial purchase
of common stock by our founders and a loan from the Sponsor, FL Co-Investment
and Intrepid Financial Partners.
Our registration statement for our initial public offering was declared
effective on February 24, 2021. On March 1, 2021, we consummated our initial
public offering of 28,750,000 units, which included 3,750,000 units issued
pursuant to the full exercise by the underwriters of their over-allotment
option, at $10.00 per Unit, generating gross proceeds of $287,500,000 and
incurring offering costs of $16,670,251, inclusive of $10,062,500 in deferred
underwriting commissions pursuant to the Business Combination Marketing
Agreement with Cowen and Company, LLC and Intrepid Partners, LLC (the "Business
Combination Marketing Agreement").
Simultaneously with the closing of our initial public offering, we consummated
the private placement of 7,750,000 warrants to our initial stockholders, each
exercisable to purchase one share of Class A common stock at $11.50 per share,
at a price of $1.00 per private placement warrant, generating gross proceeds to
us of $7,750,000.
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Upon the closing of our initial public offering and the private placement,
$287,500,000 of the net proceeds of the sale of the Units in our initial public
offering and the sale of private placement warrants in the private placement
were placed in the Trust Account, located in the United States at J.P. Morgan
Chase Bank, N.A., with American Stock Transfer & Trust Company acting as
trustee, and invested only in U.S. "government securities" within the meaning of
Section 2(a)(16) of the Investment Company Act having a maturity of 185 days or
less or in money market funds meeting certain conditions under Rule 2a-7
promulgated under the Investment Company Act which invest only in direct U.S.
government treasury obligations, as determined by us, until the earlier of:
(i) the completion of our initial business combination and (ii) the distribution
of the Trust Account as described below. Except with respect to interest earned
on the funds held in the Trust Account that may be released to us to pay our
taxes, if any, the funds held in the Trust Account will not be released until
the earliest to occur of: (a) the completion of our initial business
combination, (b) the redemption of any public shares properly submitted in
connection with a stockholder vote to amend our amended and restated certificate
of incorporation (A) to modify the substance or timing of our obligation to
allow redemption in connection with our initial business combination or redeem
100% of our public shares if we do not complete our initial business combination
by September 1, 2023, or (B) with respect to any other provision relating to
stockholders' rights or pre-initial business combination activity and (c) the
redemption of our public shares if we are unable to complete our initial
business combination by September 1, 2023, subject to applicable law. On
February 21, 2023, the Trust Account was liquidated to thereafter be held in
cash, which may include an interest bearing demand deposit account at a national
bank (see Note 11 to our financial statements included elsewhere in this annual
report). Based on current interest rates, we expect that interest income earned
on the Trust Account (if any) will be sufficient to pay our income and franchise
taxes.
If we are unable to complete our initial business combination by September 1,
2023 (or such later date as may be provided pursuant to a further amendment to
our amended and restated certificate of incorporation), we will (i) cease all
operations except for the purpose of winding up; (ii) as promptly as reasonably
possible but no more than ten business days thereafter subject to lawfully
available funds therefor, redeem the Public Shares, at a per-share price,
payable in cash, equal to the aggregate amount then on deposit in the Trust
Account, including interest earned on the funds held in the Trust Account and
not previously released to us to pay our taxes as well as expenses relating to
the administration of the Trust Account (less up to $100,000 of interest to pay
dissolution expenses) divided by the number of the then outstanding Public
Shares, which redemption will completely extinguish Public Stockholders' rights
as stockholders (including the right to receive further liquidation
distributions, if any), subject to applicable law; and (iii) as promptly as
reasonably possible following such redemption, subject to the approval of the
remaining stockholders and the board of directors, liquidate and dissolve,
subject in each case to our obligations under Delaware law to provide for claims
of creditors and the requirements of other applicable law. There will be no
redemption rights or liquidating distributions with respect to our warrants,
which will expire worthless if we fail to complete our initial business
combination by the end of the Combination Period, or by the applicable deadline
as may be extended.
