Skillz Inc. [SKLZ] Filings

10-Q 1 sklz-20220930.htm 10-Q sklz-20220930

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


☐			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: 001-39243

SKILLZ INC.

(Exact name of registrant as specified in its charter)

Delaware

84-4478274

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

PO Box 445

San Francisco, California

94104

(Address of Principal Executive Offices)

(Zip Code)

(415) 762-0511

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
Class A common stock, par value $0.0001 per share	SKLZ	New York Stock Exchange

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 Act). Yes ☐ No ☒

As of November 1, 2022, the registrant had outstanding 351,585,881 shares of Class A common stock and 68,717,138 shares of Class B common stock.

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SKILLZ INC.

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			Page

Note Regarding Forward Looking Statements

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			45

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults Upon Senior Securities			47
Item 4. Mine Safety Disclosures			47
Item 5. Other Information			47
Item 6. Exhibits			47
Signatures			48

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about Skillz Inc. (“we,” “us,” “our,” or the “Company”) and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding guidance, our future results of operations or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “going to,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this report.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by our other Securities and Exchange Commission filings, including among other things:

•The success of our business depends on our ability to attract and retain end-users, and do so in a cost-effective manner.

•It is becoming increasingly difficult and more expensive to attract and retain players for the games on our platform, and we may not achieve a positive return on our user acquisition and retention efforts.

•We have a history of losses and we may be unable to achieve profitability.

•We rely on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform.

•A limited number of games account for a substantial portion of our revenue.

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•We rely on third-party service providers including cloud computing services, payment processors, and infrastructure service providers, and if we cannot manage our relationships with such providers or lose access to such services, our business, financial condition, results of operations and prospects could be adversely affected.

•Failure to maintain our brand and reputation could harm our business, financial condition and results of operations.

•The broader entertainment industry is highly competitive and our existing and potential users may be attracted to competing forms of entertainment.

•Our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business.

•Failure to obtain, maintain, protect or enforce our intellectual property rights could harm our business, results of operations and financial condition.

•Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and results of operations.

•The occurrence of a data breach or other failure of our cybersecurity.

•Failure to properly contain COVID-19 or another global pandemic in a timely manner could materially affect how we and our business partners are operating.

•Failure to timely and effectively remediate the material weaknesses in our internal controls over financial reporting could adversely affect investor confidence in us and adversely affect our business and financial condition.

•Continued growth and success will depend on the performance of the current and future employees of Skillz, including certain key employees.

These statements are based on our historical performance and on our current plans, estimates and projections in light of information currently available to us, and therefore you should not place undue reliance on them. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and we undertake no obligation to update them in light of new information or future events, except as required by law.

You should carefully consider the above factors, as well as the factors discussed in other risks described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by our other Securities and Exchange Commission filings. The factors identified above should not be construed as an exhaustive list of factors that could affect our future results and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. If any of these trends, risks or uncertainties actually occurs or continues, our business, revenue and financial results could be harmed, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

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PART I

ITEM 1. FINANCIAL STATEMENTS

SKILLZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except for number of shares and par value per share amounts)


	September 30,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	239,852	$	241,332
Marketable securities, current	225,126		319,055
Accounts receivable, net	9,001		13,497
Prepaid expenses and other current assets	18,467		16,704
Total current assets	492,446		590,588
Property and equipment, net	7,247		9,988
Operating lease right-of-use assets, net	13,366		14,511
Marketable securities, non-current	93,256		182,629
Non-marketable equity securities	55,649		55,649
Intangible assets, net	20,289		79,137
Goodwill	86,436		86,845
Other long-term assets	3,725		3,478
Total assets	$	772,414	$	1,022,825
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,898	$	19,753

Operating lease liabilities, current	2,434		2,110
Other current liabilities	45,890		64,969
Total current liabilities	53,222		86,832
Operating lease liabilities, non-current	12,348		13,567
Common stock warrant liabilities, non-current	888		6,293
Long-term debt, non-current	271,968		278,889
Other long-term liabilities	1,687		13,544
Total liabilities	340,113		399,125
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of September 30, 2022 and December 31, 2021	—		—
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 351 million and 340 million shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively; Class B common stock – 125 million shares authorized; 69 million shares issued and outstanding as of September 30, 2022 and December 31, 2021	41		40
Additional paid-in capital	1,141,955		1,043,600
Accumulated other comprehensive loss	(2,732)		(248)
Accumulated deficit	(706,963)		(419,692)
Total stockholders’ equity	432,301		623,700
Total liabilities and stockholders’ equity	$	772,414	$	1,022,825

