10-Q
Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
Or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
                    
Commission File Number
001-40083
 
 
FAZE HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
85-2081659
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
720 N. Cahuenga Blvd.,
Los Angeles, CA
 
90038
(Address of Principal Executive Offices)
 
(Zip Code)
(818)
688-6373
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol (s)
 
Name of each exchange
on which registered
Common stock, par value $0.0001 per share
 
FAZE
 
The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of common stock
 
FAZEW
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
As of November 1
4
, 2022, there were 72,506,849 shares of common stock, par value $0.0001 per share, were issued and outstanding.
 
 
 


Table of Contents

FaZe Holdings Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2022

Table of Contents

 

         Page  
    
PART I. FINANCIAL INFORMATION      1  

Item 1.

  Financial Statements      1  
  Condensed Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021      1  
  Condensed Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited)      2  
  Condensed Statements of Changes in Stockholder’s Deficit for the three and nine months ended September 30, 2022 and 2021 (unaudited)      3  
  Condensed Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)      5  
  Notes to Unaudited Condensed Financial Statements      6  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      58  

Item 4.

  Controls and Procedures      59  
PART II. OTHER INFORMATION      59  

Item 1.

  Legal Proceedings      59  

Item 1A.

  Risk Factors      59  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      87  

Item 3.

  Defaults Upon Senior Securities      87  

Item 4.

  Mine Safety Disclosures      88  

Item 5.

  Other Information      88  

Item 6.

  Exhibits      88  
  Signatures      90  

 

i


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FaZe Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
(unaudited)
 
    
September 30,
   
December 31,
 
    
2022
   
2021
 
ASSETS
 
Current Assets:
                
Cash
   $ 43,872     $ 17,018  
Accounts receivable, net
     18,792       6,266  
Contract assets
     2,959       4,118  
Inventory
              6  
Content asset, net
              474  
Prepaid expenses
     8,833       944  
Other assets
     1,795       5,246  
Total Current Assets
     76,251       34,072  
    
 
 
   
 
 
 
Restricted cash
     600       600  
Property, equipment and leasehold improvements, net
     3,925       925  
Intangible assets, net
     947       738  
Other long-term assets
     679       733  
    
 
 
   
 
 
 
TOTAL ASSETS
  
$
82,402
 
 
$
37,068
 
    
 
 
   
 
 
 
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT
 
LIABILITIES:
                
Current liabilities:
                
Accounts payable and accrued expenses
   $ 11,311     $ 28,381  
Short-term debt
              3,148  
Contract liabilities
     10,099       7,902  
Other current liabilities
              7  
    
 
 
   
 
 
 
Total Current Liabilities
     21,410       39,438  
    
 
 
   
 
 
 
Long-term debt, net of discounts (Note 7)
              70,854  
Warrant liabilities
     95           
Other long-term liabilities
     36       —    
Total Liabilities
  
 
21,541
 
 
 
110,292
 
    
 
 
   
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 10)
                
MEZZANINE EQUITY:
                
Series A preferred stock, $0.00001 par value; 3,545,529 shares of Legacy FaZe preferred stock authorized at December 31, 2021; 3,237,800 shares of Legacy FaZe preferred stock issued and outstanding at December 31, 2021
              33,705  
STOCKHOLDERS’ DEFICIT:
                
Preferred stock, $0.0001 par value; 1,000,000 shares of the Company’s preferred stock authorized at September 30, 2022; zero share of the Company’s preferred stock issued and outstanding at September 30, 2022
                  
Common stock, $0.0001 par value at September 30, 2022 and December 31, 2021, respectively; 500,000,000 and 71,033,146 shares of common stock authorized at September 30, 2022 and December 31, 2021, respectively; 70,258,004 and 18,841,538 shares of common stock issued and outstanding at September 30, 2022 and December 31, 2021, respectively
     7       2  
Additional
paid-in
capital
     322,724       5,477  
Accumulated deficit
     (261,870     (112,408
    
 
 
   
 
 
 
Total Stockholders’ Deficit
  
 
60,861
 
 
 
(106,929
    
 
 
   
 
 
 
TOTAL LIABILITIES, MEZZANINE EQUITY, AND STOCKHOLDERS’ DEFICIT
  
$
82,402
 
 
$
37,068
 
    
 
 
   
 
 
 
 
1

Table of Contents
FaZe Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and
per-share
information)
(unaudited)
 
    
Three months ended
   
Nine months ended
 
    
September 30,
   
September 30,
 
    
2022
   
2021
   
2022
   
2021
 
Revenues
   $ 14,012     $ 12,493     $ 48,621     $ 37,756  
Cost of revenues
     10,470       11,403       34,647       32,278  
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     3,542       1,090       13,974       5,478  
Operating expenses:
                                
General and administrative
     16,928       8,408       39,025       22,720  
Sales and marketing
     1,479       1,109       3,557       2,470  
Impairment of content assets
                       1,073           
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (14,865     (8,427     (29,681     (19,712
Other (income)/expense:
                                
Interest expense, net
     459       1,517       4,491       3,635  
Change in fair value of warrant liabilities
     (19              (19         
Loss on debt extinguishment
     115,292                115,292           
Other, net
     1       11       17       (56
Total other (income)/expense:
     115,733       1,528       119,781       3,579  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  
$
(130,598
 
$
(9,955
 
$
(149,462
 
$
(23,291
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss per common share - basic and diluted
   $ (2.39   $ (0.50   $ (4.65   $ (1.24
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average number of common shares outstanding - basic and diluted
     54,590,538       19,949,557       32,144,653       18,757,552  
    
 
 
   
 
 
   
 
 
   
 
 
 
 
2

Table of Contents
FaZe Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands, except shares and
per-share
information)
(unaudited)
 
    
Common Stock
    
Additional

Paid-In

Capital
   
Accumulated

Deficit
   
Total
 
    
Shares
    
Amount
 
Balance at December 31, 2020
  
7,397,055
 
  
$
—  
 
  
$
3,086
 
 
$
(75,542
 
$
(72,456
Retroactive application of recapitalization (Note 3)
     9,073,842        2        (2     —         —    
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
  
 
16,470,897
 
  
 
2
 
  
 
3,084
 
 
 
(75,542
 
 
(72,456
Issuance of common stock options and stock option reprice
               —          653       —         653  
Issuance of restricted stock awards
     —          —          2       —         2  
Issuance of common stock
     2,226,683        —          720       —         720  
Exercise of stock option
     85,819        —          33       —         33  
Net loss
     —          —          —         (23,291     (23,291
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
  
18,783,399
 
  
$
2
 
  
$
4,492
 
 
$
(98,833
 
$
(94,339
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at December 31, 2021
  
8,461,706
 
  
$
—  
 
  
$
5,479
 
 
$
(112,408
 
$
(106,929
Retroactive application of recapitalization (Note 3)
     10,379,832        2        (2     —         —    
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
  
