Skillz Inc. [SKLZ] Filings

10-Q 1 sklz-20230930.htm 10-Q sklz-20230930

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, 2023


☐			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.)

6625 Badura Avenue

Las Vegas, Nevada

89118

(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, 2023, the registrant had outstanding 18,017,597 shares of Class A common stock and 3,430,063 shares of Class B common stock.

TABLE OF CONTENTS

SKILLZ INC.

TABLE OF CONTENTS


			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			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Mine Safety Disclosures			39
Item 5. Other Information			39
Item 6. Exhibits			39
Signatures			40

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, 2022, as supplemented by our other Securities and Exchange Commission filings, including among other things:

•Our ability to attract and retain end-users, and do so in a cost-effective manner;

•Our ability to manage our growth effectively;

•Our ability to achieve profitability given our history of losses;

•Our reliance on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform;

•Risks related to the fact that a limited number of games account for a substantial portion of our revenue;

TABLE OF CONTENTS

•Our reliance on third-party service providers including cloud computing services, payment processors, and infrastructure service providers, and our ability to manage our relationships with such providers or lose access to such services;

•Our ability to maintain our brand and reputation;

•The competitiveness of the broader entertainment industry, and the potential that our existing and potential users may be attracted to competing forms of entertainment;

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

•Our ability to obtain, maintain, protect or enforce our intellectual property rights;

•Risks related to economic downturns and political and market conditions beyond our control;

•Risk related to the occurrence of a data breach or other failure of our cybersecurity;

•Failure to properly contain a global pandemic in a timely manner and any related impact on how we and our business partners are operating;

•Our ability to timely and effectively remediate the material weaknesses in our internal controls over financial reporting or additional material weaknesses or other deficiencies in the future; and

•Our ability to mitigate the commercial, reputational and regulatory risks to our business that may arise as a consequence of our need to restate our financial statements.

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, 2022, 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 on Form 10-Q. 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.

TABLE OF CONTENTS

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,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	330,158	$	362,516
Marketable securities, current	4,800		127,268
Accounts receivable, net	9,265		7,177
Prepaid expenses and other current assets	6,275		4,722
Total current assets	350,498		501,683

Non-current assets:
Property, plant and equipment, net	13,812		2,991
Operating lease right-of-use assets, net	—		472
Marketable securities, non-current	2,058		56,728
Non-marketable equity securities	55,649		55,649
Restricted cash as other long-term assets	2,920		2,920
Other long-term assets	3,182		852
Total non-current assets	77,621		119,612
Total assets	$	428,119	$	621,295

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	2,395	$	1,696
Operating lease liabilities, current	1,469		2,133

Other current liabilities	60,934		45,666
Total current liabilities	64,798		49,495

Non-current liabilities:
Operating lease liabilities, non-current	10,874		11,942
Common stock warrant liabilities, non-current	11		289
Long-term debt, non-current	123,535		272,781
Other long-term liabilities	1,167		8,387
Total non-current liabilities	135,587		293,399
Total liabilities	200,385		342,894

Stockholders’ equity:
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of September 30, 2023 and December 31, 2022	—		—
Common stock $0.0001 par value; 31 million shares authorized; Class A common stock – 25 million shares authorized; 18 million and 18 million shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively; Class B common stock – 6 million shares authorized; 3 million shares issued and outstanding as of September 30, 2023 and December 31, 2022	41		41
Additional paid-in capital	1,186,686		1,153,031
Accumulated other comprehensive loss	(37)		(1,563)
Accumulated deficit	(958,956)		(873,108)
Total stockholders’ equity	227,734		278,401
Total liabilities and stockholders' equity	$	428,119	$	621,295

See accompanying Notes to the Condensed Consolidated Financial Statements.

TABLE OF CONTENTS

SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue	$	36,427	$	59,216	$	120,975	$	222,837
Costs and expenses:
Cost of revenue	3,693		7,599		11,923		25,802
Research and development	7,852		7,937		24,757		44,840
Sales and marketing	31,925		51,480		99,510		242,556
General and administrative	24,389		20,936		78,080		140,540
Impairment of intangible assets and other charges	—		51,230		455		51,230
Total costs and expenses	67,859		139,182		214,725		504,968
Loss from operations	(31,432)		(79,966)		(93,750)		(282,131)
Gain on extinguishment of debt	—		2,553		15,205		2,553
Interest expense, net	(2,279)		(6,360)		(7,486)		(22,113)
Change in fair value of common stock warrant liabilities	127		(80)		278		5,405
Other income, net	48		508		98		398
Loss before income taxes	(33,536)		(83,345)		(85,655)		(295,888)
Provision for (benefit from) income taxes	9		(120)		193		(488)
Net loss	$	(33,545)	$	(83,225)	$	(85,848)	$	(295,400)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(1.57)	$	(4.02)	$	(4.05)	$	(14.48)