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except for number of shares and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	60,255	$	102,072	$	227,028	$	275,240
Costs and expenses:
Cost of revenue	7,555		7,647		25,840		16,289
Research and development	8,354		13,162		45,536		30,584
Sales and marketing	51,773		114,531		242,290		310,377
General and administrative	20,280		48,376		139,784		101,092
Impairment of intangible assets	47,581		—		47,581		—

Total costs and expenses	135,543		183,716		501,031		458,342
Loss from operations	(75,288)		(81,644)		(274,003)		(183,102)
Interest expense, net	(3,807)		(87)		(19,560)		(136)
Change in fair value of common stock warrant liabilities	(80)		113,601		5,405		81,898
Other income (expense), net	508		(22)		399		108
Income (loss) before income taxes	(78,667)		31,848		(287,759)		(101,232)
Benefit from income taxes	(120)		(18,933)		(488)		(18,826)
Net income (loss)	$	(78,547)	$	50,781	$	(287,271)	$	(82,406)
Net income (loss) per share attributable to common stockholders:
Basic	$	(0.19)	$	0.13	$	(0.70)	$	(0.22)
Diluted	$	(0.19)	$	(0.16)	$	(0.70)	$	(0.43)
Weighted average shares outstanding:
Basic	413,834,082		395,053,445		407,926,348		379,450,553
Diluted	413,834,082		396,030,131		407,926,348		385,451,806

Other comprehensive income (loss):
Change in unrealized loss on available-for-sale investments, net of tax	139		—		(2,484)		—
Total other comprehensive income (loss):	139		—		(2,484)		—
Comprehensive income (loss)	$	(78,408)	$	50,781	$	(289,755)	$	(82,406)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except for number of shares)


	Preferred stock			Common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	—	$	—	369,797,524	$	37	$	295,065	$	—	$	(238,315)	$	56,787
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		268,426	—		12		—		—		12
Issuance of common stock upon exercise of warrants and other, net	—	—		8,741,863	—		172,519		—		—		172,519
Net cash contributions from follow-on offering	—	—		17,000,000	2		402,238		—		—		402,240
Stock-based compensation	—	—		—	—		10,945		—		—		10,945

Net loss	—	—		—	—		—		—		(53,592)		(53,592)
Balance at March 31, 2021	—	—		395,807,813	39		880,779		—		(291,907)		588,911
Issuance of common stock upon exercise of stock options	—	—		235,054	—		97		—		—		97
Issuance of common stock upon exercise of warrants and other, net	—	—		628,576	—		9,625		—		—		9,625


Stock-based compensation	—	—		—	—		15,774		—		—		15,774
Net loss	—	—		—	—		—		—		(79,595)		(79,595)
Balance at June 30, 2021	—	$	—	396,671,443	$	39	$	906,275	$	—	$	(371,502)	$	534,812
Issuance of common stock upon exercise of stock options	—	—		4,393,149	—		3,056		—		—		3,056
Issuance of common stock upon exercise of warrants and other, net	—	—		2,236,383	1		32,967		—		—		32,968
Issuance of common stock for business combination	—	—		4,401,633	—		66,907		—		—		66,907

Stock-based compensation	—	—		—	—		15,812		—		—		15,812
Net income	—	—		—	—		—		—		50,781		50,781
Balance at September 30, 2021	—	$	—	407,702,608	$	40	$	1,025,017	$	—	$	(320,721)	$	704,336

Balance at December 31, 2021	—	$	—	408,753,837	$	40	$	1,043,600	$	(248)	$	(419,692)	$	623,700
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		879,936	—		236		—		—		236


Stock-based compensation	—	—		—	—		77,925		—		—		77,925
Other comprehensive loss	—	—		—	—		—		(2,046)		—		(2,046)
Other, net	—	—		—	—		(64)		—		—		(64)
Net loss	—	—		—	—		—		—		(148,113)		(148,113)
Balance at March 31, 2022	—	—		409,633,773	40		1,121,697		(2,294)		(567,805)		551,638
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		9,499,536	1		616		—		—		617


Stock-based compensation	—	—		—	—		13,820		—		—		13,820
Other comprehensive loss	—	—		—	—		—		(577)		—		(577)

Net loss	—	—		—	—		—		—		(60,611)		(60,611)
Balance at June 30, 2022	—	$	—	419,133,309	$	41	$	1,136,133	$	(2,871)	$	(628,416)	$	504,887
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		1,030,733	—		—		—		—		—