 
18,841,538
 
  
 
2
 
  
 
5,477
 
 
 
(112,408
 
 
(106,929
Stock based compensation expense
     —          —          5,205       —         5,205  
Issuance of common stock in connection with litigation settlement
     28,994        —          294       —         294  
Issuance of common stock upon vesting of restricted stock awards
     212,767        —          —         —         —    
Exercise of stock option
     576,425        —          220       —         220  
Exercise of common and preferred warrants
     2,332,117        —          101       —         101  
Conversion of preferred stock to FaZe common stock
  
 
7,209,555
 
  
 
1
 
  
 
33,704
 
 
 
—  
 
 
 
33,705
 
Conversion of convertible debt to FaZe common stock
  
 
19,545,406
 
  
 
2
 
  
 
195,115
 
 
 
—  
 
 
 
195,117
 
Issuance of earn-out shares
  
 
5,312,098
 
  
 
1
 
  
 
(1
)

 
 
—  
 
 
 
 
Conversion of B Riley Class B stock to FaZe common stock
  
 
4,832,500
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
Recapitalization transaction, net of equity issuance costs
     1,366,604               (17,390 )     —         (17,390 )
Proceeds from PIPE offerings
  
 
10,000,000
 
  
 
1
 
  
 
99,999
 
 
 
—  
 
 
 
100,000
 
Net loss
     —          —          —         (149,462     (149,462
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at September 30, 2022
  
70,258,004
 
  
$
7
 
  
$
322,724
 
 
$
(261,870
 
$
60,861
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
3

Table of Contents
FaZe Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands, except shares and
per-share
information)
(unaudited)
 
    
Common Stock
    
Additional

Paid-In

Capital
   
Accumulated

Deficit
   
Total
 
    
Shares
    
Amount
 
Balance at June 30, 2021
    
7,397,055
 
  
$
—  
 
  
$
3,086
 
 
$
(88,878
 
$
(85,792
Retroactive application of recapitalization (Note 3)
     9,073,842        2        (2  
 
—  
 
 
 
—  
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
  
 
16,470,897
 
  
 
2
 
  
 
3,084
 
 
 
(88,878
 
 
(85,792
Issuance of common stock options and stock option reprice
               —          653       —         653  
Issuance of restricted stock awards
     —          —          2       —         2  
Issuance of common stock
     2,226,683        —          720       —         720  
Exercise of stock option
     85,819        —          33       —         33  
Net loss
     —          —          —         (9,955     (9,955
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
    
18,783,399
 
  
$
2
 
  
$
4,492
 
 
$
(98,833
 
$
(94,339
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2022
    
8,612,791
 
  
$
—  
 
  
$
8,532
 
 
$
(131,272
 
$
(122,740
Retroactive application of recapitalization (Note 3)
     10,565,165        2        (2     —         —    
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
  
 
19,177,956
 
  
 
2
 
  
 
8,530
 
 
 
(131,272
 
 
(122,740
Stock based compensation expense
     —          —          2,546       —         2,546  
Issuance of common stock upon vesting of restricted stock awards
     167,806        —          —         —         —    
Exercise of stock option
     313,962        —          120       —         120  
Exercise of common and preferred warrants
     2,332,117        —          101       —         101  
Conversion of preferred stock to FaZe common stock
  
 
7,209,555
 
  
 
1
 
  
 
33,704
 
 
 
—  
 
 
 
33,705
 
Conversion of convertible debt to FaZe common stock
  
 
19,545,406
 
  
 
2
 
  
 
195,115
 
 
 
—  
 
 
 
195,117
 
Issuance of earn-out shares
  
 
5,312,098
 
  
 
1
 
  
 
(1

)
 
 
—  
 
 
 
 
Conversion of B Riley Class B stock to FaZe common stock
  
 
4,832,500
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
Recapitalization t
ransaction
,
net of equity issuance costs
     1,366,604               (17,390 )     —         (17,390 )
Proceeds from PIPE offerings
  
 
10,000,000
 
  
 
1
 
  
 
99,999
 
 
 
—  
 
 
 
100,000
 
Net loss
     —          —          —         (130,598     (130,598
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at September 30, 2022
    
70,258,004
 
  
$
7
 
  
$
322,724
 
 
$
(261,870
 
$
60,861
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
4

Table of Contents
FaZe Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Nine Months ended September 30,
 
    
2022
   
2021
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net loss
   $ (149,462   $ (23,291
Adjustments to reconcile net loss to net cash used in operating activities:
                
Bad debt expense (recovery)
     378       (26
Additions to content asset
     (599         
Depreciation & amortization expense
     1,230       675  
Content asset impairments
     1,073           
Stock-based compensation expense
     4,996       655  
Change in fair value of warrant liabilities
     (19     —    
Non-cash
interest expense
     4,491       3,635  
Loss on debt extinguishment
     115,292       —    
Other
     (37     (73
Change in operating assets and liabilities:
                
Accounts receivable and contract assets
     (11,742     (3,784
Inventory
     6       48  
Prepaid expenses and other assets
     (6,127     (260
Accounts payable and accrued expenses
     (9,728     (1,789
Contract liabilities
     2,197       3,053  
Other current liabilities
     (7     (50
Short-term debt
     (420     —    
Other long term liabilities
     36           
    
 
 
   
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
  
$
(48,442
 
$
(21,207
    
 
 
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchase of property, plant and equipment
     (3,804     (305
Purchase of intangible assets
     (607     (314
Issuance of note receivable
  
 
  
 
    (123
    
 
 
   
 
 
 
NET CASH USED IN INVESTING ACTIVITIES
  
$
(4,411
 
$
(742
    
 
 
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Payments of loan principal
     (21,123     (385
Proceeds from issuance of term loan
     20,000           
Proceeds from issuance of convertible debt
              35,675  
Issuance of common stock in connection with exercise of stock options
     220           
Payments of transaction fees by Legacy FaZe
     (25,146         
Proceeds from recapitalization of B. Riley 150
, net of B. Riley 150 redemptions and transaction costs
     5,655           
Proceeds from PIPE offering
     100,000           
Proceeds from conversion of preferred and common warrants
     101           
Payment of debt issuance costs
              (254
    
 
 
   
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
  
$
79,707
 
 
$
35,036
 
    
 
 
   
 
 
 
NET CHANGE IN CASH AND RESTRICTED CASH
  
 
26,854
 
 
 
13,087
 
Cash and restricted cash at beginning of period
     17,618       4,431  
    
 
 
   
 
 
 
CASH AND RESTRICTED CASH AT END OF PERIOD
  
$
44,472
 
 
$
17,518
 
    
 
 
   
 
 
 
RECONCILIATION TO CONSOLIDATED BALANCE SHEETS
                
Cash
   $ 43,872     $ 16,918  
Restricted cash
     600       600  
    
 
 
   
 
 
 
Cash and restricted cash
  
$
44,472
 
 
$
17,518
 
    
 