Weighted average shares outstanding:
Basic and diluted	21,305,470		20,691,704		21,175,797		20,396,317


Other comprehensive income (loss):
Change in unrealized loss on available-for-sale investments, net of tax	135		139		1,526		(2,484)
Total other comprehensive income (loss):	135		139		1,526		(2,484)
Total comprehensive loss	$	(33,410)	$	(83,086)	$	(84,322)	$	(297,884)

See accompanying Notes to the Condensed Consolidated Financial Statements.

TABLE OF CONTENTS

SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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


	Common stock		Additional paid-in capital			Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
		Shares			Amount
Balance at December 31, 2021		20,437,692	$	40		$	1,043,600	$	(248)	$	(434,233)	$	609,159
Issuance of common stock upon exercise of stock options and release of restricted stock units		43,997	—			236		—		—		236
Stock-based compensation		—	—			77,879		—		—		77,879
Other comprehensive loss		—	—			—		(2,046)		—		(2,046)
Other, net		—	—			(64)		—		—		(64)
Net loss		—	—			—		—		(149,564)		(149,564)
Balance at March 31, 2022		20,481,689	$	40		$	1,121,651	$	(2,294)	$	(583,797)	$	535,600
Issuance of common stock upon exercise of stock options and release of restricted stock units		474,977	1			616		—		—		617
Stock-based compensation		—	—			13,431		—		—		13,431
Other comprehensive loss		—	—			—		(577)		—		(577)
Net loss		—	—			—		—		(62,611)		(62,611)
Balance at June 30, 2022		20,956,666	$	41		$	1,135,698	$	(2,871)	$	(646,408)	$	486,460
Issuance of common stock upon exercise of stock options and release of restricted stock units		51,537	—			—		—		—		—
Stock-based compensation		—	—			6,058		—		—		6,058
Other comprehensive loss		—	—			—		139		—		139
Net loss		—	—			—		—		(83,225)		(83,225)
Balance at September 30, 2022		21,008,203	$	41		$	1,141,756	$	(2,732)	$	(729,633)	$	409,432

Balance at December 31, 2022		21,068,697	$	41		$	1,153,031	$	(1,563)	$	(873,108)	$	278,401
Issuance of common stock upon exercise of stock options and release of restricted stock units		61,124	—			33		—		—		33
Stock-based compensation		—	—			10,548		—		—		10,548
Other comprehensive income		—	—			—		997		—		997

Net loss		—	—			—		—		(35,593)		(35,593)
Balance at March 31, 2023		21,129,821	$	41		$	1,163,612	$	(566)	$	(908,701)	$	254,386
Issuance of common stock upon exercise of stock options and release of restricted stock units		40,271	—			37		—		—		37
Stock-based compensation		—	—			10,622		—		—		10,622
Other comprehensive income		—	—			—		394		—		394

Net loss		—	—			—		—		(16,710)		(16,710)
Balance at June 30, 2023		21,170,092	$	41		$	1,174,271	$	(172)	$	(925,411)	$	248,729
Issuance of common stock upon exercise of stock options and release of restricted stock units		287,021	—			(25)		—		—		(25)
Stock-based compensation		—	—			12,440		—		—		12,440
Other comprehensive income		—	—			—		135		—		135

Net loss		—	—			—		—		(33,545)		(33,545)
Balance at September 30, 2023		21,457,113	$	41		$	1,186,686	$	(37)	$	(958,956)	$	227,734

See accompanying Notes to the Condensed Consolidated Financial Statements.

TABLE OF CONTENTS

SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2023		2022
Operating Activities
Net loss	$	(85,848)	$	(295,400)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,858		15,705
Stock-based compensation	33,610		97,368
Gain on extinguishment of debt	(15,205)		(2,553)
Accretion of unamortized debt discount and amortization of debt issuance costs	1,815		2,930
Amortization of premium (accretion of discount) for marketable securities	839		2,819
Deferred income taxes	—		(481)
Change in fair value of common stock warrant liabilities	(278)		(5,405)
Impairment charges	455		51,230
Noncash operating lease costs	17		1,145
Changes in operating assets and liabilities:
Accounts receivable, net	(2,088)		4,597
Prepaid expenses and other assets	(1,883)		(2,247)
Accounts payable	699		(14,020)
Loss contingency accrual	—		(4,605)
Operating lease liabilities	(1,732)		(895)
Other accruals and liabilities	8,255		(16,972)
Net cash used in operating activities	(59,486)		(166,784)
Investing Activities
Purchases of property and equipment, including internal-use software	(12,081)		(1,957)
Investment in loan receivable	(2,000)		—