Stock-based compensation	—	—		—	—		5,822		—		—		5,822
Other comprehensive income	—	—		—	—		—		139		—		139

Net loss	—	—		—	—		—		—		(78,547)		(78,547)
Balance at September 30, 2022	—	$	—	420,164,042	$	41	$	1,141,955	$	(2,732)	$	(706,963)	$	432,301

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2022		2021
Operating Activities
Net loss	$	(287,271)	$	(82,406)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	15,971		6,093
Stock-based compensation	97,567		42,531
Gain on extinguishment of debt	(2,553)		—
Accretion of unamortized debt discount and amortization of debt issuance costs	2,930		28

Amortization of premium (accretion of discount) for marketable securities	2,819		—
Deferred income taxes	(479)		(18,825)
Change in fair value of common stock warrant liabilities	(5,405)		(81,898)
Impairment of intangible assets	47,581		—
Changes in operating assets and liabilities:
Accounts receivable, net	4,496		975
Prepaid expenses and other assets	(2,247)		(7,217)
Operating lease right-of-use assets	1,145		(15,045)
Accounts payable	(14,020)		(3,445)
Loss contingency accrual	(4,605)		11,557
Operating lease liabilities	(895)		16,118
Other accruals and liabilities	(21,818)		28,208
Net cash used in operating activities	(166,784)		(103,326)
Investing Activities
Purchases of property and equipment, including internal-use software	(1,957)		(2,068)
Investment in non-marketable equity securities	—		(54,748)
Purchases of marketable securities	(432,873)		—
Proceeds from maturities of marketable securities	485,565		—
Proceeds from sales of marketable securities	125,306		—
Business combination, net of cash acquired	—		(83,987)
Net cash provided by (used in) investing activities	176,041		(140,803)
Financing Activities
Principal payments on finance leases obligations	(2,044)		(946)
Payments for debt issuance costs	(2,005)		—
Payments for extinguishment of debt	(7,540)		—
Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs	—		402,139
Payments made towards deferred offering costs	—		(13,221)
Net proceeds from exercise of stock options and issuance of common stock	852		3,166


Proceeds from exercise of common stock warrants, net of redemptions	—		130,571
Net cash provided by (used in) financing activities	(10,737)		521,709
Net change in cash, cash equivalents and restricted cash	(1,480)		277,580
Cash, cash equivalents and restricted cash – beginning of year	244,252		265,648
Cash, cash equivalents and restricted cash – end of period	$	242,772	$	543,228
Supplemental cash flow data:
Cash paid during the period for:
Interest	$	15,420	$	161
Noncash investing and financing activities:
Issuance for common stock for business combination	$	—	$	67,051


Warrant liability reclassified to additional paid-in capital	$	—	$	84,016

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

1. Description of the Business and Basis of Presentation

Business

Skillz (the “Company” or “Skillz”) is a mobile eSports platform, driving the future of entertainment by accelerating the convergence of sports, video games and media. The Company’s principal activities are to develop and support a proprietary online-hosted technology platform that enables independent game developers to host tournaments and provide competitive gaming activity (“Competitions”) to end-users worldwide.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).

Unaudited Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 1, 2022.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Estimates are used in several areas including, but not limited to, stock-based compensation, valuation of common stock warrants, the fair values of goodwill and intangible assets and the useful lives of the Company’s intangible assets. The Company bases these estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.

Revenue Recognition

The Company generates substantially all its revenues by providing a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. Skillz provides developers with a software development kit (“SDK”) that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer.

The Company recognizes revenue for its services in accordance with the FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Revenues from Contracts with Customers

The Company applies the five-step model to achieve the core principle of ASC 606. The Company determined that its customer in the provision of its technology platform and services is the game developer. The Company’s ordinary activities consist of providing game developers services through access to its technology platform using the Skillz SDK. The SDK acts as an application programming interface enabling communication of data between Skillz and the game developers, which when integrated with the developer’s game content, facilitates end-user registration into Competitions, managing and hosting end-user Competition accounts, matching players of similar skill levels, collecting end-user entry fees, distributing end-user prizes, resolving end-user disputes pertaining to their participation in Competitions, and running third-party marketing campaigns (“Monetization Services”).