Results of Operations
Our entire activity since inception through December 31, 2022 was related to our
formation, the preparation for our initial public offering, and since the
closing of our initial public offering, the search for a target for our initial
business combination (see Note 6 to our financial statements included elsewhere
in this annual report). We have neither engaged in any operations nor generated
any revenues to date. We will not generate any operating revenues until after
completion of our initial business combination. We will generate non-operating
income in the form of interest income on cash and cash equivalents and changes
in fair value of our derivative warrant liabilities and promissory notes. We
expect to incur increased expenses as a result of being a public company (for
legal, financial reporting, accounting and auditing compliance), as well as for
due diligence expenses.
Until consummation of its Business Combination, the Company will be using the
funds not held in the Trust Account, and any additional Working Capital Loans
(as defined in Note 5 to our financial statements included elsewhere in this
annual report) from the initial stockholders, the Company's officers and
directors, or their respective affiliates (which is described in Note 5 to our
financial statements included elsewhere in this annual report), for identifying
and evaluating prospective acquisition candidates, performing business due
diligence on prospective target businesses, traveling to and from the offices,
plants or similar locations of prospective target businesses, reviewing
corporate documents and material agreements of prospective target businesses,
selecting the target business to acquire and structuring, negotiating and
consummating the Business Combination.
If the Company's estimates of the costs of undertaking in-depth due diligence
and negotiating a business combination are less than the actual amounts
necessary to do so, the Company may have insufficient funds available to operate
its business prior to the business combination and will need to raise additional
capital through loans from the Sponsor, its officers and/or directors, or third
parties. Except as contemplated by the terms of the Initial Promissory Note,
First Working Capital Loan, Second Working Capital Loan, Third Working Capital
Loan, Q3 2022 Promissory Note, Q4 2022 Promissory Note and Q1 2023 Promissory
Note, neither the Sponsor or the Company's officers or directors are under any
obligation to advance funds to, or to invest in, the Company. If the Company is
unable to raise additional capital, it may be required to take additional
measures to conserve liquidity, which could include, but not necessarily be
limited to, curtailing operations, suspending the pursuit of its business plan,
and reducing overhead expenses. The Company cannot provide any assurance that
new financing will be available to it on commercially acceptable terms, if at
all. We are also subject to a mandatory liquidation and subsequent dissolution
requirement if we do not complete our initial business combination by
September 1, 2023. We cannot assure you that our plans to raise capital or to
consummate an initial business combination before September 1, 2023 will be
successful. These factors, among others, raise substantial doubt about our
ability to continue as a going concern. These financial statements do not
include any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the Company be
unable to continue as a going concern.
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For the year ended December 31, 2022, we had a net loss of $2,590,948, which
consisted of interest income on our amounts held in the Trust Account of
$3,989,061, and a decrease in the fair value of warrants of $498,000, offset by
operating costs of $6,150,199, income tax expense of $757,069 and an increase in
fair value of the previously issued promissory notes of $170,741.
For the year ended December 31, 2021, we had a net income of $4,273,078, which
consisted of $1,682,816 in operating costs, $280,829 of financing costs, and
$18,323 of initial fair value adjustment on promissory note, offset by
$6,155,125 of change in fair value of derivative warrant liabilities, $83,768 of
change in fair value of promissory note and $16,153 in gain on investments held
in Trust Account. The $280,829 in financing costs represents offering costs
allocated to warrant liabilities and expensed at the time of the initial public
offering.
Going Concern
As of December 31, 2022, we had $100,256 in cash and working capital deficit of
$6,547,305. We are also subject to a mandatory liquidation and subsequent
dissolution requirement if we do not complete our initial business combination
by September 1, 2023. All remaining cash held in the Trust Account is generally
unavailable for the Company's use, prior to an initial business combination, and
is restricted for use either in a Business Combination, to redeem common stock
or to use for payment of taxes. During the period ended December 31, 2022, the
Company withdrew $786,918 for payment of taxes, leaving $3,218,297 available for
withdrawal from the Trust account as of December 31, 2022. Further, we expect to
incur significant costs in pursuit of our acquisition plans. Management's plans
to address this need for capital are discussed in Note 1 to our financial
statements included elsewhere in this Annual Report on Form 10-K. Our plans to
raise capital and to consummate our initial business combination by September 1,
2023 may not be successful. These factors, among others, raise substantial doubt
about our ability to continue as a going concern. The financial statements
contained elsewhere in this Quarterly Report on Form 10-Q do not include any
adjustments that might result from our inability to continue as a going concern.