Purchases of marketable securities	—		(432,873)
Proceeds from maturities of marketable securities	121,226		485,565
Proceeds from sales of marketable securities	56,599		125,306
Net cash provided by investing activities	163,744		176,041
Financing Activities
Principal payments on finance leases obligations	(807)		(2,044)
Payments for debt issuance costs	—		(2,005)
Payments for extinguishment of debt	(135,855)		(7,540)


Net proceeds from exercise of stock options and issuance of common stock	46		852



Net cash used in financing activities	(136,616)		(10,737)
Net change in cash, cash equivalents and restricted cash	(32,358)		(1,480)
Cash, cash equivalents and restricted cash – beginning of year	365,436		244,252
Cash, cash equivalents and restricted cash – end of period	$	333,078	$	242,772
Supplemental cash flow data:
Cash paid during the period for:
Interest	$	12,261	$	15,420
Taxes	$	200	$	—

See accompanying Notes to the Condensed Consolidated Financial Statements.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Basis of Presentation

Business

Skillz (the “Company” or “Skillz”) operates a competitive mobile gaming 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”).

Consolidation

The Company consolidates the variable interest entity due to controlling financial interest and when the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022, as filed with the SEC on March 31, 2023.

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 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, end user incentive program, stock-based compensation, valuation of common stock warrants and indirect tax liabilities. 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 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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. Entry fees used to enter paid competitions can include net cash deposits, cash from prior winnings, and end-user incentives. The game developers earn revenue share from monthly net cash deposits received from end-users, calculated based on paid entry fees attributable to their games as a percentage of total entry fees. End-user incentives are not paid for by game developers. In addition, the Company accounts for end-user incentives either as a reduction of revenue or as sales and marketing expense as noted below.

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 the amounts withheld by the Company is not subject to significant judgment. Certain of the Company’s larger developer agreements provide the Company with the right to receive additional consideration from the game developer related to user acquisition costs incurred by the Company to provide its Monetization Services. The amount and timing of the additional consideration the Company expects to receive is uncertain and based on the future performance of the respective developer’s games. The Company has not included these amounts of additional consideration in the transaction price related to its Monetization Services as it is not probable that a significant reversal of cumulative revenue recognized related to these amounts will not occur.

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 recognize 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, 2023 and 2022.

Games provided by two developer partners accounted for 81% and 80% of the Company’s revenue from Monetization Services in the three months ended September 30, 2023 and 2022, respectively. Games provided by two developer partners accounted for 80% and 80% in the nine months ended September 30, 2023 and 2022, 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 expense are recognized when the related cost is incurred by the Company.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables are in thousands, unless otherwise noted)

The Company’s primary end-user incentive is Bonus Cash (“Bonus Cash”), which is a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid-entry fee contests. Bonus Cash used as entry fees for paid competitions can include newly issued Bonus Cash and/or Bonus Cash that had been returned from prior winnings to an end-user. The Company recognizes the entire cost of Bonus Cash as a sales and marketing expense or a reduction of revenue (as discussed below) only when the Bonus Cash is lost in a competition, as that is the point at which the Company incurs the cost of the Bonus Cash and when revenue is recognized from such Bonus Cash. When Bonus Cash used as entry fees for a paid competition is returned to an end-user as winnings, the Company does not record a sales and marketing expense or a reduction of revenue for such Bonus Cash. Further, if the Bonus Cash is returned to an end-user and is used to enter subsequent competitions and the end-user continues to win, the Company does not record any sales and marketing expense or a reduction of revenue each time the Bonus Cash is returned to the winning end-user.

•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.

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. 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 until it is won by another end-user.

For the three months ended September 30, 2023 and 2022, the Company recognized a reduction of revenue of $6.7 million and $10.9 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2023 and 2022, the Company recognized a reduction of revenue of $21.9 million and $40.4 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 incentive will be offered, the Company records the related cost as sales and marketing expense. 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, 2023 and 2022, the Company recognized sales and marketing expense of $15.5 million and $21.4 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2023 and 2022, the Company recognized sales and marketing expense of $48.1 million and $87.2 million, respectively, related to these end-user incentives.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables are in thousands, unless otherwise noted)

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, 2023 and 2022 was $16.9 million and $23.5 million, respectively. Total engagement marketing accounted for as sales and marketing expense recognized in the nine months ended September 30, 2023 and 2022 was $51.6 million and $97.6 million, respectively.