The Company provides Monetization Services to game developers enabling them to offer competitive games to their end-users. These activities are not distinct from each other as the Company provides an integrated service enabling the game developers to provide the competitive game service to the end-users and, as a result, they do not represent separate performance obligations. The Company is entitled to a revenue share based on total entry fees for paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide the Monetization Services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash deposits received from end-users. End-user incentives are not paid for by game developers. In addition, the Company reduces revenue for end-user incentives which are treated as a reduction of revenue.

The Company collects the entry fees and related charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is not subject to significant judgment.

Revenue is recognized at the time the performance obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that the Company expects to receive in exchange for the Monetization Services. The Company recognizes revenue upon completion of a game, which is when its performance obligation to the game developer is satisfied. The Company does not have contract assets or contract liabilities as the payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, the Company has the right to receive payment for the services rendered. The Company’s agreements with game developers can generally be terminated for convenience by either party upon thirty days prior written notice and, in certain of the Company’s larger developer agreements, the developer, if required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition does not extend beyond the contractual notification period. The Company did not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of September 30, 2022 and 2021.

Games provided by two developer partners each accounted for 40% of the Company’s revenue from Monetization Services in the three months ended September 30, 2022, 38% and 41% for the nine months ended September 30, 2022, respectively. Games provided by two developer partners accounted for 43% and 37% in the three months ended September 30, 2021, respectively, and 43% and 39% in the nine months ended September 30, 2021, respectively.

End-User Incentive Programs

To drive traffic to the platform, the Company provides promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction of revenue at the later of when revenue is recognized or when the Company pays or promises to pay the incentive. Promotions and incentives recorded as sales and marketing expenses are recognized when the related cost is incurred by the Company. In either case, the promotions and incentives are recognized when they are used by end-users to enter into a paid Competition.

•Marketing promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based on the Company’s agreement with its developers, the Company considers that the game developers have a valid expectation that certain incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

An example of an incentive for which the game developer has a valid expectation is Ticketz, which are a virtual currency earned for every Competition played based on the amount of the entry fee (“Ticketz”). Ticketz can be redeemed for prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). Another example is initial deposit Bonus Cash, which is a promotional incentive that can be earned in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future paid entry fee Competitions and cannot be withdrawn by end-users.

For the three months ended September 30, 2022 and 2021, the Company recognized a reduction of revenue of $10.8 million and $18.7 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2022 and 2021, the Company recognized a reduction of revenue of $40.2 million and $54.9 million, respectively, related to these end-user incentives.

•Marketing promotions accounted for as sales and marketing expense. When the Company concludes that the game developers do not have a valid expectation that the rewards and awards will be offered to end-users to engage on the platform, the Company records the engagement marketing expenses as sales and marketing expenses. The Company’s assessment is based on an evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements. These promotions are offered to end-users to draw, re-engage, or generally increase end-users’ use of the Company’s platform.

An example of this type of incentive is limited-time Bonus Cash offers, which are targeted to specific end-users, typically those who deposit more frequently or have not made a deposit recently, via email or in-app promotions. The Company targets groups of end-users differently, offering specific promotions it thinks will best stimulate engagement. Similar to Bonus Cash earned from a redemption of Ticketz or an initial deposit, limited-time Bonus Cash can only be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users. The Company also hosts engagement marketing leagues run over a period of days or weeks, which award league prizes in the form of cash or luxury goods to end-users with the most medals at the end of the league. End-users accumulate medals by winning Skillz enabled paid entry fee competitions. Skillz determines whether or not to run a league, what prizes should be awarded, over what time period the league should run, and to which end-users the prizes should be paid, all at its discretion. The league parameters vary from one league to the next and are not reasonably known to the game developers. League prizes in the form of cash can be withdrawn or used by end-users to enter into future paid entry fee competitions.

For the three months ended September 30, 2022 and 2021, the Company recognized sales and marketing expense of $21.9 million and $47.0 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2022 and 2021, the Company recognized sales and marketing expense of $85.4 million and $122.6 million, respectively, related to these end-user incentives.

From time to time, the Company issues credits or refunds to end-users that are unsatisfied by the level of service provided by the game developer. There is no contractual obligation for the Company to refund such end-users nor is there a valid expectation by the game developers for the Company to issue such credits or refunds to end-users on their behalf. The Company accounts for credits or refunds, which are not recoverable from the game developer, as sales and marketing expenses when incurred.

Total engagement marketing accounted for as sales and marketing expense recognized in the three months ended September 30, 2022 and 2021 was $23.8 million and $50.0 million, respectively. Total engagement marketing accounted for as sales and marketing expenses recognized in the nine months ended September 30, 2022 and 2021 was $96.3 million and $130.9 million, respectively.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash, commercial paper, money market funds and U.S government agency securities with maturities of three months or less when purchased.