Through December 31, 2022, the Company's liquidity needs were satisfied through
receipt of $25,000 from the sale of the Founder Shares and the remaining net
proceeds from the IPO and the sale of Private Placement Warrants, as well as
$300,000 that was available under the Initial Promissory Note, $365,000 that was
available under the First Working Capital Loan (see Note 5 to our financial
statements included elsewhere in this annual report), $800,000 that was
available under the Second Working Capital Loan (see Note 5 to our financial
statements included elsewhere in this annual report), $335,000 that was
available under the Third Working Capital Loan (see Note 5 to our financial
statements included elsewhere in this annual report), $170,000 that was
available under the Q3 2022 Promissory Note (see Note 5 to our financial
statements included elsewhere in this annual report) and $200,000 that was
available under the Q4 2022 Promissory Note (see Note 5 to our financial
statements included elsewhere in this annual report). As of December 31, 2022,
each of the working capital loans was fully drawn down. The Q3 2022 Promissory
Note was fully drawn down on October 5, 2022, and the Q4 2022 Promissory Note
(see Note 5 to our financial statements included elsewhere in this annual
report) was fully drawn down on October 31, 2022. On February 6, 2023, the
Company issued an additional unsecured promissory note ("Q1 2023 Promissory
Note") in the principal amount of $535,000 (see Note 11 to our financial
statements included elsewhere in this annual report).
Related Party Transactions
Founder Shares
In November 2020, our founders acquired 7,187,500 founder shares for an
aggregate purchase price of $25,000. Our sponsor purchased 4,671,875 founder
shares, FL Co-Investment purchased 1,257,813 founder shares and Intrepid
Financial Partners purchased 1,257,812 founder shares. Also in November 2020,
our sponsor transferred 434,375 founder shares to our independent director
nominees and certain individuals, including Gregory D. Patrinely, our Executive
Vice President and Chief Financial Officer, at their original purchase price.
Simultaneously with such transfer, each of FL Co-Investment and Intrepid
Financial Partners transferred 13,125 founder shares to our sponsor,
respectively, at their original purchase price.
The initial stockholders agreed, subject to limited exceptions, not to transfer,
assign or sell any of the Founder Shares until the earlier to occur of:
(a) one year after the completion of our initial business combination or
(b) subsequent to our initial business combination, (x) if the last reported
sale price of our Class A common stock equals or exceeds $12.00 per share (as
adjusted for stock splits, stock dividends, reorganizations, recapitalizations
and other similar transactions) for any 20 trading days within any 30-trading
day period commencing at least 150 days after our initial business combination,
or (y) the date on which we complete a liquidation, merger, capital stock
exchange or other similar transaction that results in all of our stockholders
having the right to exchange their shares of common stock for cash, securities
or other property. Any permitted transferees would be subject to the same
restrictions and other agreements of our initial stockholders with respect to
any founder shares.
Private Placement Warrants
Simultaneously with the closing of our initial public offering, we consummated
the private placement of 7,750,000 private placement warrants to our initial
stockholders, each exercisable to purchase one share of Class A common stock at
$11.50 per share, at a price of $1.00 per private placement warrant, generating
gross proceeds to us of $7,750,000.
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Each private placement warrant is exercisable for one whole share of Class A
common stock at a price of $11.50 per share. A portion of the proceeds from the
sale of the private placement warrants to the initial stockholders was added to
the proceeds from our initial public offering held in the Trust Account. If we
do not complete a business combination by September 1, 2023, the private
placement warrants will expire worthless. Except as set forth below, the private
placement warrants will be non-redeemable for cash and exercisable on a cashless
basis so long as they are held by the initial stockholders or their permitted
transferees.
The purchasers of the private placement warrants agreed, subject to limited
exceptions, not to transfer, assign or sell any of their private placement
warrants (except to permitted transferees) until 30 days after the completion of
the initial business combination.