Cost of Revenue

Cost of revenue primarily comprises of third-party payment processing fees, server costs, amortization of developed technology, personnel expenses, direct software costs, amortization of internal use software, hosting expenses, and allocation of shared facility and other costs.

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.

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. For the nine months ended September 30, 2023, restricted cash of $2.9 million mainly relates to the 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 statements of cash flows is as follows:


	September 30,		December 31,
	2023		2022
Cash	$	21,948	$	130,068
Money market funds	308,210		232,448
Restricted cash included in other long-term assets	2,920		2,920
Cash, cash equivalents and restricted cash	$	333,078	$	365,436

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 corporate debt securities, asset backed securities and debt instruments issued by foreign governments. The Company limits the amount of credit exposure to any one issuer and monitors the financial condition of the financial institutions on a regular basis.

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 consolidated 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

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables are in thousands, unless otherwise noted)

supportable forecasts of future economic conditions to inform adjustments to historical loss data. At September 30, 2023, 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.

•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.

Long-Lived Assets

Long-lived assets consist of property and equipment with estimable useful lives subject to depreciation and 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. When impairment indicators are identified, the Company assesses its long-lived assets for impairment. Recoverability of 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.

On March 15, 2023, the Company completed the purchase of an office building in Las Vegas, Nevada for $11.5 million, with $10.5 million and $1.0 million allocated to building and land components, respectively. The Company intends to use the

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables are in thousands, unless otherwise noted)

building as the Company’s future headquarters. The building will be depreciated on a straight-line basis over its estimated useful life of 39 years. The land is not subject to depreciation.

During the nine months ended September 30, 2022, the Company recognized $11.3 million of amortization expense associated with finite-lived intangible assets, including developed technology, customer relationships, trademarks and tradenames, in the condensed consolidated statements of operations and comprehensive loss. As these finite-lived intangible assets were fully impaired and written off as of December 31, 2022, the Company did not recognize amortization expense during the nine months ended September 30, 2023.

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. Dividend and interest income are recognized when earned.

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 income (loss) in the consolidated statements of operations and 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 income (expense), net in the condensed consolidated statements of operations and comprehensive loss 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 income (expense), net in the condensed consolidated statements 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 $9.7 million and $18.8 million for the three months ended September 30, 2023 and 2022, respectively, and $26.8 million and $109.4 million for the nine months ended September 30, 2023 and 2022, respectively.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables are in thousands, unless otherwise noted)

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 9, 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 is treated as a 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 (and in certain circumstances, performance-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, 2023, 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 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 adopted this guidance effective January 1, 2023 and it did not have an impact on the Company’s financial position, results of operations including per-share amounts, or cash flow statements.

Other recent accounting pronouncement issued, not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated statements upon future adoption.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

3. Previously Issued Financial Statements Correction of Immaterial Errors

During the preparation of the condensed consolidated financial statements for the period ended September, 30,2023, the Company identified certain immaterial errors related to $4.0M stock compensation expenses and $1.3M accrued expenses for the three and six-month ended June 30, 2023, which resulted in a net overstatement of operating expenses for the period.

In accordance with Staff Accounting Bulletin No. 99, “Materiality,” the Company evaluated the misstatements and determined that the related impact was immaterial to the Company’s financial statements for the period ended June 30, 2023. Accordingly, the effect of correcting the immaterial errors in the condensed consolidated financial statements as applicable for the period ended June 30, 2023 is shown in the following table:


Condensed Consolidated Balance Sheets

	As of June 30, 2023
	As Previously
	Reported		Adjustment		As Adjusted
Prepaid expenses and other current assets	$	6,038	$	(48)	$	5,990
Other current liabilities	$	58,339	$	(1,306)	$	57,033
Additional paid-in capital	$	1,178,290	$	(4,019)	$	1,174,271
Accumulated deficit	$	(930,688)	$	5,277	$	(925,411)
Total stockholders’ equity	$	247,471	$	1,258	$	248,729