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Restricted cash maintained under an agreement that legally restricts the use of such funds is not included within cash and cash equivalents and is reported within other long-term assets. Restricted cash is comprised of $2.9 million, which is pledged in the form of a letter of credit for the Company’s headquarters in San Francisco.

A reconciliation of the Company’s cash and cash equivalents in the condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows is as follows:


	September 30,		December 31,
	2022		2021
Cash and cash equivalents	$	239,852	$	241,332
Restricted cash included in other long-term assets	2,920		2,920
Cash, cash equivalents and restricted cash	$	242,772	$	244,252

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, restricted cash, and marketable securities. Although the Company deposits its cash with multiple well-established financial institutions, the deposits, at times, may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. Marketable securities primarily consist of U.S government, corporate debt securities, asset backed securities, commercial paper, and debt instruments issued by foreign governments. The Company limits the amount of credit exposure to any one issuer. Management believes that the institutions are financially stable and, accordingly, minimal credit risk exists.

Accounts Receivable, Net

Accounts receivable, net, is comprised of trade accounts receivable recorded at the invoiced amounts for programmatic media campaigns, net of an allowance for credit losses. The allowance for credit losses is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the condensed statements of operations and comprehensive loss. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when there are specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. At September 30, 2022, the Company’s allowance for credit losses on accounts receivable was not significant to the condensed consolidated financial statements.

Fair Value Measurement

The Company applies fair value accounting for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

•Level 2 — Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3 — Unobservable inputs reflecting management’s estimate of assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Certain financial instruments, including debt, are not measured at fair value on a recurring basis in the consolidated balance sheets. The fair value of debt was estimated using primarily level 2 inputs, including quoted market prices or present value of future payments discounted by the market interest rates or the fixed rates based on current rates offered to the Company for debt with similar terms and maturities.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level, which is the same or one level below the operating segment. The Company has one operating segment and a single reporting unit. The Company identifies its reporting unit by assessing whether there are components of its operating segment which constitute businesses for which discrete financial information is available and reviewed regularly by the segment manager. The Company tests goodwill for impairment at least annually during the fourth fiscal quarter, or more frequently if indicators of impairment exist during the fiscal year. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, loss of key customers, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations. When testing goodwill for impairment, the Company first performs a qualitative assessment. If the Company determines it is not more likely than not that a reporting unit’s fair value is less than its carrying amount, then no further analysis is necessary. If the Company determines it is more likely than not that a reporting unit’s fair value is less than its carrying amount, then the Company compares the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If, however, the fair value of the reporting unit is less than its carrying amount, the difference between the carrying value and the fair value would be recorded as an impairment loss. Any impairment loss is limited to the carrying amount of goodwill allocated to the reporting unit.

The Company performs its goodwill impairment evaluation annually, during the fourth quarter, or sooner if triggering events are identified. The Company observed continued market volatility including significant declines in its market capitalization and revised its financial outlook during the three months ended September 30, 2022, which was identified as a triggering event. As a result, the Company performed an interim quantitative goodwill impairment evaluation during the three months ended September 30, 2022, and determined the fair value of its reporting unit was greater than its carrying value and did not record a goodwill impairment charge. See Note 5, Goodwill and Intangible Assets, for further details.

Long-Lived Assets

Long-lived assets consist of property, plant equipment and intangible assets with estimable useful lives subject to depreciation and amortization. Intangible assets consist of purchased intangible assets, including developed technology, customer relationships, trademarks and tradenames, and are amortized over their useful lives ranging from one to eight years using the straight-line method of amortization. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.

In the third quarter of 2022, the Company revised its financial outlook, resulting in lower projected user acquisition spend and a slower than expected migration of that spend to the Aarki technology-driven marketing platform, resulting in unrealized cost-saving synergies. The Company determined that this constituted a triggering event for one of the Company’s held and used long-lived asset groups, primarily consisting of developed technology and customer relationship intangible assets. The Company determined the fair value of the long-lived asset group was lower than its carrying value and recorded an intangible asset impairment charge of $47.6 million during the three months ended September 30, 2022. See Note 5, Goodwill and Intangible Assets, for further details.

Investments

The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as non-current marketable securities.

Marketable securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive loss. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, the Company employs a systematic methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other (expense) income, net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.