 
   
 
 
 
SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES:
                
Cash paid for interest
   $ 3,027     $     
SUPPLEMENTAL DISCLOSURE FOR
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
                
Capitalization of deferred transaction costs included in accounts payable
   $        $ 1,764  
Issuance of common stock in connection with litigation settlement
     294       720  
Purchase of property, plant and equipment in accrued expenses
     28           
Issuance of common stock in connection with exercise of stock options prior to receipt of cash
              33  
Conversion of convertible notes and accrued interest into common stock under original contractual terms
     17,551           
Conversion of redeemable convertible preferred stock to common stock pursuant to Business Combination
   $ 33,705     $     
 
5

Table of Contents
FAZE HOLDINGS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
 
 
1.
DESCRIPTION OF THE BUSINESS
FaZe Holdings Inc. (“FaZe” or the “Company”), is a lifestyle and media platform rooted in gaming and youth culture. The Company’s premium brand, talent network, and large audience can be monetized across a variety of products and services.
On July 19, 2022 (the “Closing Date”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of October 24, 2021 (as amended in December 2021 and March 2022), by and among B. Riley 150 Merger Corp. (“B. Riley 150”), a special purpose acquisition company, and BRPM Merger Sub, Inc., a directly wholly owned subsidiary of B. Riley 150 (“Merger Sub”) and FaZe Clan, Inc. (“Legacy FaZe”), the parties consummated the merger of Merger Sub with and into Legacy FaZe, with Legacy FaZe continuing as the surviving corporation (the “Merger”), as well as the other transactions contemplated by the Merger Agreement (the Merger and such other transactions, the “Business Combination”). In connection with the closing of the Business Combination (the “Closing”), Legacy FaZe became a wholly owned subsidiary of B. Riley 150, which changed its name to “FaZe Holdings Inc.” The Merger is further described in Note 3,
Business Combination.
Legacy FaZe determined that it was the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805, Business Combinations. The Merger was accounted for as a reverse recapitalization, in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Under this method of accounting, B. Riley 150 was treated as the acquired company for financial reporting purposes. Accordingly, the Business Combination was treated as the equivalent of Legacy FaZe issuing stock for the net assets of B. Riley 150, accompanied by a recapitalization. The net assets of B. Riley 150 were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Legacy FaZe.
In accordance with guidance applicable to these circumstances, the equity structure has been retroactively restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company’s common stock issued to Legacy FaZe’s common stockholders in connection with the Business Combination. As a result, these financial statements represent the continuation of Legacy FaZe and the historical shareholders’ deficit. Common stock, preferred stock and loss per share of Legacy FaZe prior to the Business Combination have been retrospectively adjusted for the Business Combination using an exchange ratio of 2.2267 (“Equity Value Exchange Ratio”). The accumulated deficit of Legacy FaZe has been carried forward after the Business Combination.
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding annual financial reporting. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP included in the ASC, and Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
 
 
6

Table of Contents
Unaudited Interim Condensed Consolidated Financial Information
The accompanying Condensed Consolidated Balance Sheet as of September 30, 2022, Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2022 and 2021, Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 and Condensed Consolidated Statements of Stockholders’ Deficit for the three months and nine months ended September 30, 2022 and 2021 are unaudited. The financial data and other information contained in the notes thereto as of and for the three months and nine months ended September 30, 2022, and 2021 are also unaudited. The Consolidated Balance Sheet as of December 31, 2021 was derived from the Company’s audited consolidated financial statements incorporated by reference in the Company’s Form
S-1/A,
which was filed with the SEC on September 29, 2022.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements, and in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2022, the results of its operations for the three months and nine months ended September 30, 2022 and 2021, and its cash flows for the nine months ended September 30, 2022 and 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020, and the notes thereto.
The results for the three months and nine months ended September 30, 2022, are not necessarily indicative of results to be expected for the year ended December 31, 2022, or any other interim periods, or any future year or period.
The significant accounting policies used in preparation of these unaudited interim condensed consolidated financial statements are consistent with those described in the Company’s audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to
non-emerging
growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised, and it has different application dates for public and private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
This may make comparison of the Company’s condensed consolidated financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
 
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Use of Estimates​​​​​​​​​​​​​​​​​​​​​
The preparation
of the Company’s condensed consolidated financial statements in
conformity
with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements. The inputs into certain of these estimates and assumptions include the consideration of the economic impact of the
COVID-19
pandemic. Significant estimates include revenue recognition, allowance for doubtful accounts, warrant liabilities, valuation of the Company’s common stock before the Business Combination, stock-based compensation expense, and income taxes. These estimates generally involve complex issues and require management to make judgments, involve analysis of historical and future trends, can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from management’s estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported results of operations. Contract assets and accounts receivable have been consolidated into accounts receivable and contract assets on the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021. In addition, prepaid expenses has been reclassified out of prepaid expenses and other assets, with prepaid expenses and other assets presented as separate line items on the Consolidated Balance Sheet as of December 31, 2021.
COVID-19
The continuing presence of
COVID-19
around the world has affected the United States and global economies and has affected the Company’s operations and those of third parties upon which the Company relies, including disruption in staffing, order fulfillment, and demand for product. In addition, the
COVID-19
pandemic has and may continue to affect the Company’s revenues. Additionally, while the duration and potential economic impact brought by the
COVID-19
pandemic are difficult to assess or predict, the
COVID-19
pandemic may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity. The continuing impact of the
COVID-19
pandemic is highly uncertain and subject to change. The Company continues to monitor
COVID-19
and the extent to which the continued spread of the virus adversely affects the Company’s customer base and revenue. As
COVID-19
is complex and evolving, the Company’s plans as described above may change. At this point, the Company cannot reasonably estimate the duration and severity of this pandemic, which could have a material adverse impact on the business, results of operations, financial position, and cash flows.
Content Asset, net
The Company produces programming content which it plans to broadcast on online video and streaming platforms. Costs of produced content consist of development and production costs. These costs are capitalized as “Content Asset, net” on the Condensed Consolidated Balance Sheets.
Each title is predominantly monetized on its own. At the specific title level, the Company tests the content asset for impairment when events and circumstances indicate that its fair value may be less than its unamortized cost. If the carrying value of a content asset exceeds its estimated fair value, an impairment charge will be recorded in the amount of the difference.
In April 2022, the Company performed an evaluation of its content asset and determined that the underlying programming of the content asset will not be released. In addition, the Company determined that the content asset has no further utility. Accordingly, the Company recorded an impairment loss of $1.1 million to write off the entire carrying value of content asset. As such, the Company has no content asset balance as of September 30, 2022. Content asset balance as of September 30, 2021 was 0.2 million.
The Company’s policy is to amortize the content asset once the content airs. Given that the content was fully written off prior to airing, no amortization expense was recorded for the three and nine months ended September 30, 2022. The Company does not own any purchased or licensed programming content.
 
