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FaZe is a Los Angeles-based gaming group.NASDAQ:FAZE) went public with little fanfare and near-zero hype in sharp contrast to its esports competitions and media platform. The company used a now obsolete technology called a Blank check company to list its shares at NASDAQ in a deal that would bring it value $725 Million. It now has a value of $338.6million, with common shares at 53% below the SPAC reference price. Since the announcement of the deal last year, the go-public market value had been reduced by 25%.
Is it possible for the company to transform its large social media presence and esports history into year-overyear revenue growth and eventual profits? It all depends on who you ask. FaZe already has some bears that have voiced their disapproval of the company. The 12-year old company has a long history filled with controversy and negative headlines. But, this is to be expected given the space’s young, chaotic and unpredictable nature.
FaZe is a videogame company at its core. In 2010, a group of Call of Duty gamers started the company. They started a YouTube channel to share compilations of sniper tricks shots and other gaming antics. It now includes 11 competitive esports groups in games like Fortnite, Counter-Strike, and other popular titles. Snoop Dogg is on the board. T-shirts, sweatpants and other merchandise are available on the company’s website. Critically, FaZe has been an integral part of online gaming culture over the years. This has enabled the company to reach a large, young audience of both Gen Z and millennials via its social media platforms. It has more than 510 million combined followers. These numbers are large but they will likely be overlapped with many followers engaging with multiple FaZe clan members.
Increased Revenue based on Brand Strength
FaZe’s fiscal 2022 quarter second quarter earnings were reported in August. It was FaZe’s first quarterly earnings report as a publicly traded company. The revenue came in at $18.8million, which is 22% more than the previous quarter. As the gross margin at 34% grew by 868 basis points, the company made $6.4 million. This is an 868 basis point increase in sequential profits compared to the 13.62% gross margin for year-ago quarter. The net loss for the quarter was $9.3 million. This is an increase of $7.6million in the previous year-ago quarter. Cash burn from operations came in at $16million.
This is a serious problem. First, this was the highest cash burn rate recorded, despite higher revenues. It was also more than 122% greater than its comparable year-ago quarter. Additionally, the quarter’s free cash outflow was $17.6 millions with capital expenditure at $1.6million. Second, net proceeds from the go-public transaction were only $57.8 millions. This was a drop from the original $218 million expected. The net proceeds were to be raised from a combination PIPE investors and cash from B. Riley Principal. Redemptions were 92% and $71.4 millions of the $100 million in PIPE obligations.
The company should still have a year to go at the current rate of burn. FaZe will likely rely on dilution in order to expand this runway. Management is already working to improve their topline, with the hope that it will flow through to the bottom. With the recent filing of a Notification of Effectiveness (SEC) with the company, the company is now preparing to sell more shares. FaZe plans to issue additional 5.9 million shares. After the end of the lockup period, shareholders have the option to sell their shares.
Can Sandwiches Benefit The Commons?
FaZe is currently exploring new ways to make money using its brand, including gambling and ghost-kitchens. FaZe has partnered with The Sandbox, a virtual gaming world that is decentralized and allows for the development of a plot. FaZe World, which will host virtual events as well games and digital product launches, will provide new opportunities for followers to interact with the FaZe Clan roster. FaZe Subs was also launched by DoorDash (DASH), a ghost-kitchen brand. Although the mix of revenue drivers, from sandwiches to clothing and metaverse, does not paint a strong picture, it is essential for growth.
But, I am not a buyer. This is because of the high cash burn and the dilutive roadmap to fix it. It doesn’t encourage confidence. FaZe will likely feel sustained pressure on its common in the first quarter of 2023, as the share lockup expires.