The Company has elected to measure its existing investments in non-marketable equity securities at cost, less impairments, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for the identical or similar securities of the same issuer (“measurement alternative”). This election is reassessed each reporting period to determine whether non-marketable equity securities have a readily determinable fair value, in which case they would no longer be eligible for this election and would be measured at fair value. The Company evaluates its non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. Impairment indicators might include, but would not necessarily be limited to, a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, a significant adverse change in the regulatory, economic, or technological environment of the investee, a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar securities for an amount less than the carrying amount of the investments in those securities. If an impairment exists, a loss is recognized in the condensed consolidated statements of operations and comprehensive loss for the amount by which the carrying value exceeds the fair value of the investment. Gains and losses resulting from the remeasurement of non-marketable equity securities, including impairment, are recorded through other (expense) income, net in the condensed consolidated statement of operations and comprehensive loss. The Company separately presents investments in non-marketable equity securities within long-term assets on the condensed consolidated balance sheets.

Advertising and Promotional Expense

Advertising and promotional expenses are included in sales and marketing expenses within the condensed consolidated statements of operations and comprehensive loss and are expensed when incurred. Excluding marketing promotions related to the Company’s end-user incentive programs, advertising expenses were $18.6 million and $55.2 million for the three months

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

ended September 30, 2022 and 2021, respectively, and $109.0 million and $156.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Public and Private Common Stock Warrant Liabilities

As part of the Company’s initial public offering, it issued to third party investors 69.0 million units, consisting of one share of Class A common stock and one-fourth of one warrant, at a price of $10.00 per unit. Each whole warrant entitled the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously, the Company completed the private sale of 10,033,333 warrants at a purchase price of $1.50 per warrant (the “Private Warrants”) of which 5,016,666 Private Warrants were subsequently forfeited. Each Private Warrant allows the holder to purchase one share of Class A common stock at $11.50 per share. There were zero Public Warrants and 4,535,728 Private Warrants outstanding as of September 30, 2022.

The Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

The Company evaluated the Public and Private Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, (“ASC 815-40”), and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public and Private Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of the Company’s Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company concluded that the Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the condensed consolidated statement of operations and comprehensive loss at each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they were valued based on their trading price as of each reporting date.

The Private Warrants are valued using the Black-Scholes-Merton Option (“BSM”) pricing model that is based on the individual characteristics of the warrants on the valuation date, which include the Company’s stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based awards based on estimated grant-date fair values recognized over the requisite service period. For awards that vest solely based on a service condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. The compensation expense related to awards with performance conditions is recognized over the requisite service period when the performance conditions are probable of being achieved. The compensation expense related to awards with market conditions is recognized on an accelerated attribution basis over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved and is not reversed if the market condition is not satisfied. See Note 14, Stock-Based Compensation, for more information. The Company accounts for forfeitures as they occur. If an employee stock-based award is canceled without the concurrent grant or offer of a replacement award, the cancellation should be treated as a

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

settlement for no consideration and any previously unrecognized compensation cost shall be recognized at the cancellation date. Stock-based awards granted to employees are primarily stock options and restricted stock units.

The Company has primarily granted restricted stock units (“RSUs”), which have a service-based vesting condition over a four-year period, to its employees and members of the Board of Directors since the start of 2021. The Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's common stock on the date of the grant.

For awards with market conditions, the Company determines the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of a qualifying event, expected capital raise percentage and market capitalization milestones. Given the Company’s limited market trading history, it has estimated the volatility of its common stock on the date of grant of awards with market conditions based on the weighted average historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimated the expected term of its awards with market conditions based on various exercise scenarios, as these awards are not considered “plain vanilla.” The Company utilized a risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated the expected date of a qualifying event, the expected capital raise percentage and the expected achievement date of market capitalization milestones based on management’s expectations at the time of measurement of the award’s value.

Segments

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. During the three and nine months ended September 30, 2022, the Company continued to operate as a single operating and reportable segment as the CODM reviews financial information presented on a consolidated basis for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, instead of fair value at the acquisition date in accordance with Topic 805. The amendments in ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.

3. Business Combinations

Acquisition of Aarki, Inc.

On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and acquired 100% of the outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company transferred $162.3 million in consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform is expected to result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The following table summarizes the fair value of the purchase price to acquire Aarki:


Description	Amount
Cash	$	95,296
Common stock issued (1)	67,051
Total purchase price	$	162,347

_______________

(1) The fair value of the Skillz Class A Common Stock issued in the merger was based on 4,401,663 shares issued on the July 16, 2021 acquisition date at the closing price of the Company’s common stock on such date of $15.23 per share.