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Table of Contents
Exploitation costs such as marketing, advertising, publicity, promotion, and other distribution expenses directly connected with the distribution of the content asset are expensed as incurred.
Revenue Recognition and Contract Balances
In May 2014, the FASB issued new accounting guidance related to revenue recognition. On January 1, 2019, the Company adopted the new accounting standard and related amendments using the modified retrospective approach. Based on the Company’s assessment, the adoption of ASC 606, Revenue from Contracts with Customers (“ASC 606”) did not have a material impact to the Company’s condensed consolidated financial statements and there were no material differences between the Company’s adoption of ASC 606 and its historic accounting under
ASC 
605, Revenue Recognition.
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s payment terms and conditions vary by customer and contract type. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company’s transfer of a promised product or service to the Company’s customer and payment for that product or service will be one year or less.
The Company generally records a receivable related to revenue when the Company has an unconditional right to invoice and receive payment. Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized, including management’s estimate of variable consideration that has been included in the transaction price exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. These contract assets are reclassified to receivables when the right to consideration becomes unconditional. For the three months and nine months ended September 30, 2022, and 2021, no impairment was recorded from contract assets.
The Company’s allowances for doubtful accounts are typically immaterial and, if required, are based on management’s best estimate of expected credit losses inherent in the Company’s accounts receivable balance.
Contract liabilities are recorded in the event that the Company bills for services in advance of the time the services are performed, or when cash payments are received or due in advance of satisfying the Company’s performance obligations, even if amounts are refundable. Contract liabilities recorded at September 30, 2022, and December 31, 2021, represent the Company’s accounting for the timing difference between when the customer is billed or funds are received and when the performance obligation is satisfied. During the nine months ended September 30, 2022 and 2021, the Company recognized $7.8 million and $0.8 million as revenue that was relating to the contract liability balance as of January 1, 2022 and 2021, respectively.
 
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The following table disaggregates the Company’s revenue by major type for the three months
ended
and nine months ended September 30, 2022, and 2021:​​​​​​​
 
    
(in thousands)
 
    
Three months ended September 30,
    
Nine months ended September 30,
 
    
2022
    
2021
    
2022
    
2021
 
Brand sponsorships
   $ 7,072      $ 6,385      $ 28,054      $  17,080  
Content
     4,098        3,413        10,641        13,826  
Consumer products
     471        1,769        2,328        4,001  
Esports
     2,322        837        7,285        2,651  
Other
     49        89        313        198  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
  
$
14,012
 
  
$
12,493
 
  
$
48,621
 
  
$
37,756
 
    
 
 
    
 
 
    
 
 
    
 
 
 
The section below describes the Company’s revenue recognition policies and significant judgments in further detail for each major revenue source of the Company.
Brand Sponsorships
The Company offers advertisers a full range of promotional vehicles, including but not limited to online advertising, livestream announcements, content generation, social media posts, logo placement on the Company’s official merchandise, and special appearances of members of the Company’s talent roster. The Company’s brand sponsorship agreements may include multiple services that are capable of being individually distinct, however the intended benefit is an association with the Company’s brand and the services are not distinct within the context of the contracts. Revenues from brand sponsorship agreements are recognized ratably over the contract term. Payment terms and conditions vary, but payments are generally due periodically throughout the term of the contract. In instances where the timing of revenue recognition differs from the timing of billing, management has determined the brand sponsorship agreements generally do not include a significant financing component.
Content
The Company generates and produces original content which the Company monetizes through Google’s AdSense service. Revenue is variable and is earned when the visitor views or “clicks through” on the advertisement. The amount of revenue earned is reported to the Company monthly and is recognized upon receipt of the report of viewership activity. Payment terms and conditions vary, but payments are generally due within 30 to 45 days after the end of each month.
The Company grants exclusive licenses to customers for certain content produced by the Company’s talent. The Company grants the customer a license to the intellectual property, which is the content and its use in generating advertising revenues, for a
pre-determined
period, for an amount paid by the customer upon execution of the contract. The Company’s only performance obligation is to license the content for use in generating advertising revenues, and recognizes the full contract amount at the point at which the Company provides the customer access to the content, which is at the execution of the contract. The Company has no further performance obligations under these types of contracts and does not anticipate generating any additional revenue from these arrangements apart from the contract amount.
 
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Principal Versus Agent Considerations
A significant amount of the Company’s brand sponsorship and content revenues are generated from the Company’s talent, who are under exclusive, multi-year contracts. The Company’s talent consists of highly trained independent contractors, whose compensation is tied to the revenue that they generate. Management has evaluated the terms of the Company’s brand sponsorship and content agreements and has concluded the Company is the principal. Brand sponsorship and content revenues are reported on a gross basis, while revenue-sharing and other fees paid to the Company’s talent are recorded as cost of revenues. The Company owns the brand and intellectual property, takes primary responsibility for delivery of services, and exercises control over content generation and monetization. The Company contracts directly with Google on its Company operated channels, and the talent contracts directly with Google on their own channels. As part of the Company’s contracts with its talent, the Company agrees to serve as the talent’s exclusive management company as it relates to any and all type of work the talent may perform, including content creation and advertising revenue generated from the content. While the talent owns the content they create while they are under contract with the Company, the talent grants the Company an exclusive perpetual license to the content, and the Company grants limited usage rights of that content back to the talent, conditional upon them complying with their contract. Furthermore, all income earned from services provided by the talent related to gaming, Esports, content creation, or the business of the Company, which includes revenue from advertising via talent content, is subject to the talent agreement and is payable to the Company. In addition, the Company’s contracts with its talent specify rules and restrictions on the content the talent can create and post. As such, through its contracts with talent, the Company is the principal because the Company is the entity exercising primary control over the content generated in the YouTube channels being monetized.
Consumer Products
The Company earns consumer products revenue from sales of the Company’s consumer products on the Company’s website or at live or virtual events. Revenues are recognized at a point in time, as control is transferred to the customer upon shipment. The Company offers customer returns and discounts through a third-party distributor and accounts for this as a reduction to revenue. The Company does not offer loyalty programs or other sales incentive programs that are material to revenue recognition. Payment is due at the time of sale. The Company has outsourced the design, manufacturing, fulfillment, distribution, and sale of the Company’s consumer products to a third party in exchange for royalties based on the amount of revenue generated. Management evaluated the terms of the agreement to determine whether the Company’s consumer products revenues should be reported gross or net of royalties paid. Key indicators that management evaluated in determining whether the Company is the principal in the sale (gross reporting) or an agent (net reporting) include, but are not limited to:
 
   
the Company is the party that is primarily responsible for fulfilling the promise to provide the specified good or service,
 
   
the Company has inventory risk before the good is transferred to the customer, and
 
   
the Company is the party that has discretion in establishing pricing for the specified good or service.
Based on management’s evaluation of the above indicators, the Company reports consumer products revenues on a gross basis.
Esports
League Participation
: Generally, The Company has one performance obligation—to participate in the overall Esport event—because the underlying activities do not have standalone value absent the Company’s participation in the tournament or event. Revenue from prize winnings and profit-share agreements is variable and is highly uncertain. The Company recognizes revenue at the point in time when the uncertainty is resolved.
 
