FaZe (FAZE) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial position has weakened, with total assets decreasing from $67.2 million at the end of 2022 to $40.3 million as of September 30, 2023, primarily due to a significant drop in cash. For the nine months ended September 30, 2023, revenues fell 24.4% year-over-year to $36.7 million, and the company reported a net loss of $35.6 million. A significant subsequent event is the signing of a merger agreement with GameSquare Holdings, Inc. in October 2023. The company has also received a notice of delisting from Nasdaq for failing to meet the minimum bid price requirement, with a compliance period extended to March 18, 2024 Condensed Consolidated Balance Sheets As of September 30, 2023, the company's total assets were $40.3 million, a significant decrease from $67.2 million at December 31, 2022. This was primarily driven by a reduction in cash from $37.2 million to $16.6 million. Total liabilities decreased slightly from $20.5 million to $18.1 million, while total stockholders' equity fell from $46.8 million to $22.2 million over the same period Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash | $16,623 | $37,207 | | Accounts receivable, net | $3,095 | $8,525 | | Total Current Assets | $34,483 | $58,723 | | TOTAL ASSETS | $40,261 | $67,238 | | Liabilities & Equity | | | | Total Current Liabilities | $17,979 | $19,379 | | Total Liabilities | $18,074 | $20,487 | | Total Stockholders' Equity | $22,187 | $46,751 | | TOTAL LIABILITIES & EQUITY | $40,261 | $67,238 | Condensed Consolidated Statements of Operations For the three months ended September 30, 2023, revenue was $12.5 million, down from $14.0 million in the same period of 2022. The net loss was $7.2 million, a significant improvement from a net loss of $130.6 million in Q3 2022, which included a one-time $115.3 million loss on debt extinguishment. For the nine-month period, revenue decreased to $36.7 million from $48.6 million year-over-year, with a net loss of $35.6 million compared to $149.5 million in the prior year Statement of Operations Summary (in thousands, except per-share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $12,510 | $14,012 | $36,749 | $48,621 | | Gross Profit | $851 | $3,542 | $3,170 | $13,974 | | Loss from operations | $(8,621) | $(14,865) | $(36,669) | $(29,681) | | Net loss | $(7,201) | $(130,598) | $(35,597) | $(149,462) | | Net loss per share | $(0.10) | $(2.39) | $(0.54) | $(4.65) | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash used in operating activities was $21.2 million, an improvement from $48.4 million used in the same period of 2022. Net cash used in investing activities was minimal at $0.1 million. Net cash provided by financing activities was only $0.8 million, a stark contrast to the $79.7 million provided in the prior-year period which was driven by the Business Combination. This resulted in a net decrease in cash of $20.6 million, ending the period with $17.2 million in cash and restricted cash Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(21,219) | $(48,442) | | Net Cash Used in Investing Activities | $(148) | $(4,411) | | Net Cash Provided by Financing Activities | $783 | $79,707 | | Net Change in Cash and Restricted Cash | $(20,584) | $26,854 | | Cash and restricted cash at end of period | $17,223 | $44,472 | Notes to Unaudited Condensed Financial Statements Key disclosures include a notice of potential delisting from Nasdaq due to the stock price falling below $1.00, with a compliance period extended to March 2024. The company has expressed substantial doubt about its ability to continue as a going concern due to recurring losses and negative cash flows, noting it does not have sufficient resources for the next twelve months. A significant subsequent event is the October 2023 merger agreement with GameSquare Holdings, Inc., where FaZe will become a wholly-owned subsidiary - The company received a delisting notice from Nasdaq in March 2023 for failing to meet the $1.00 minimum bid price. An extension was granted, giving the company until March 18, 2024, to regain compliance[20][22] - Management has raised substantial doubt about the company's ability to continue as a going concern, stating that based on cash resources as of September 30, 2023, it does not have sufficient funds for operations for at least the next twelve months[25][26] - On October 19, 2023, the company entered into a merger agreement with GameSquare Holdings, Inc., under which FaZe will be acquired and become a wholly-owned subsidiary of GameSquare[122] - To address liquidity issues, the company entered into a Standby Equity Purchase Agreement (SEPA) in May 2023, allowing it to sell up to $25 million of its common stock to an investor[27][28] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 24.4% year-over-year decline in nine-month revenue to decreases in Brand Sponsorships and Consumer Products. The net loss for the nine months ended September 30, 2023, was $35.6 million. Key performance indicators such as Total Reach, Aggregate YouTube Subscribers, and ARPU have all declined compared to the prior year. The company's liquidity is a major concern, with only $17.2 million in cash as of September 30, 2023, and management reiterates substantial doubt about its ability to continue as a going concern. Cost-saving initiatives have been implemented, leading to a 45% decrease in G&A expenses in Q3 2023 Results of Operations For the nine months ended Sep 30, 2023, revenues decreased 24.4% to $36.7 million from $48.6 million in the prior-year period. This was driven by a $13.4 million (47.9%) drop in Brand Sponsorships and a $1.5 million (63.4%) drop in Consumer Products, partially offset by a $4.3 million (58.4%) increase in Esports revenue. Gross profit fell 77.3% to $3.2 million. Loss from operations widened to $36.7 million from $29.7 million. The net loss improved to $35.6 million from $149.5 million, as the 2022 period included a $115.3 million one-time loss on debt extinguishment Revenue by Type (Nine Months Ended Sep 30, in thousands) | Revenue Type | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Brand sponsorships | $14,616 | $28,054 | $(13,438) | (47.9)% | | Content | $9,658 | $10,641 | $(983) | (9.2)% | | Consumer products | $852 | $2,328 | $(1,476) | (63.4)% | | Esports | $11,537 | $7,285 | $4,252 | 58.4% | | Total revenue | $36,749 | $48,621 | $(11,872) | (24.4)% | - General and administrative expenses for Q3 2023 decreased by $7.6 million (45%) year-over-year, primarily due to a $5.2 million reduction in compensation and benefits from company restructuring and better cost management[183] - The significant decrease in net loss year-over-year for both the three and nine-month periods is primarily due to a $115.3 million loss on debt extinguishment recorded in Q3 2022 following the Business Combination, which was not repeated in 2023[177] Key Performance Indicators The company's key performance indicators showed a general decline as of September 30, 2023, compared to the prior year. Total Reach decreased to 505 million, and Aggregate YouTube Subscribers fell to 131.9 million. Consequently, Average Revenue per YouTube Subscriber (ARPU) for the nine-month period dropped to $0.28 from $0.36. The number of significant sponsors also decreased from 11 to 9 for the nine-month period Key Performance Indicators Comparison | Metric | As of/For Nine Months Ended Sep 30, 2023 | As of/For Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Total Reach (in thousands) | 504,526 | 526,268 | | Aggregate YouTube Subscribers (in thousands) | 131,867 | 135,974 | | ARPU | $0.28 | $0.36 | | Total Significant Sponsors | 9 | 11 | - A significant portion of 'Total Reach' (212.6 million out of 504.5 million) comes from channels of celebrity talent like Snoop Dogg, which the company is not contractually allowed to directly monetize[142] Liquidity and Capital Resources The company's liquidity position is critical, with principal sources of liquidity being cash of $17.2 million as of September 30, 2023. Management states these resources are insufficient to fund operations for the next twelve months, raising substantial doubt about its ability to continue as a going concern. For the first nine months of 2023, cash used in operations was $21.2 million. The company has no outstanding long-term debt - The company's principal source of liquidity was its cash balance of $17.2 million as of September 30, 2023[206] - Management believes it has insufficient resources to fund its operations for at least the next twelve months, which continues to raise substantial doubt about its ability to continue as a going concern[204][205] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(21,219) | $(48,442) | | Net cash provided by financing activities | $783 | $79,707 | Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2023. This was due to the identification of two material weaknesses in internal control over financial reporting, related to inadequate IT controls, lack of segregation of duties, and insufficient review of accounts. The company is implementing remediation plans, including hiring experienced personnel and enhancing processes - Disclosure controls and procedures were determined to be not effective as of September 30, 2023[243] - The ineffectiveness is due to two material weaknesses involving: (1) inadequate IT general and application controls, including inappropriate system access, and (2) lack of adequate segregation of duties and timely review of accounts[243] - Remediation efforts are underway, including hiring experienced personnel and improving processes, but the material weaknesses are not yet considered remediated[244] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business or financial condition. Note 10 of the financial statements provides additional details on litigation matters - The company states it is not a party to any legal proceedings that would be material to its business, financial condition, or cash flows if determined adversely[246] Risk Factors The company highlights several significant risks. A primary risk is the potential delisting from Nasdaq for failing to meet the minimum bid price requirement, with a compliance deadline of March 18, 2024. There are substantial risks associated with the pending merger with GameSquare, including the possibility of delays, termination, or costly litigation. The company also notes risks related to attracting and retaining key personnel, highlighted by the recent termination of its CEO - The company faces a risk of being delisted from Nasdaq for not meeting the $1.00 minimum bid price rule. It has until March 18, 2024, to regain compliance[248][249] - There are significant risks that the merger with GameSquare may be delayed or not completed at all, which could adversely affect the stock price, business, and financial condition[255] - The pendency of the merger could negatively impact business relationships with customers, talent, and partners, and restricts the company from pursuing certain strategic actions[259] - The company depends on its ability to attract and retain key personnel, noting the recent termination of its CEO in September 2023 as an example of personnel risk[261] Unregistered Sales of Equity Securities and Use of Proceeds None - No unregistered sales of equity securities were reported for the period[262] Other Information None - No other information was reported under this item[264]