Los Angeles-based FaZe gaming costume (Nasdaq: FAZE) became public with little to no buzz and almost zero noise in sharp contrast to esports competitions and the media platform. The company has taken the dead path now largely using a file A blank check company to list its shares on the NASDAQ Stock Exchange in a transaction valued at 725 million dollars. It is now valued at $338.6 million with common stock 53% below SPAC’s reference price. The overall market valuation has already been reduced by 25% from the time the deal was initially announced last year.
Can the company turn its significant legacy on social media and esports into tangible annual revenue growth and bottom line profits? Depends on who you ask. FaZe already has a small share of bears who have been clear about their criticism of the company. In fact, the 12-year-old company has a very lively history with a large number of controversies and negative headlines. However, this is to be expected for a young, irregular and chaotic space like esports.
At its core, FaZe is a video game company. The company was started in 2010 by a group of Call of Duty players who met on Xbox Live and then started a YouTube channel together to showcase collections of sniper trick shots and public game titles. It has since grown to include around 11 competitive esports teams in games like Fortnite and Counter-Strike. The company counts Snoop Dogg on its board and sells T-shirts, track pants, and other merchandise on its website. Crucially, FaZe has been a part of the online gaming culture for years. This position allowed the company to build a large, young audience of Millennials and Generation Z across its social media platforms where it has over 510 million followers combined. While it’s large, a large number of these will likely overlap with the followers that many FaZe Clan members engage with.
Revenue ramp built on brand strength
FaZe announced its second-quarter fiscal year 2022 earnings in August, its first as a public company. This brought revenue to $18.8 million, an increase of 22% from last year’s quarter. The company generated a gross profit of $6.4 million as its gross margin increased 34% by 868 basis points sequentially and from a gross margin of 13.62% in the previous quarter of last year. Net loss for the third quarter came in at $9.3 million, up from $7.6 million in the same quarter last year with a cash burn from operations of $16 million.
This cash burn rate is a problem. First, it was the highest rate ever recorded despite higher revenue and was an increase of more than 122% from the same quarter last year. Furthermore, free cash flow was $17.6 million during the quarter with capital expenditures of $1.6 million. Second, the company only managed to raise a net proceeds of $57.8 million from its public deal. This was underestimated at first $218 million It was supposed to come from a group of PIPE investors and cash from B. Riley Principal, SPAC’s sponsor. Recoveries came in 92% and $71.4 million of the $100 million of PIPE commitments defaulted.
At the current burn rate, the company should have less than a full year. Of course, FaZe will likely rely on mitigation to expand that runway with management already taking steps to grow its baseline in the hope that it will flow through to the bottom. The company is also preparing to sell new shares with a recent notification of efficacy filed with the Securities and Exchange Commission. FaZe aims to issue an additional 5.9 million common shares. The deposit also creates an option for stock sales by existing shareholders once the stock lock period has expired.
Do sandwiches help the House of Commons?
FaZe is exploring other ways to use their brand to make money by throwing ghost kitchens and gambling in the hat. In this endeavor to monetize the FaZe brand, the company owns In partnership with a virtual world of decentralized games Sandbox is called to develop a plot. FaZe World will host virtual events, games and digital product releases and will provide new ways for the company’s followers to interact with the FaZe Clan. The company also partnered with DoorDash (DASH) to launch FaZe Subs, a ghost kitchen brand. The eclectic mix of revenue drivers from the metaverse and sandwiches to apparel doesn’t exactly paint a strong picture but is essential for growth.
I am not a buyer here though. The high cash burn and watered-down roadmap to bridge this do not tempt confidence. FaZe will likely see its subscriber under constant pressure as early as the first quarter of 2023 when the stock lock ends and when it rolls out on its stock offering.
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