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Player Transfer Fees
: Player transfer agreements include a fixed fee and may include a variable fee component. The Company recognizes the fixed portion of revenue from transfer fees upon satisfaction of the Company’s performance obligation, which coincides with the execution of the related agreement. The variable portion of revenue is considered highly uncertain and is recognized at the point in time when the uncertainty is resolved.
Licensing of Intellectual Property
: The Company’s licenses of intellectual property generate royalties that are recognized in accordance with the royalty recognition constraint. That is, royalty revenue is recognized at the time when the sale occurs.
Transaction Price Allocated to the Remaining Performance Obligations
For the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2022, the Company applies the allowable practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Revenue expected to be recognized in the future related to performance obligations that have original expected durations greater than one year that are unsatisfied (or partially unsatisfied) as of September 30, 2022 were not material.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. Warrants that meet the definition of a derivative financial instrument and the equity scope exception in ASC
815-10-15-74(a)
are classified as equity, and are not subject to remeasurement provided that the Company continues to meet the criteria for equity classification. Warrants that are accounted for as equity-classified are further discussed in Note 8,
Equity
. Warrants that are classified as liabilities are accounted for at fair value and remeasured at each reporting date until exercise, expiration, or modification that results in equity classification. Any change in the fair value of the warrants is recognized as change in fair value of warrant liabilities in the Condensed Consolidated Statements of Operations. The classification of warrants, including whether warrants should be recorded as liabilities or as equity, is
re-assessed
at the end of each reporting period. The fair value of liability-classified warrants is determined using the Black-Scholes options pricing model (“Black-Scholes model”) which includes Level 3 inputs as further discussed in Note 6,
Private Placement Warrants and Recurring Fair Value Measurements
.
Stock-Based Compensation
The Company accounts for its stock-based awards in accordance with ASC 718, Compensation – Stock Compensation, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards.
Legacy FaZe has issued stock options before there was an active market for the Company’s common stock. The Board of Directors (the “Board”) was required to estimate the fair value of the Company’s common stock at the time of each award. The Board considered numerous objective and subjective factors in determining the value of the Company’s common stock at each grant date, including the following: (1) the
per-share
price of issuances of the Company’s preferred stock, which the Company sold to outside investors in
arm’s-length
transactions, and the rights, preferences, and privileges of the Company’s preferred stock and common stock; (2) valuations performed by an independent valuation specialist; (3) the Company’s stage of development and revenue growth; (4) the fact that the awards involved illiquid securities in a private company; and (5) the likelihood of achieving a liquidity event for the shares of common stock underlying the awards, such as an initial public offering or sale of the Company, given prevailing market conditions. The Company believed this to have been a reasonable methodology based on certain
arm’s-length
transactions involving the Company’s preferred stock, supported by the results produced by this valuation methodology. Since the Business Combination, the Company’s common stock is now actively traded, so the fair value of the common stock is readily available.
 
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For stock options, the Company estimates the fair value using the Black-Scholes model. The fair value is expensed over the requisite service periods of the awards (usually one to four years), in the period of grant for awards that vest immediately and have no future service condition, or in the period the awards vest immediately after meeting a performance condition becomes probable (i.e., the occurrence of a change in control event). As there was no public market for its common stock at the time of the stock option grant, the Company determined the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of options granted has been estimated based on an average of the historical volatility measures of this peer group of companies. The expected life of options has been estimated utilizing the “simplified method” due to the lack of available or sufficient historical exercise data for the Company for the applicable options terms. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. As the Company’s stock is now publicly traded after the Business Combination, the fair value of the Company’s stock and the volatility is readily available.
The Black-Scholes model requires the input of certain assumptions that require the Company’s judgment, including the fair value of common shares before the Business Combination, expected term, and the expected price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. The Company accounts for forfeitures of stock-based awards as they occur.
Fair Value Measurement
The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy consists of the following three levels:
Level
 1
: Quoted prices in active markets for identical assets or liabilities
Level
 2
: Quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices which are observable for the assets or liabilities
Level
 3
: Unobservable inputs which are supported by little or no market activity
The carrying amount of the Company’s financial instruments, including cash, accounts receivable, notes receivable, and accounts payable, approximate fair value due to their short-term nature.
The Company’s private placement warrants (the “Private Placement Warrants”) are accounted for as liabilities in accordance with ASC
815-40
and are presented within warrant liabilities on the Condensed Consolidated Balance Sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the Condensed Consolidated Statements of Operations.
See Note 6,
Private Placement Warrants and Recurring Fair Value Measurements,
for additional information on the Company’s liabilities measured at fair value.
 
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Table of Contents
Loss Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to the Company by the number of weighted average shares of the Company’s common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) attributable to the Company by the number of weighted-average shares of the Company’s common stock outstanding during the period after adjusting for the impact of securities that would have a dilutive effect on earnings (loss) per share. As the Company has incurred losses in all periods presented, all potentially dilutive securities are antidilutive. See Note 12,
Loss Per Share,
for additional information on dilutive securities.
Segment Reporting
Operating segments are defined as components of an entity for which separate financial information is available and is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company has determined that its Chief Executive Officer is the CODM. The Company operates and reports financial information in one segment, as the CODM reviews financial information presented on a consolidated basis, at the Company level, for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.
As of September 30, 2022 and December 31, 2021, the Company did not have material assets located outside of the United States. For the three months and nine months ended September 30, 2022, the Company had $1.8 million and $4.0 million of revenue, respectively, earned outside of the United States. The Company earned no material revenue outside of the United States for three months and nine months ended September 30, 2021.
Revisions to Previously Issued Financial Statements
As previously disclosed in the audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020, Legacy FaZe identified a misapplication of the accounting guidance related to accounting for customer returns and discounts. For the nine months ended September 30, 2021, Legacy FaZe recorded $0.8 million in customer discounts and $0.3 million in customer returns. Legacy FaZe had accounted for these as Cost of revenues, as opposed to as a reduction to Revenues.
Legacy FaZe assessed the materiality of this error on prior period financial statements in accordance with the SEC Staff Accounting Bulletin Number 99,
Materiality
, and ASC
250-10,
Accounting Changes and Error Corrections
. As this is a reclassification between Revenues and Cost of revenues, gross margin and net loss are not impacted. The error did not have any effect on Legacy FaZe’s previously reported Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows, and Condensed Consolidated Statements of Shareholders’ Deficit. The Company determined that this error was not material to the financial statements for the nine months ended September 30, 2021. The Company elected to correct this immaterial error as revision to previously issued financial statements and has revised the September 30, 2021 financial statements presented herein.
The following tables set forth the effects of the revisions on the affected line items within the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021:
 