Condensed Consolidated Statements of Operations and Comprehensive Loss

	Three Months Ended June 30, 2023						Six Months Ended June 30, 2023
	As Previously						As Previously
	Reported		Adjustment		As Adjusted		Reported		Adjustment		As Adjusted
Research and development	$	8,966	$	(941)	$	8,025	$	17,847	$	(941)	$	16,906
Sales and marketing	$	33,085	$	(416)	$	32,669	$	68,003	$	(416)	$	67,587
General and administrative	$	30,098	$	(4,024)	$	26,074	$	58,168	$	(4,024)	$	54,144
Income (loss) before income taxes	$	(21,977)	$	5,381	$	(16,596)	$	(57,502)	$	5,381	$	(52,121)
Provision for income taxes	$	10	$	104	$	114	$	79	$	104	$	183
Net income (loss)	$	(21,987)	$	5,277	$	(16,710)	$	(57,581)	$	5,277	$	(52,304)


	Three Months Ended June 30, 2023				Six Months Ended June 30, 2023
	As Previously				As Previously
	Reported		As Adjusted		Reported		As Adjusted
Numerator:
Net loss – basic and diluted	$	(21,987)	$	(16,710)	$	(57,581)	$	(52,304)
Denominator:
Weighted average common shares outstanding – basic and diluted	20,990,780		21,143,257		20,939,723		21,109,886
Net loss per share attributable to common stockholders – basic and diluted	$	(1.05)	$	(0.79)	$	(2.75)	$	(2.48)

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

4. Spin-Off Transaction

On August 31, 2023, in order to more directly incentivize the key employees of the Company’s subsidiary, Aarki, Inc. (“Aarki”), the Company made the determination to allow certain key employees of Aarki to receive equity awards in Aarki. On a fully diluted basis, the awards would represent approximately 20% of the ownership of Aarki. As of September 30, 2023 and November 8, 2023, no awards have been granted in connection with the foregoing and the Company continues to consolidate Aarki in its consolidated financial statements. In connection with the spin-off transaction, the Company is also investing $5,000,000 in the form of Series A Preferred Stock of Aarki to properly allocate working capital to the business. The Company does not intend to grant any future Skillz equity awards to any Aarki employees, and all unvested Skillz equity awards have been surrendered by Aarki employees. The Company recognized $3.3 million of stock compensation expense in connection with acceleration of these awards.

In connection with the foregoing, Aarki is also being designated as an unrestricted subsidiary under the indenture governing the Company’s 10.250% Secured Notes due 2026.

5. Balance Sheet Components

Note Receivable

Note receivable included in other long-term assets on the consolidated balance sheets consisted of the following as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
Note receivable	$	2,000	$	—

Note receivable	$	2,000	$	—

On July 7, 2023, the Company entered into a Loan and Security Agreement (together, the “Credit Agreement”) whereby it would lend approximately $2 million to Big Run Studio. The designated rate on the credit facility is 11.5%, with interest for the first six months being paid, at Big Run’s option each month, (1) in cash or (2) in-kind and compounded monthly to the principal. The interest-only period may be extended by six months upon mutual written agreement between Big Run and Skillz. After the interest-only period, principal and interest shall be payable monthly in equal installments. The default rate is 16.5% per annum. Late charges will be assessed at 5% of the payment amount overdue if not paid within five business days of its due date. The credit facility will mature on June 1, 2025, subject to applicable permitted prepayments; provided that upon the occurrence of a six-month extension of the interest-only period, the maturity shall also be extended by six additional months to December 1, 2025.

For the nine months ended September 30, 2023, the company recognized $0.1 million of interest income.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
Credit card processing reserve	$	1,000	$	1,000
Prepaid expenses	4,483		2,234
Other current assets	792		1,488
Prepaid expenses and other current assets	$	6,275	$	4,722

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Property, Plant and Equipment, Net

Property, plant and equipment consisted of the following as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
Land	$	980	$	—
Building	10,541		—
Capitalized internal-use software	9,126		9,126
Computer equipment and servers	1,424		1,291
Furniture and fixtures	278		278
Leasehold improvements	115		114
Construction in progress	945		—
Finance lease right-of-use assets	—		10
Total property, plant and equipment	23,409		10,819
Less: Accumulated Depreciation	9,597		7,828
Property, plant and equipment, net	$	13,812	$	2,991

Other Current Liabilities

Other current liabilities consisted of the following as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
Accrued sales and marketing expenses	$	3,728	$	4,409
Accrued compensation	8,374		4,991
Accrued publisher fees	2,437		4,442
End-user liability, net	6,163		8,984
Accrued developer revenue share	1,639		2,017
Short-term lease obligation	890		1,525
Accrued legal expenses	5,249		1,984
Contingent liabilities	7,109		—
Accrued interest expense	3,877		1,236
Indirect tax liabilities	11,908		10,909
Other accrued expenses	9,560		5,169
Other current liabilities	$	60,934	$	45,666