The following is an allocation of the purchase price as of July 16, 2021, the acquisition closing date, based on an estimate of the fair value of the assets acquired and liabilities assumed by the Company in the acquisition:


Description	Amount
Cash and cash equivalents	$	11,309
Accounts receivable, net	13,700
Prepaid expenses and other current assets	356
Property, plant and equipment, net	5,075
Intangible assets, net	86,800

Accounts payable	(445)
Accrued professional fees	(3,145)
Other current liabilities	(16,471)
Deferred tax liabilities	(20,075)
Other long-term liabilities	(1,693)
Identifiable net assets acquired	75,502
Goodwill	86,845
Total purchase price	$	162,347

The following is a summary of identifiable intangible assets acquired and their expected lives as of the acquisition closing date:


Type	Weighted-average useful life (in years)	Fair Value
Developed technology	8	$	60,400
Customer relationships	3	26,200
Trademark and trade name	0.3	200
Total identifiable intangible assets acquired		$	86,800

During the first quarter of 2022, the Company recorded a measurement period adjustment of $0.4 million to increase the carrying value of the identifiable net assets acquired, with a corresponding decrease to goodwill. The adjustment is related to a subsequent adjustment to Aarki’s federal and state tax payable as of the acquisition closing date.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

4. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021
Credit card processing reserve	$	11,913	$	9,527
Prepaid expenses	5,350		5,681
Other current assets	1,204		1,496
Prepaid expenses and other current assets	$	18,467	$	16,704

Other Current Liabilities

Other current liabilities consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021
Accrued sales and marketing expenses	$	4,181	$	28,895
Accrued compensation	9,016		12,108
Accrued publisher fees	5,735		3,912
End-user liability, net	18		4,118
Accrued developer revenue share	970		1,655
Short-term lease obligation	1,904		2,447
Accrued legal expenses	9,714		5,126
Accrued interest expense	8,637		956
Other accrued expenses	5,715		5,752
Other current liabilities	$	45,890	$	64,969

5. Goodwill and Intangible Assets

Goodwill

Accordingly, the Company performed a quantitative goodwill impairment test and estimated the fair value of its single reporting unit based on the combination of an income approach (estimates of future discounted cash flows) and a market approach (market multiples for similar companies). Significant unobservable inputs and assumptions inherent in the valuation methodologies, which represented Level 3 inputs under the fair value hierarchy, were employed and included, but were not limited to, prospective financial information, terminal value assumptions, discount rates, and multiples from comparable publicly traded companies in the Company’s industry.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The income approach consisted of a discounted cash flow ("DCF") method that utilized the present value of cash flows to estimate the fair value of the Company's reporting unit. The future cash flows for the reporting unit were projected primarily based upon the Company's estimates of future revenue and operating income. As part of the DCF analysis, the Company projected revenue and operating profits, and a long-term revenue growth rate in the terminal year. The market approach utilized multiples of revenues and earnings before interest expense, taxes, depreciation and amortization ("EBITDA") to estimate the fair value of the Company's reporting unit. The market multiples used for the Company's single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s projected revenue. As part of its analysis, the Company reconciled the estimated fair value of its single reporting unit derived from the combination of the income and market approaches to its market capitalization as of the measurement date, adjusted to reflect an estimated control premium.

During the three and nine months ended September 30, 2022, the Company determined its goodwill was not impaired as the fair value of its reporting unit was higher than its carrying value.

The following table presents details of changes to the Company’s goodwill balance for the nine months ended September 30, 2022:


	Goodwill
Balance at December 31, 2021	$	86,845
Goodwill adjustment (1)	(409)
Balance as of September 30, 2022	$	86,436

(1) During the first quarter of 2022, the Company recorded a measurement period adjustment to increase the carrying value of the identifiable net assets acquired as a result of the Aarki acquisition, with a corresponding decrease to goodwill. See Note 3, Business Combinations, for more details.

Intangible Assets, Net

In the third quarter of 2022, the Company revised its financial outlook, resulting in lower projected user acquisition spend and a slower than expected migration of that spend to the Aarki technology-driven marketing platform, resulting in unrealized cost-saving synergies. The Company determined that this constituted a triggering event for one of the Company’s held and used long-lived asset groups, primarily consisting of developed technology and customer relationship intangible assets. The Company reviewed the undiscounted future cash flows for the identified long-lived asset group, and the results of the analysis indicated the carrying amount for the long-lived asset group was not expected to be recovered. As a result, the Company performed an analysis to estimate the fair value of the long-lived asset group, comprising the intangible assets acquired as part of the Aarki acquisition.

