FaZe Clan’s SPAC merger in doubt after missing the mark on financial forecast

Fresh off his appearance at Super Bowl LVI’s halftime show, Snoop Dogg joined FaZe Clan’s board of directors.FaZe Clan

FaZe Clan, one of the most recognizable names in esports and gaming, could be taking a financial stumble. In October, the North American brand declared that it would go public on the NASDAQ at a $1 billion valuation through a merger with the SPAC (Special Purpose Acquisition Company) B. Riley Principal 150 Merger Corp. (BRPM). A recent amendment to its merger filing (Form S-4) with the SEC (Securities and Exchange Commission) revealed potentially detrimental issues with the business. Sources are telling Sports Business Journal that the FaZe Clan merger may be dead in the water, placing an additional burden on the status of FaZe Clan’s plans to go public.

The latest turn of events could cost FaZe Clan and its stakeholders dearly. Worst-case scenario, the $1 billion figure on the horizon can turn into a fight against bankruptcy. Not only did the recent developments drop the post-merger market capitalization of FaZe Clan substantially below the billion-dollar mark, but it also reduced the expected transaction proceeds from the merger by presumably at least $73 million, which is in doubt at best.

FaZe Clan, which is a registered Delaware corporation under the name FaZe Clan Inc., is well known for its content creation team and competes in a variety of esports titles. However, one of the marketing tools the organization is using to garner a greater audience is crossing over into the traditional sports world by partnering with people involved around NFL activities, like February’s Super Bowl.

Branding itself as the “most popular esports and entertainment organization in the world,” FaZe Clan — in trying to grab a portion of the traditional sports audience — was the first esports organization featured on the cover of Sports Illustrated and took the field in a flag football game against the likes of Hall of Fame quarterback Brett Favre.

THE INITIAL PLAN

According to FaZe’s initial plans, the merger was supposed to be completed sometime during the first quarter of 2022. While the company went ahead and announced its expected post-merger board of directors, featuring the likes of Snoop Dogg and The Arena Group CEO Ross Levinsohn in March, the first quarter of 2022 passed, and FaZe Clan is still a private company.

FaZe Clan’s management crafted the financial forecast, which BRPM used to evaluate the company and base the initial merger filing on, in September. BRPM’s amendment to its merger filing disclosed that FaZe Clan’s de facto financial performance in 2021 deviated significantly from that forecast. While the company’s revenue and gross profits slightly exceeded expectations at $52.85 million in annual revenue ($50 million forecast) and $11.30 million in annual gross profit ($10 million forecast), FaZe’s bottom line turned out to be a lot worse than expected. FaZe planned an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of $19 million but recorded an actual adjusted EBITDA loss of $28.741 million. The filing points out a change in methodology of calculating its adjusted EBITDA to align with existing SEC non-GAAP (generally accepted accounting principles) guidance as the primary reason for such a significant gap between forecast and actual results. The change reduced the 2021 result by $6.6 million.

The 2021 financial results of FaZe Clan also revealed that almost half of its revenue was generated from brand sponsorships, which contributed $24.87 million. Other significant revenue streams in 2021 were its content segment contributing $16.07 million, its consumer products generating $5.75 million, and its esports segment revenue adding $5.85 million. Furthermore, the financial results shine a light on leadership compensation of the unprofitable company, with CEO Lee Trink receiving a total of $1.38 million in compensation and Chief Strategy Officer Kai Henry being the top earner, with $2.91 million in compensation for the year.

Aside from missing its financial targets, the delay in its merger process with BRPM demonstrates a major issue FaZe Clan faces. The company based its business strategy and financial forecasts on the assumption of completing the merger by Dec. 31. Therefore, getting access to at least 75% of the proceeds from BRPM’s $173 million trust account and the planned $118 million PIPE (private investment in public equity) investment at or around September 2021 to finance its growth strategy. Instead, FaZe Clan’s audited financial statements have now raised substantial doubt about its capability to continue as a going concern, meaning that it must generate sufficient revenue and raise additional funds to stay afloat.

DELAY OF GAME

Beyond FaZe Clan’s failure to hit its 2021 forecast, the company also acknowledged that it expects that its actual results in 2022 and the following years will materially differ from its forecast. Reasons include that FaZe Clan now expects higher costs of revenue, additional general and administrative expenses and reduced revenue by at least 20%. Crucially, the company also expects transaction proceeds linked with the merger to drop by $73 million to potentially less than $218 million. Consequently, FaZe Clan’s planned acquisition and international expansion strategy could be significantly delayed or limited in its scope.

FaZe Clan’s commitment to a merger with a SPAC came during a period of the pandemic-era SPAC boom unraveling. If the merger agreement between FaZe and BRPM does get terminated down the road, that would not be unusual in the world of SPACs. Forbes reported in December that in the second half of 2021, 17 SPAC mergers were terminated.

FaZe Clan’s initial announcement of its plans to go public caused a stir in esports, as it claimed that completing those plans would crown them the winners of the so-called race to become the first billion-dollar esports organization. In October’s merger filing with the SEC, FaZe Clan expected that the post-merger company will have a pro-forma market capitalization of almost $1 billion ($987 million), the golden figure it has been leading its merger campaign with.

Considering the brand’s noisy and in-your-face attitude, putting itself in the spotlight during the process of going public with a $1 billion valuation figure is an unsurprising strategy. A closer look at the numbers provided in the initial merger filing reveals that the actual preliminary enterprise value for the post-merger company was set at $713 million and inflated by a planned cash position of $274 million. Additionally, the $1 billion market capitalization was dependent on the completion of the now-delayed $118 million PIPE investment deal. The current FaZe Clan entity was valued at $650 million in total equity value on a pre-money, cash-free and debt-free basis.

MARKET MATTERS

FaZe Clan’s plans to go public potentially falling apart might be a blessing for esports. Going public on the NASDAQ is the ultimate high-risk, high-reward financing strategy for a company such as FaZe Clan in the age of social media-fueled trading frenzies. Of course, the expected $118 million PIPE deal linked to the merger would secure enough funding for FaZe to execute its esports and adjacent businesses strategy for some time. However, it would also expose a company that could become the definition of a meme stock to the social media investor.

In a market where those investors were responsible for creating highly volatile stocks through short squeezes and internet pumps, such as GameStop and AMC, a company that is associated with individuals involved in crypto pump-and-dumps could easily be taken on a market-price roller coaster, potentially hurting the company’s finances — a development that could put other esports organizations trying to raise funds from the financial markets in jeopardy. Consequently, FaZe Clan remaining a private company might be the best scenario for the esports industry at large, especially in case FaZe Clan eventually implodes.