6. Fair Value Measurements

As of September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022 were $330.2 million and $362.5 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

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

fair value hierarchy. Highly liquid investments such as commercial papers and corporate bonds are classified within Level 2 of the fair value hierarchy.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:


	As of September 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Cash Equivalents:
Money market funds	$	308,210	$	—	$	—	308,210
Available-for-Sale Investments:
Asset-backed securities	$	—	$	2,058	$	—	$	2,058
Corporate notes and bonds	—		4,800		—		4,800
Total assets	$	308,210	$	6,858	$	—	$	315,068
Liabilities:
Private Common Stock Warrants	$	—	$	—	$	11	$	11
Total liabilities	$	—	$	—	$	11	$	11


	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash Equivalents:
Money market funds	$	232,448	$	—	$	—	$	232,448
Available-for-Sale Investments:
Asset-backed securities	$	—	$	58,192	$	—	$	58,192
Corporate notes and bonds	—		110,298		—		110,298
Commercial paper	—		10,479		—		10,479
Foreign government securities	—		5,027		—		5,027
US government and agency securities	86,898		—		—		86,898
Total assets	$	319,346	$	183,996	$	—	$	503,342
Liabilities:
Private Common Stock Warrants	$	—	$	—	$	289	$	289
Total liabilities	$	—	$	—	$	289	$	289

Available-for-Sale Investments

Available-for-sale investments were classified within Level 1 or Level 2 because the Company’s use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The market values of Level 2 investments are determined based on observable inputs for the securities other than quoted prices, such as interest rates, yield curves, and credit spreads, or quoted prices for identical or similar securities in markets that are not considered active. There were no transfers between levels during the periods presented.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Private Common Stock Warrants

The Private Warrants were classified within Level 3 as they were valued based on a Black-Scholes pricing model, which involved the use of certain unobservable inputs, such as expected volatility estimated based on the average historical stock price volatility of comparable companies.

The following sets forth the activity for Private Warrants:


	Private Warrants
Balance at December 31, 2022	$	289
Fair market value adjustment	(278)
Balance at September 30, 2023	$	11

7. Investments

Investment Components

The components of investments were as follows:


	As of September 30, 2023
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset-backed securities	$	2,079	$	—	$	(21)	$	2,058	$	—	$	—	$	2,058

Corporate notes and bonds	4,816		—		(16)		4,800		—		4,800		—

Money market funds	308,210		—		—		308,210		308,210		—		—


Total investments	$	315,105	$	—	$	(37)	$	315,068	$	308,210	$	4,800	$	2,058


	As of December 31, 2022
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset-backed securities	$	58,455	$	1	$	(264)	$	58,192	$	—	$	1,464	$	56,728

Corporate notes and bonds	111,592		—		(1,294)		110,298		—		110,298		—
Commercial paper	10,477		2		—		10,479		—		10,479		—
Money market funds	232,448		—		—		232,448		232,448		—
Foreign government securities	5,064		—		(37)		5,027		—		5,027		—
US government and agency securities	86,869		29		—		86,898		86,898		—		—
Total investments	$	504,905	$	32	$	(1,595)	$	503,342	$	319,346	$	127,268	$	56,728

Non-marketable equity securities are investments in privately held companies without readily determinable fair values. The carrying value of the Company’s investments without readily determinable fair values was $55.6 million as of September 30, 2023 and December 31, 2022 and was classified within “non-marketable equity securities” in the condensed consolidated balance sheets. The Company did not record any adjustments to the carrying value of its non-marketable equity securities accounted for under the measurement alternative and did not recognize any gains or losses related to the sale of non-marketable equity securities in the nine months ended September 30, 2023.

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Unrealized Losses on Marketable Securities

Marketable securities with continuous unrealized losses for less than 12 months and 12 months or more and their related fair values were as follows:


	As of September 30, 2023
	Less than 12 Months				12 Months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Asset-backed securities	$	—	$	—	$	2,058	$	(21)	$	2,058	$	(21)

Corporate notes and bonds	—		—		4,800		(16)		4,800		(16)




Total investments	$	—	$	—	$	6,858	$	(37)	$	6,858	$	(37)


	As of December 31, 2022
	Less than 12 Months				12 Months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Asset-backed securities	$	52,412	$	(229)	$	4,656	$	(35)	$	57,068	$	(264)

Corporate notes and bonds	55,864		(571)		54,434		(723)		110,298		(1,294)


Foreign government securities	—		—		5,027		(37)		5,027		(37)

Total investments	$	108,276	$	(800)	$	64,117	$	(795)	$	172,393	$	(1,595)