    
Nine months ended
 
    
September 30, 2021
 
    
As previously
    
Revision
        
    
reported
    
adjustments
    
As revised
 
    
(in thousands)
 
Revenues
   $  38,808      $  (1,052    $  37,756  
Cost of revenues
     33,330        (1,052      32,278  
    
 
 
    
 
 
    
 
 
 
Gross profit
  
$
5,478
 
   $        
$
5,478
 
 
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Table of Contents
The following tables set forth the effects of the revisions on the affected line items within Note 2,
Summary of Significant Accounting Policies
, section
Revenue Recognition and Contract Balances
for the financial statements for the nine months ended September 30, 2021:
 
    
Nine months ended
 
    
September 30, 2021
 
    
As previously
    
Revision
        
    
reported
    
adjustments
    
As revised
 
    
(in thousands)
 
Brand sponsorships
   $ 17,080      $         $ 17,080  
Content
     13,826                  13,826  
Consumer products
     5,053        (1,052      4,001  
Esports
     2,651                  2,651  
Other
     198                  198  
    
 
 
    
 
 
    
 
 
 
Total revenue
  
$
38,808
 
  
$
(1,052
  
$
37,756
 
    
 
 
    
 
 
    
 
 
 
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU
2020-06,
Debt–Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic
815-40)
. This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock as well as amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. The ASU is effective for interim and annual periods beginning after December 15, 2023, with early adoption permitted for fiscal years beginning after December 15, 2020. Adoption of the ASU can either be on a modified retrospective or full retrospective basis. The Company adopted the standard with an effective date of January 1, 2022 using the modified retrospective approach. The adoption of this ASU impacted the Company’s accounting for the conversion of convertible debt under original contractual terms at the Merger on July 19, 2022 as discussed in Note 7,
Debt
.
In May 2021, the FASB issued ASU
2021-04,
Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic
470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40):
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.
The amendments are designed to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange. The ASU provides guidance on how an issuer would measure and recognize the effects of these transactions. The standard provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The ASU is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU
2021-04
prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted the standard with an effective date of January 1, 2022. The adoption of this ASU did not have a material impact on the condensed consolidated financial
statements.
 
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Table of Contents
Accounting Pronouncements Not Yet Adopted
As an emerging growth company, the JOBS Act allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company elected to use this extended transition period under the JOBS Act until such time the Company is no longer considered to be an emerging growth company. The adoption dates discussed below reflect this election.
In February 2016, the FASB issued ASU
2016-02,
Leases
(Topic 842)
, which requires lessees to recognize a
right-of-use
(“ROU assets”) asset and a lease liability for all leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing, and uncertainty of cash flows arising from leases. After the issuance of ASU
2016-02,
the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as “ASC 842”. The ASU is effective for annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In September 2016, the FASB issued ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This guidance requires the measurement of all expected credit losses for financial assets held at the reporting data based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgements used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes
(Topic-740):
Simplifying the Accounting for Income Taxes
, which is intended to simplify various aspects related to accounting for income taxes. ASU
2019-12
removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
 
3.
BUSINESS COMBINATION
As discussed in Note 1,
Description of the Business
, on July 19, 2022, the Business Combination was consummated. The following transactions occurred in connection with the Business Combination:
 
   
Redemption of 15,883,395 shares of B. Riley 150 public shares that occurred subsequent to B. Riley 150 stockholders exercising their right to redeem public shares for their pro rata share of the trust account;
 
   
10,000,000 shares of the Company’s common stock at a purchase price of $10.00 per share were sold and issued for an aggregate purchase price of $100.0 million pursuant to the subscription agreements entered in connection with the PIPE investment, including purchases made by the Company PIPE investor, sponsor related PIPE investors, and third-party investors, and inclusive of shares issued to the sponsor pursuant to the backstop commitment under the sponsor support agreement, representing the portion of the PIPE investment not purchased by third-party investors;
 
   
525,782 shares of Legacy FaZe’s options to its executives, 1,450,914 shares of Legacy FaZe options, representing 75% of the unvested Legacy FaZe’s options outstanding under its existing incentive plans that remain unvested as of the effective time were vested;
 
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Table of Contents
   
42,441 shares of the Company’s restricted stock awards were vested at the Closing, pursuant to existing contractual terms. In addition, 923,886 shares of the Company’s restricted stock awards will vest 90 days after the Closing, pursuant to amendments to certain restricted stock awards entered prior to the Closing;
 
   
1,047,623 shares of Legacy FaZe’s warrants (including 292,790 shares of preferred stock warrants and 754,833 shares of common stock warrants) were exercised into Legacy FaZe’s common stock and preferred stock, respectively;
 
   
3,237,800 shares of Legacy FaZe’s preferred stock were converted into Legacy FaZe common stock on a
one-to-one
basis
;
 
   
$72.9 million of Legacy FaZe’s convertible debt (including 2021 Cox Convertible Promissory Notes, 2021 Convertible Promissory Notes, 2020 Secured Convertible Note Purchase Agreements and Secured Convertible Promissory Notes, and 2020 Convertible Promissory Notes) were converted into Legacy FaZe common stock, with $6.9 million accrued interest converted into the common stock, and $2.6 million accrued interest settled in cash;
 
   
All 22,902,063 shares of issued and outstanding Legacy FaZe’s common stock (including shares of its common stock issued pursuant to the exercise of common stock and preferred stock purchase warrants and the conversion of its convertible debts and the preferred stocks) were surrendered and exchanged into 50,995,637 shares of the Company’s common stock calculated using the Equity Value Exchange Ratio;
 
   
The Company entered into
earn-out
agreements to remove restrictions of legally outstanding shares if certain share price milestones are achieved. Refer to Note 8,
Equity
; and
 
   
The Company assumed public and private placement warrants from B. Riley 150. Refer to Note 8,
Equity
, for the public warrants (the “Public Warrants”) and Note 6,
Private Placement Warrants and Recurring Fair Value Measurements
, for the Private Placement Warrants.
As of the Closing Date and following the completion of the Business Combination, the Company had the following outstanding securities:
 
   
70,132,639 shares of common stock, with a par value of $0.0001 per share.
 
   
5,923,333 warrants, consisting of 5,750,000 Public Warrants and 173,333 Private Placement Warrants.
As a result of the Business Combination, Legacy FaZe received net cash consideration of $57.8 million. Legacy FaZe and B. Riley 150 incurred costs that were considered direct and incremental costs associated with the transaction. These costs amounted to $25.9 million and were treated as a reduction of additional
paid-in
capital.
Cash flows provided to or paid by Legacy FaZe or the Company in connection with the Business Combination are included in the Company’s Condensed Consolidated Statements of Cash Flows as financing activities.
 