Related Party Loans
On November 25, 2020, our founders agreed to loan us an aggregate of up to
$300,000 to cover expenses related to our initial public offering pursuant to a
promissory note (the "Initial Promissory Note"). This loan was non-interest
bearing and payable upon the completion of our initial public offering. We
borrowed $75,000 under the Initial Promissory Note and repaid the Initial
Promissory Note to our founders in full as of September 30, 2021. On March 1,
2021, we issued an unsecured promissory note as a working capital loan to the
Sponsor in the principal amount of $365,000 to cover additional expenses related
to our initial public offering (the "First Working Capital Loan"). This loan was
non-interest bearing and is payable upon the completion of the initial business
combination. The Sponsor assigned $145,000 of the First Working Capital Loan to
our Executive Vice President and Chief Financial Officer, Gregory Patrinely,
$110,000 of the First Working Capital Loan to our Executive Vice President,
General Counsel and Secretary, Anthony Duenner, and $110,000 of the First
Working Capital Loan to our President, Caldwell Flores. As of December 31, 2022,
we have borrowed $365,000 under the First Working Capital Loan. On December 27,
2021, we issued an unsecured promissory note as a working capital loan to the
Sponsor in the principal amount of $800,000 to cover additional expenses related
to our search for the initial business combination (the "Second Working Capital
Loan"). This loan was non-interest bearing and payable upon the completion of
the initial business combination. As of December 31, 2022, we have borrowed
$800,000 under the Second Working Capital Loan. On March 29, 2022, we issued an
unsecured promissory note as a working capital loan to the Sponsor in the
principal amount of $335,000 to cover additional expenses related to our search
for the initial business combination (the "Third Working Capital Loan"). This
loan is non-interest bearing and payable upon the completion of the initial
business combination. As of December 31, 2022, we have borrowed $335,000 under
the Third Working Capital Loan. The Sponsor assigned $112,000 of the Third
Working Capital Loan to our Executive Vice President and Chief Financial
Officer, Gregory Patrinely, $112,000 of the Third Working Capital Loan to our
Executive Vice President, General Counsel and Secretary, Anthony Duenner, and
$112,000 of the Third Working Capital Loan to our President, Caldwell Flores. On
September 30, 2022, we issued an unsecured promissory note as a working capital
loan to the Sponsor in the principal amount of $170,000 to cover additional
expenses related to our search for the initial business combination (the "Q3
2022 Promissory Note"). This loan is non-interest bearing and payable upon the
completion of the initial business combination. As of December 31, 2022, we have
borrowed $170,000 under the Q3 2022 Promissory Note. On October 31, 2022, the
Company issued an unsecured promissory note to the Sponsor (the "Q4 2022
Promissory Note"), pursuant to which the Company may borrow up to an aggregate
principal amount of $200,000. The Q4 2022 Promissory Note is non-interest
bearing and payable on the consummation of the Company's Business Combination.
On October 31, 2022, the Q4 2022 Promissory Note was fully drawn down by the
Company. On February 6, 2023, the Company issued an unsecured promissory note to
the Sponsor (the "Q1 2023 Promissory Note"), pursuant to which the Company may
borrow up to an aggregate principal amount of $535,000. The Q1 2023 Promissory
Note is non-interest bearing and payable on the consummation of the Company's
Business Combination. On February 7, 2023, the Q1 2023 Promissory Note was fully
drawn down by the Company.
In addition, in order to finance transaction costs in connection with an
intended initial business combination, the Sponsor or an affiliate of the
Sponsor or certain of our officers and directors may, but are not obligated to,
loan us funds as may be required. If we complete our initial business
combination, we may repay such loaned amounts. In the event that our initial
business combination does not close, we may use a portion of the working capital
held outside the Trust Account to repay such loaned amounts but no proceeds from
the Trust Account would be used for such repayment. Initially up to $1,500,000,
which was increased to $3,500,000 on March 24, 2023, of such loans may be
convertible into warrants at a price of $1.00 per warrant at the option of the
lender (the "Working Capital Loans"). Such warrants are identical to the private
placement warrants, including as to exercise price, exercisability and exercise
period. On March 28, 2023, the Company and the Sponsor entered into amendments
to each of the Q3 2022 Promissory Note, Q4 2022 Promissory Note and Q1 2023
Promissory Note, pursuant to which loans made under such notes are, at the
lender's discretion, convertible into warrants of the post-Business Combination
entity at a price of $1.00 per warrant. Each of the First Working Capital Loan,
Second Working Capital Loan, Third Working Capital Loan, Q3 2022 Promissory
Note, Q4 2022 Promissory Note and Q1 2023 Promissory Note are Working Capital
Loans and may be convertible into warrants at a price of $1.00 per warrant at
the option of the Sponsor. We do not expect to seek loans from parties other
than the Sponsor or an affiliate of the Sponsor as we do not believe third
parties will be willing to loan such funds and provide a waiver against any and
all rights to seek access to funds in the Trust Account. As of December 31,
2022, we had drawn down $1,500,000 of such loans.