Marketable Securities Maturities


	Adjusted		Estimated
	Cost Basis		Fair Value
September 30, 2023
Due in one year or less	$	4,816	$	4,800
Due after one year through five years	2,079		2,058
Due after five years through ten years	—		—
Total	$	6,895	$	6,858

8. Long-Term Debt

Components of long-term debt were as follows as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
2021 Senior Secured Notes, non-current	$	129,671	$	289,500
Unamortized discount and issuance costs	(6,136)		(16,719)
Long-term debt, non-current	$	123,535	$	272,781

2021 Senior Secured Notes

In December 2021, the Company entered into a $300 million of 10.25% secured notes in a private placement to certain institutional buyers. The interest is payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. At issuance, the effective interest rate on the notes was 12.14%. The notes will mature on December 15, 2026, unless repurchased or redeemed earlier. On September 1, 2022, the Company repurchased $10.5 million of the principal amount of the 2021 Senior Secured Notes at 69.5% for $7.3 million plus accrued interest of $0.2 million. This resulted in a gain on extinguishment of debt of $2.6 million as the notes were redeemed for total consideration below par value of the notes as well as the write-off of unamortized debt issuance costs and discounts. On April 13, 2023, the Company’s repurchased

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

approximately $159.8 million of its senior secured notes. In connection with the repurchase, the Company’s recognized a gain on extinguishment of $15.2 million on the consolidated statements of operations. The gain primarily reflected the payment discounts as the notes were redeemed for total consideration below the notes par value of the notes as well as the write-off of unamortized debt issuance costs and discounts. After giving effect to the 2022 and the 2023 open market repurchases, as of September 30, 2023, $129.7 million of the senior secured notes remained outstanding and the effective interest rate is 12.09%. The secured notes contain customary covenants restricting the Company’s ability to incur debt, incur liens, make distributions to stockholders, make certain transactions with our affiliates, as well as certain other financial covenants. Aarki, Inc. “Aarki” incorporated as a separate legal entity effective September 1, 2023 through a spinoff transaction and was designated as an unrestricted subsidiary under the indenture governing by this secured notes. The Company was in compliance with all covenants as of September 30, 2023.

In accounting for the senior secured notes, unamortized discount and issuance costs were deducted from the carrying value in the condensed consolidated balance sheets. Issuance costs was recognized as interest expense over the five-year term of the senior secured notes. The senior secured notes are classified as Level 2 financial instruments, and its fair value is presented for disclosure purposes only. The Company determined the fair value of the notes was $105.7 million as of September 30, 2023 based on secondary market quotes.

Interest is paid semi-annually. Accrued interest as of September 30, 2023 was $3.9 million and was recorded within other current liabilities in the Company’s condensed consolidated balance sheets.

The following table outlines maturities of the principle related to the Company’s long-term debt as of September 30, 2023:


	Amount
2023 (excluding the nine months ended September 30, 2023)	$	—
2024	—
2025	—
2026	129,671
Total	$	129,671

9. Commitments and Contingencies

Legal Matters

The Company is a party to certain claims, suits, and proceedings which arise in the ordinary course and conduct of its business and has certain unresolved claims pending, the outcomes of which are not determinable at this time. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s opinion, resolution of pending matters, other than as disclosed herein, is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s financial position, as of September 30, 2023. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the results of operations, cash flows, or financial position in a particular period. However, based on the information known by the Company, except as set forth herein, any such amount is either immaterial or it is not possible to provide an estimated range of any such possible loss.

On May 15, 2019, a former employee of the Company filed a suit against the Company in the San Francisco Superior Court in California for claims including breach of contract, retaliation and wrongful termination. The case was tried in August and September 2021. The jury found in favor of the former employee and rendered a verdict against the Company for $11.6 million in compensatory damages, and the Company recorded a loss contingency accrual of $7.1 million and corresponding general and administrative expenses in such amount in the third quarter of 2021. In April 2022, the judge in the case determined, in light of the Company’s post-verdict motions, that the instructions given to the jury at trial were defective. Accordingly, the judge ordered a new trial on damages or, alternatively, permitted the plaintiff accept a reduced verdict in the amount of $4.35 million, which the plaintiff subsequently levied from the Company’s bank account. On May 25, 2022, the Company filed an appeal from the judgment seeking, in part, entry of judgment in the Company's favor notwithstanding the verdict. The plaintiff accepted the reduced verdict, and filed an appeal from the judgment on June 7, 2022, seeking in part, to reinstate the jury's original verdict (or an award less than the original verdict but greater than $4.35 million final judgment) and

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

challenge the trial court’s conclusion that stock options are not “wages,” which was the basis for dismissing his wrongful termination and retaliation claims. Skillz filed its response and reply brief on July 7, 2023. After multiple extensions, the former employee filed a reply brief on October 6, 2023, which was limited to only his cross-appeal and did not raise any new request for relief. Management believes that this dispute will be resolved by the end of 2024 calendar year.