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4.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements as of September 30, 2022 and December 31, 2021 consisted of the following:
 
    
(in thousands)
 
    
September 30,
    
December 31,
 
  
2022
    
2021
 
Furniture / Fixtures
   $ 743      $ 159  
Computer equipment
     3,588        708  
Vehicles
     106        106  
Leasehold improvements
     663        731  
    
 
 
    
 
 
 
Subtotal
     5,100        1,704  
Less accumulated depreciation
     (1,175      (779
    
 
 
    
 
 
 
Property, equipment and leasehold improvements, net
  
$
3,925
 
  
$
925
 
    
 
 
    
 
 
 
Depreciation expense totaled $0.3 million and $0.8 million for the three months and nine months ended September 30, 2022, respectively, and $0.2 million and $0.3 million for the three and nine months ended September 30, 2021, respectively. During the three months and nine months ended September 30, 2022, the Company disposed of certain leasehold improvements that were fully depreciated at the time of disposal, and there was no gain or loss on disposal.
 
5.
INTANGIBLE ASSETS
Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following:
 
         
(in thousands)
 
As of September 30, 2022
  
Useful Life
  
Gross

Carrying
Value
    
Accumulated

Amortization
    
Net

Carrying Value
 
Website development
   3 years    $ 332      $ 145      $  187  
Talent acquisition
   2 – 3 years      1,237        477        760  
         
 
 
    
 
 
    
 
 
 
Intangible assets, net
       
$
 1,569
 
  
$
622
 
  
$
947
 
         
 
 
    
 
 
    
 
 
 
     
         
(in thousands)
 
As of December 31, 2021
  
Useful Life
  
Gross

Carrying
Value
    
Accumulated

Amortization
    
Net

Carrying Value
 
Website development
   3 years    $ 211      $ 75      $ 136  
Talent acquisition
   2 – 3 years      1,653        1,051        602  
         
 
 
    
 
 
    
 
 
 
Intangible assets, net
       
$
1,864
 
  
$
1,126
 
  
$
738
 
         
 
 
    
 
 
    
 
 
 
 
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Amortization expense totaled $0.2 million and $0.4 million for the three months and nine months ended September 30, 2022, respectively, and $0.1 million and $0.4 million for the three months and nine months ended September 30, 2021, respectively.
The following table presents the estimated future amortization of intangible assets:
 
Years ending December 31,
  
(in thousands)
 
2022 (remainder)
   $  155  
2023
     456  
2024
     311  
2025
     25  
    
 
 
 
Total future amortization of amortizable intangible assets
  
$
947
 
    
 
 
 
During the nine months ended September 30, 2022, the Company removed $0.9 million of intangible assets, that were fully amortized from intangible assets and accumulated amortization, and there was no gain or loss on the removal. The Company did not have any fully amortized intangible assets as of September 30, 2022.
 
6.
PRIVATE PLACEMENT WARRANTS AND RECURRING FAIR VALUE MEASUREMENTS
Warrant Liability
Prior to the Business Combination, B. Riley 150 issued 173,333 Private Placement Warrants with an exercise price of $11.50 per share. The Private Placement Warrants are identical to the Public Warrants, as described in Note 8,
Equity
, except that the Private Placement Warrants (including the common stock underlying the Private Placement Warrants) were not transferable, assignable or salable until August 18, 2022 and they are not redeemable by the Company for cash so long as they are held by the sponsor or its permitted transferees. The sponsor, or its permitted transferees, has the option to exercise the Private Placement Warrants on a cashless basis. If the Private Placement Warrants are held by holders other than the sponsor or its permitted transferees, the Private Placement Warrants can be redeemable by the Company in all redemption scenarios and exercisable by the holders on the same basis as the Public Warrants. Upon the Closing of the Business Combination, the Company has determined that the Private Placement Warrants are classified as liabilities and marked to market at each reporting period.
A Black-Scholes model is used to value the Private Placement Warrants at each reporting period. The change in fair value of warrants is recognized as part of change in fair value of warrant liabilities in the Condensed Consolidated Statements of Operations. Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate, discount rate and dividend yield. The Company estimates the volatility of its common stock based on a binomial lattice model using the stock price and the price of the Public Warrants as of the valuation date, risk-free interest rate, and the expected life of the warrants. The risk-free interest rate is based on the U.S. Treasury
zero-coupon
yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the Private Placement Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remai
n at
zero
.
 
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The key inputs into the Black-Scholes model in determining the fair value of the Private Placement Warrants were as follows at September 30, 2022 and December 31, 2021:

 
    
September 30, 2022
   
December 31, 2021
 
Risk-free interest rate
     4.1     1.3
Expected term (years)
     4.8       5.5  
Expected volatility
     5.1     18.5
Exercise price
   $  11.50     $ 11.50  
Dividend yield
     0       0  
The following table presents a summary of the changes in the fair value of the Private Placement Warrants liability since the Closing Date:
 
    
(in thousands)
 
Warrant liabilities at July 19, 2022
   $  114  
Change in fair value of warrant liabilities
     (19
    
 
 
 
Warrant liabilities at September 30, 2022
   $ 95  
    
 
 
 
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2022, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. As of December 31, 2021, no assets and liabilities were measured at fair value on a recurring basis.
 
    
(in thousands)
 
    
September 30,
2022
    
Quoted Prices in
Active Markets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant Other
Observable Inputs
(Level 3)
 
Liabilities:
                                   
Private Placement Warrants
   $  95      $         $         $ 95  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
95
 
  
$
  
 
  
$
  
 
  
$
95
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
7.
DEBT
As of September 30, 2022, there is no debt outstanding as all outstanding debts have been paid off or converted into Legacy FaZe common stock and eventually to Company common stock as a result of the Business Combination. Debt as of December 31, 2021 consisted of the following:
 
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As of December 31, 2021
                                 
    
(in thousands)
 
    
Unpaid
                  
Unamortized
   
Net Carrying
 
    
Principal
    
Short-term
    
Long-term
    
Issuance Costs
   
Value
 
2021 Cox Convertible Promissory Note
   $ 15,000      $         $ 15,000      $        $ 15,000  
2021 Convertible Promissory Notes
     675                  675                 675  
2020 Secured Convertible Promissory Note
     55,000                  55,000        (358     54,642  
2020 Convertible Promissory Notes
     2,525        2,025        500                 2,525  
2020 PPP Loan
     1,123        1,123                           1,123  
Other loans
     37                  37                 37  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total principal amount outstanding
  