The fair value of the identified intangible assets was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. Significant factors considered in the calculation of the fair value of the long-lived asset group were projected revenue, gross margins, maintenance level operating expenses, the remaining economic life of the overall long-lived asset group based on the primary asset of the group, which was determined to be the developed technology, along with the discount rates used to derive the estimated present values of future cash flows. The Company applied judgment which involved the use of significant assumptions with respect to its income forecast such as the level and timing of future cash flows. The Company believes the level and timing of expected future cash flows appropriately reflects market participant assumptions.

The Company determined the fair value of the long-lived asset group was lower than its carrying value and recorded an intangible asset impairment charge of $47.6 million during the three months ended September 30, 2022, of which $36.2 million and $11.4 million related to the Company’s developed technology and customer relationships, respectively. This non-cash charge was recorded to impairment of intangible assets on the unaudited condensed consolidated statements of operations and comprehensive loss.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The components of intangible assets consisted of the following as of September 30, 2022:


	Weighted Average Remaining Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Impairment		Net Carrying Amount
Developed technology	6.8	$	60,400	$	(8,684)	$	(36,170)	$	15,546
Customer relationships	1.8	26,200		(10,046)		(11,411)		4,743
Trademark and trade name	0.0	200		(200)		—		—
Intangible assets, net		$	86,800	$	(18,930)	$	(47,581)	$	20,289

The following table sets forth the activity related to finite-lived intangible assets:


	Nine Months Ended September 30,
	2022
Beginning balance at December 31, 2021	$	79,137

Amortization	(11,267)
Impairment	(47,581)
Ending balance at September 30, 2022	$	20,289

The following table summarizes amortization expense associated with finite-lived intangible assets recognized in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	1,449	$	1,573	$	5,224	$	1,573
Sales and marketing	1,676		1,819		6,043		1,819
General and administrative	—		167		—		167
Total amortization expense	$	3,125	$	3,559	$	11,267	$	3,559

The following table outlines the estimated future amortization expense related to finite intangible assets as of September 30, 2022:



2022 (excluding the nine months ended September 30, 2022)	$	1,234
2023	4,936
2024	3,723
2025	2,289
2026	2,289
Thereafter	5,818
Total	$	20,289

6. Restructuring

In the second and third quarters of 2022, the Company approved and implemented restructuring plans to realign resources and reduce operating costs. As a result, during the three and nine months ended September 30, 2022, the Company recorded restructuring charges of $1.9 million and $4.5 million, respectively, primarily consisting of severance and continuation of health insurance benefits. The Company does not expect to incur restructuring charges in fourth quarter of fiscal year 2022.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The table below summarizes the restructuring charges recognized on the condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2022 as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022		2022
Research and development	$	1,075	$	1,905
Sales and marketing	160		947
General and administrative	625		1,673
Total	$	1,860	$	4,525

The table below summarizes the activity and balance of accrued restructuring, which is included in “Other current liabilities” in the condensed consolidated balance sheet:


	Restructuring Accrual
Employee termination benefits	$	4,830
Cash payments	(4,203)
Restructuring liability as of September 30, 2022	$	627

7. Fair Value Measurements

As of September 30, 2022 and December 31, 2021, the recorded values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of the instruments.

Cash and cash equivalents held by the Company as of September 30, 2022 and December 31, 2021 were $239.9 million and $241.3 million, respectively, and were comprised of cash on hand, money market funds, and highly liquid investments with original contractual maturity dates of three months or less. Cash and money market funds are classified within Level 1 of the fair value hierarchy. Highly liquid investments such as commercial papers and corporate bonds are classified within Level 2 of the fair value hierarchy.

Skillz Inc. [SKLZ] Filings
10-Q	[2022-11-07]
10-Q	[2022-08-04]
10-Q	[2022-05-06]
10-K	[2022-03-01]
10-Q	[2021-11-09]
S-1	[2021-08-17]
10-Q	[2021-08-10]
10-Q	[2021-05-14]
S-1	[2021-03-17]
10-K	[2021-03-12]
S-1	[2021-02-09]
S-1	[2020-12-04]
10-Q	[2020-11-16]
10-Q	[2020-08-13]
10-Q	[2020-05-07]
S-1	[2020-02-11]