10. Stockholders’ Equity

Common Stock

The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to 20 votes per share. Shares of Class B common stock are convertible into an equivalent number of shares of Class A common stock and generally convert into shares of Class A common stock upon transfer. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid on a pro rata basis. On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock and Class B common stock.

As of September 30, 2023, after giving effect to the reverse stock split described below, the Company has authorized a total of 41 million shares, consisting of (i) 31 million shares of common stock, par value $0.0001 per share (“common stock”), including 25 million shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), 6 million shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), and (ii) 10 million shares of preferred stock, par value 0.0001 per share (“preferred stock”).

Reverse Stock Split

On June 23, 2023, the Company’s effectuated the one-for twenty reverse stock split of its issued and outstanding shares of Common Stock. As a result of the reverse stock split, every 20 shares of issued and outstanding Common Stock were combined and converted into one issued and outstanding share of Common Stock, and the number of authorized shares of Common Stock was reduced proportionately. The par value per share of Common Stock remains unchanged. The Company’s Class A Common Stock began trading on a split-adjusted basis on the NYSE at market open on June 26, 2023. All share and per-share amounts have been retrospectively adjusted to reflect the impact of the reverse stock split.

11. Stock-Based Compensation

The following table summarizes stock-based compensation expense recognized for the three and nine months ended September 30, 2023 and 2022 as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Research and development	$	1,415	$	(2,088)	$	3,581	$	3,063
Sales and marketing	2,482		2,125		6,478		6,579
General and administrative	8,543		6,021		23,551		87,726
Total stock-based compensation expense (1)	$	12,440	$	6,058	$	33,610	$	97,368

Equity Incentive Plans

Skillz Inc. 2020 Omnibus Incentive Plan

In December 2020, the Board of Directors of the Company adopted the Skillz Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective upon consummation of the Flying Eagle Acquisition Corporation, a Delaware corporation (“FEAC”) business combination and succeeds the Company’s legacy equity incentive plans. Under the 2020 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are exercisable over a maximum term of 10 years from the date of grant. RSUs are also granted under

TABLE OF CONTENTS

SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

the 2020 Plan. These awards typically have a cliff vesting period of one year and continue to vest quarterly thereafter. The 2020 Plan also permits the Company to grant stock-based awards with performance or market conditions. In connection with the closing of the FEAC business combination, the Company entered into certain option agreements that include vesting conditions contingent upon the attainment of volume weighted average price targets related to the Company’s Class A common stock on the NYSE.

The 2020 Plan permits the Company to deliver up to 5,392,022 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 750,000 shares which may be of Class A and/or Class B common stock, 3,694,871 shares of Class A common stock and 947,151 shares of Class B common stock. The total number of shares of Class A common stock and Class B common stock that will be reserved and that may be issued under the 2020 Plan will automatically increase on the first trading day of each calendar year, beginning with calendar year 2021, by a number of shares equal to 5% of the total number of shares of Class A common stock and Class B common stock, respectively, outstanding on the last day of the prior calendar year.

Stock Options and Restricted Stock Units

Stock option and RSU activity during the nine months ended September 30, 2023 is as follows (in thousands, except for share, per share, and contractual term data):


		Options Outstanding						Restricted Stock Units
	Number of Shares Available for Issuance Under the Plan	Number of Shares Outstanding Under the Plan	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value		Number of Plan shares outstanding	Weighted-Average Grant Date Fair Value per share
Balance at December 31, 2022	1,422,876	812,293	$	263.00	7.27	$	1,145	2,505,328	$	24.60
Additional shares authorized	1,053,433	—	—
Granted	(1,089,831)	—	—					1,089,831	11.13
Exercised/Vested	—	(95,911)	1.53					(292,505)	38.01
Cancelled/Forfeited/Expired	625,955	(11,067)	27.68					(614,888)	28.12
Balance at September 30, 2023	2,012,433	705,315	$	302.25	7.14	$	68	2,687,766	$	14.69


Exercisable at September 30, 2023

Skillz Inc. [SKLZ] Filings
10-Q	[2023-11-08]
10-Q	[2023-08-08]
10-Q	[2023-05-10]
10-K	[2023-03-31]
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]