$
74,360
 
  
$
3,148
 
  
$
71,212
 
  
$
(358
 
$
74,002
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
2021 Cox Convertible Promissory Notes
In August 2021, Legacy FaZe entered into an agreement with Cox Investment Holdings, Inc. (“Cox”) to which the Legacy FaZe sold convertible promissory notes totaling $10.0 million. The maturity date is the earliest of (a) December 15, 2023, (b) the consummation of an initial public offering, (c) the merger of Legacy FaZe with another entity, (d) a transaction pursuant to which more than 50% of Legacy FaZe’s equity securities come to be owned by an unrelated third party, (e) a sale of all or substantially all of the assets of Legacy FaZe, or (f) the consummation of a private round of equity financing resulting in aggregate gross proceeds to Legacy FaZe of at least $15.0 million (“Cox Qualified Financing”). In addition, Cox exercised its right to purchase an additional $5.0 million in Cox Convertible Promissory Notes in October 2021.
The convertible promissory notes are convertible, at the investor’s election, into shares of common stock or shares of the series or class of capital stock most recently sold in a Cox Qualified Financing consummated prior to such time. The conversion price is equal to the lesser of (a) the imputed
pre-money
enterprise value of Legacy FaZe with respect to the Cox Qualified Financing most recently consummated prior to the time of determination, and (b) $250.0 million minus the then outstanding debt of Legacy FaZe in excess of $25.0 million, divided by the total number of shares of capital stock of Legacy FaZe then currently issued and outstanding, calculated on an
as-exercised,
as-converted,
fully diluted basis, but excluding (a) shares of capital stock of Legacy FaZe issuable upon the conversion of the note, and (b) shares of capital stock issuable upon conversion of other convertible notes or indebtedness then outstanding.
The 2021 Cox Convertible Promissory Notes, which cannot be prepaid without consent of the holder, bear interest at a rate of 10.00% per annum and are secured against substantially all assets of Legacy FaZe.
Legacy FaZe evaluated the embedded conversion feature in accordance with ASC 815 and determined that embedded conversion feature did not meet the definition of a derivative and therefore did not account for it as a separate derivative liability.
As a result of the Business Combination, on the Closing Date, $15.0 million of Legacy FaZe’s 2021 Cox Convertible Promissory Notes with $1.3 million accrued interest were converted into 3,096,908 shares of the Company’s common stock pursuant to original contractual terms and derecognized at the carrying amount of the debt.
 
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2021 Convertible Promissory Notes
In June and August 2021, Legacy FaZe entered into Convertible Promissory Note agreements with accredited investors pursuant to which Legacy FaZe sold Promissory Notes totaling $0.7 million. For each note issued, the maturity date is the second anniversary of the date of the Purchase Agreement. The conversion price is equal to 90% of the price per share sold in a preferred stock financing, provided the price is subject to adjustment in the event Legacy FaZe’s enterprise value is greater than $250.0 million on that date.
The 2021 Convertible Promissory Notes, which cannot be prepaid without consent of the holder, bear interest at a rate of 4.00% per annum and are subordinate and junior in right of payment to any senior indebtedness of Legacy FaZe.
Legacy FaZe evaluated the embedded conversion feature in accordance with ASC 815 and determined that embedded conversion feature did not meet the definition of a derivative and therefore did not account for it as a separate derivative liability.
As a result of the Business Combination, on the Closing Date, $0.7 million of Legacy FaZe’s 2021 Convertible Promissory Notes with $26,770 accrued interest were converted into 133,276 shares of the Company’s common stock pursuant to original contractual terms and derecognized at the carrying amount of the debt.
2020 Secured Convertible Note Purchase Agreements and Secured Convertible Promissory Notes
In December 2020, Legacy FaZe entered into a Secured Convertible Note Purchase Agreement as amended on February 22, 2021, April 23, 2021, and August 16, 2021 (together, the “Purchase Agreement”) with CPH Phase II SPV L.P. and CPH Phase III SVP L.P., accredited investors, (collectively referred to as “CPH Noteholders”) pursuant to which Legacy FaZe agreed to sell Secured Convertible Promissory Notes (the “CPH Notes”), for a total of up to $91.7 million, to the investors. Legacy FaZe issued Secured Convertible Promissory Notes to the investors for a total of $55.0 million.
In October 2021, Legacy FaZe entered into an agreement with the CPH Noteholders, for the settlement of the accrued interest on the CPH Notes and the settlement of the purchaser’s right, but not obligation, to purchase additional CPH Notes from Legacy FaZe for up to $36.7 million expiring in June 2022 (“CPH Right”). The CPH Right has an anti-dilution feature and survives beyond a
change-in-control
event, including a merger transaction with a special purpose acquisition company. Legacy FaZe settled the accrued interest through February 1, 2022 and the CPH Right for 523,763 and 4,800,000 shares of the Company’s common stock, respectively, issuable upon the close of the Merger. The accrued interest after February 1, 2022 was paid in cash. The common stock and cash for accrued interest and the common stock for the CPH Right was settled upon close of the Merger on July 19, 2022.
For each note issued under the Purchase Agreement, the maturity date is the earlier of December 15, 2023 of either (i) an initial public offering, (ii) a transaction or series of related transactions pursuant to which more than 50% of Legacy FaZe’s equity securities come to be owned by an unrelated third party or (iii) the sale of all or substantially all of the assets of Legacy FaZe (a “Liquidity Event”). The CPH Notes are convertible, at the investor’s election, into shares of common stock or shares of the series or class of capital stock (“Conversion Shares”) sold in a private round of equity financing consummated after January 1, 2021 that result in gross proceeds of at least $15.0 million (a “CPH Qualified Financing”). The conversion price is equal to the imputed
pre-money
enterprise value of Legacy FaZe with respect to the CPH Qualified Financing divided by the total number of shares of capital stock then currently issued and outstanding, calculated on an
as-exercised,
as-converted,
fully diluted basis, but excluding shares of capital stock of Legacy FaZe issuable to the investor upon conversion of the CPH Notes. The conversion price is subject to adjustment in the event Legacy FaZe’s enterprise value is greater than $250.0 million at the time of conversion.
 
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Legacy FaZe may prepay the CPH Notes in whole or in part at any time without penalty, provided the investor has the right to utilize the proceeds to purchase the Conversion Shares at the conversion price prior to the maturity date. The CPH Notes bear interest at 10.00% per annum and are secured against substantially all assets of Legacy FaZe.
Legacy FaZe evaluated the embedded conversion feature in accordance with ASC 815 and determined that embedded conversion feature did not meet the definition of a derivative and therefore did not account for it as a separate derivative liability.
As a result of the Business Combination, on the Closing Date, $54.7 million of Legacy FaZe’s 2020 Secured Convertible Note Purchase Agreements and Secured Convertible Promissory Notes, with $5.3 million accrued interest, were converted into 15,769,002 shares of the Company’s common stock. In addition, $2.6 million of accrued interest was settled by cash. Upon the conversion of such debts under the Merger Agreement terms, approximately $112.9 million of loss on debt extinguishment was recognized in the three months and nine months period ended September 30, 2022.
2020 Convertible Promissory Notes
In March — June 2020, Legacy FaZe entered into Convertible Promissory Note agreements with accredited investors pursuant to which Legacy FaZe sold Convertible Promissory Notes totaling $2.5 million. Subsequent to the execution of the Merger Agreement, in November and December 2021,