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Commitments and Contingencies
Registration Rights
The holders of our founder shares, private placement warrants and warrants that
may be issued upon conversion of Working Capital Loans (and any shares of
Class A common stock issuable upon the exercise of the private placement
warrants or warrants issued upon conversion of the Working Capital Loans and
upon conversion of the founder shares), are entitled to registration rights
pursuant to a registration rights agreement. These holders will be entitled to
certain demand and "piggyback" registration rights. However, the registration
rights agreement provides that we will not be required to effect or permit any
registration or cause any registration statement to become effective until
termination of the applicable lock-up period. We will bear the expenses incurred
in connection with the filing of any such registration statements.
Underwriting Agreement
The underwriters were entitled to an underwriting discount of $0.20 per Unit, or
$5,750,000 in the aggregate, paid upon the closing of our initial public
offering. An additional fee of $0.35 per Unit, or $10,062,500 in the aggregate
will be payable to the underwriters pursuant to the Business Combination
Marketing Agreement. The deferred fee will become payable to the underwriters
from the amounts held in the Trust Account solely in the event that we complete
a business combination, subject to the terms of the underwriting agreement.
Critical Accounting Estimates
This management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
income and expenses and the disclosure of contingent assets and liabilities in
our financial statements. On an ongoing basis, we evaluate our estimates and
judgments, including those related to fair value of financial instruments and
accrued expenses. We base our estimates on historical experience, known trends
and events and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We have identified the following as our critical
accounting policies:
Investments Held in the Trust Account
As of December 31, 2022, our portfolio of investments held in the Trust Account
is comprised of U.S. government securities, within the meaning set forth in
Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or
less, or in money market funds investing solely in U.S. government treasury
obligations and meeting certain conditions under Rule 2a-7 under the Investment
Company Act, or a combination thereof. The investments held in the Trust Account
are classified as trading securities. Trading securities are presented on the
balance sheets at fair value at the end of each reporting period. Gains and
losses resulting from the change in fair value of these securities is included
in income from investments held in Trust Account in the accompanying statements
of operations. The estimated fair values of investments held in the Trust
Account are determined using available market information, other than for
investments in open-ended money market funds with published daily net asset
values ("NAV"), in which case the Company uses NAV as a practical expedient to
fair value. The NAV on these investments is typically held constant at $1.00 per
unit. The Trust Account may also contain balances of cash as result of
investment activity. On February 21, 2023, the Trust Account was liquidated to
thereafter be held in cash, which may include an interest bearing demand deposit
account at a national bank (see Note 11 to our financial statements included
elsewhere in this annual report).
Class A Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in Accounting Standards Codification Topic 480,
"Distinguishing Liabilities from Equity." Shares of Class A common stock subject
to mandatory redemption (if any) are classified as liability instruments and are
measured at fair value. Conditionally redeemable shares of Class A common stock
(including shares of Class A common stock that feature redemption rights that
are either within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within our control) are classified as
temporary equity. At all other times, shares of Class A common stock are
classified as stockholders' equity. Our shares of Class A common stock feature
certain redemption rights that are considered to be outside of our control and
subject to the occurrence of uncertain future events. Accordingly, as of
December 31, 2022, 28,750,000 shares of Class A common stock subject to possible
redemption were presented as temporary equity, outside of the stockholders'
deficit section of our balance sheets.
On February 23, 2023, the Company was notified by stockholders holding
20,317,255 shares of Class A Common Stock that they exercised their right to
redeem such shares for a pro rata portion of the funds in the Trust Account. As
a result, $206,121,060 (approximately $10.15 per share) was removed from the
Trust Account to pay such redeeming holders on March 2, 2023.
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Under ASC 480-10-S99, we have elected to recognize changes in the redemption
value immediately as they occur and adjust the carrying value of the security to
equal the redemption value at the end of the reporting period. This method would
view the end of the reporting period as if it were also the redemption date of
the security. Effective with the closing of our initial public offering, we
recognized the accretion from initial book value to redemption amount, which,
resulted in charges against additional paid-in capital (to the extent available)
and accumulated deficit.
Net Income (Loss) Per Share of Common Stock
We comply with accounting and disclosure requirements of Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 260,
"Earnings Per Share." We have two classes of shares, which are referred to as
Class A common stock and Class B common stock. Income and losses are shared pro
rata between the two classes of shares.
Net (loss) income per share of common stock is computed by dividing net income
by the weighted average number of shares of common stock outstanding for the
period. Subsequent remeasurement of the redeemable Class A common stock is
excluded from income per share of common stock as the redemption value
approximates fair value. Net (loss) income per share of common stock is computed
by dividing the pro rata net income between the shares of Class A common stock
and the shares of Class B common stock by the weighted average number of shares
of common stock outstanding for each of the periods. The calculation of diluted
net (loss) income per share does not consider the effect of the warrants issued
in connection with the IPO, as well as warrants issuable upon the exercise of
the conversion option on outstanding working capital loans, since the exercise
of the warrants is contingent upon the occurrence of future events and the
inclusion of such warrants would be anti-dilutive. As of December 31, 2022, the
warrants are exercisable for 23,625,000 shares of Class A common stock in the
aggregate.
Derivative Warrant Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. We evaluate all of our financial instruments, including
issued stock purchase warrants, to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives, pursuant to ASC 480
and ASC 815-15. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period.
We issued 14,375,000 common stock warrants to investors in our initial public
offering and issued 7,750,000 private placement warrants. All of our outstanding
warrants are recognized as derivative liabilities in accordance with ASC 815-40.
Accordingly, we recognize the warrant instruments as liabilities at fair value
and adjust the instruments to fair value at each reporting period. The
difference between the fair value of the private placement warrants and the
initial purchase consideration thereof is recorded as compensation expense. The
liabilities are subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in our statement of
operations. The fair value of the Public Warrants and Private Warrants were
initially and subsequently measured at fair value using a Monte-Carlo simulation
model. Beginning as of December 31, 2021, the fair value of Public Warrants have
been measured based on the listed market price of such Public Warrants. The
private placement warrants are measured by reference to the listed trading price
of the Public Warrants at December 31, 2022.
Convertible Promissory Notes-Related Party
The Company accounts for the convertible promissory notes under ASC 815. The
Company has made the election under ASC 815-15-25 to account for the notes under
the fair value option. Using the fair value option, the convertible promissory
notes are required to be recorded at their initial fair value on the date of
issuance, and each balance sheet date thereafter. Differences between the face
value of the note and fair value at issuance are recognized as either an expense
in the statement of operations (if issued at a premium) or as a capital
contribution (if issued at a discount). Changes in the estimated fair value of
the notes are recognized as non-cash gains or losses in the statements of
operations.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06 to simplify accounting for certain
financial instruments. ASU 2020-06 eliminates the current models that require
separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance
pertaining to equity classification of contracts in an entity's own equity. The
new standard also introduces additional disclosures for convertible debt and
freestanding instruments that are indexed to and settled in an entity's own
equity. ASU 2020-06 amends the diluted earnings per share guidance, including
the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 is effective no later than January 1, 2024, and should be applied on
a full or modified retrospective basis, with early adoption permitted beginning
on January 1, 2021. The Company is currently reviewing what impact, if any,
adoption will have on the Company's financial position, results of operations or
cash flows.
Our management does not believe that any other recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on our financial statements.
JOBS Act
The JOBS Act contains provisions that, among other things, relax certain
reporting requirements for qualifying public companies. 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. We are electing to delay the adoption of new or
revised accounting standards, and as a result, we may not comply with new or
revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. As a result, the
financial statements may not be comparable to companies that comply with new or
revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal
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controls over financial reporting pursuant to Section 404, (ii) provide all of
the compensation disclosure that may be required of non-emerging growth public
companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act,
(iii) comply with any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements (auditor discussion and analysis) and
(iv) disclose certain executive compensation related items such as the
correlation between executive compensation and performance and comparisons of
the Chief Executive Officer's compensation to median employee compensation.
These exemptions will apply for a period of five years following the completion
of our initial public offering or until we are no longer an "emerging growth
company," whichever is earlier.
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