skillz(SKLZ) - 2021 Q1 - Quarterly Report

Note Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section warns readers that the report contains forward-looking statements subject to significant risks and uncertainties - The report contains forward-looking statements regarding future operations, financial condition, business strategy, user growth, and product initiatives, which are subject to substantial risks and uncertainties[10] - Readers should not rely on forward-looking statements as predictions of future events, as they are based on current expectations and projections and are subject to various risks and uncertainties detailed in the Annual Report on Form 10-K/A and other SEC filings[11][14][15] - Key risk factors include sustainability of rapid growth, effective growth management, history of losses, reliance on third-party developers and service providers, brand and reputation maintenance, competitive entertainment industry, regulatory compliance, intellectual property protection, economic downturns, cybersecurity, and the impact of global pandemics like COVID-19[12][16] PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Skillz Inc.'s unaudited condensed consolidated financial statements and explanatory notes for Q1 2021 and FY 2020 Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in total assets, primarily driven by a substantial rise in cash and cash equivalents and warrant exercise receivables Condensed Consolidated Balance Sheets (Unaudited, in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $612,578 | $262,728 | | Warrant exercise receivable | $104,558 | — | | Total current assets | $732,117 | $273,219 | | Total assets | $741,423 | $282,421 | | Total current liabilities | $40,098 | $47,356 | | Common stock warrant liabilities | $112,378 | $178,232 | | Total liabilities | $152,512 | $225,634 | | Total stockholders' equity | $588,911 | $56,787 | Condensed Consolidated Statements of Operations The company experienced significant revenue growth year-over-year, but also a substantial increase in operating expenses, leading to a higher net loss for the three months ended March 31, 2021 Condensed Consolidated Statements of Operations (Unaudited, in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $83,677 | $43,559 | | Cost of revenue | $4,256 | $2,767 | | Research and development | $7,282 | $4,366 | | Sales and marketing | $96,323 | $46,825 | | General and administrative | $27,284 | $4,833 | | Total costs and expenses | $135,145 | $58,791 | | Loss from operations | $(51,468) | $(15,232) | | Net loss | $(53,592) | $(15,522) | | Net loss per share – basic | $(0.15) | $(0.06) | | Net loss per share – diluted | $(0.16) | $(0.06) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' equity significantly increased from December 31, 2020, to March 31, 2021, primarily due to substantial increases in additional paid-in capital from common stock issuances Condensed Consolidated Statements of Stockholders' Equity (Unaudited, in thousands) | Metric | Balance at December 31, 2020 | Balance at March 31, 2021 | | :-------------------------- | :--------------------------- | :------------------------ | | Common stock | $37 | $39 | | Additional paid-in capital | $295,065 | $880,779 | | Accumulated deficit | $(238,315) | $(291,907) | | Total stockholders' equity | $56,787 | $588,911 | - Issuance of common stock upon exercise of warrants and other, net, contributed $172.5 million to additional paid-in capital[26] - Net cash contributions from a follow-on offering added $402.2 million to additional paid-in capital[26] Condensed Consolidated Statements of Cash Flows The company experienced a significant net change in cash, cash equivalents, and restricted cash, primarily driven by substantial cash provided by financing activities Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(39,153) | $(9,109) | | Net cash used in investing activities | $(659) | $(860) | | Net cash provided by financing activities | $389,662 | $146 | | Net change in cash, cash equivalents and restricted cash | $349,850 | $(9,823) | | Cash, cash equivalents and restricted cash – end of year | $615,498 | $18,725 | - Financing activities were significantly boosted by $402.8 million in proceeds from a follow-on offering, net of underwriting commissions and offering costs[31] Notes to the Condensed Consolidated Financial Statements These notes detail the company's business, accounting policies, financial components, and significant events, providing a comprehensive understanding of the financial statements 1. Description of the Business and Basis of Presentation Skillz Inc. operates a mobile eSports platform enabling game developers to host competitive gaming activities, with its financial statements prepared under U.S. GAAP - Skillz is a mobile eSports platform that provides a proprietary online-hosted technology platform for independent game developers to host tournaments and competitive gaming activities for end-users worldwide[34] - The business combination on December 16, 2020, between Flying Eagle Acquisition Corp (FEAC) and Old Skillz was accounted for as a reverse recapitalization, with Old Skillz treated as the accounting acquirer for financial reporting purposes[35][38][40] 2. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including the use of estimates, revenue recognition, cash definitions, fair value measurement, advertising, and accounting for warrants - Revenue is primarily generated by providing monetization services to game developers through the Skillz SDK, enabling competitive gaming and increasing end-user retention[46][48][50] - End-user incentives are categorized: $17.6 million (2021) and $10.0 million (2020) were recognized as a reduction of revenue, while $33.3 million (2021) and $15.6 million (2020) were recognized as sales and marketing expense[55][58] - Public Common Stock Warrants are classified as Level 1 fair value measurements, while Private Common Stock Warrants are classified as Level 3, valued using the Black-Scholes-Merton Option pricing model due to unobservable inputs[74][75][105] - The company has elected to use the extended transition period for complying with new or revised financial accounting standards as an emerging growth company (EGC)[84] 3. Business Combination This note details the December 16, 2020, merger between FEAC and Old Skillz, accounted for as a reverse recapitalization, specifying share exchange, cash consideration, earnout release, and a private placement - The merger involved an exchange ratio of 0.7471 shares of common stock for each Old Skillz common stock[92] - Holders of Old Skillz received 191,932,860 shares of Class A common stock and 76,663,551 shares of Class B common stock, and $566.2 million in cash consideration[93] - Earnout conditions were fully satisfied in March 2021, releasing 10 million shares (5 million to Sponsor, 5 million to Old Skillz stockholders) as Class A or Class B common stock[94] - A private placement of 15,853,052 shares of Class A common stock generated an aggregate purchase price of $158.5 million[95] 4. Balance Sheet Components This note breaks down specific balance sheet items, including prepaid expenses, property and equipment, and other current liabilities, showing changes between December 2020 and March 2021 Prepaid Expenses and Other Current Assets (in thousands) | Item | March 31, 2021 | December 31, 2020 | | :------------------------------ | :------------- | :---------------- | | Credit card processing reserve | $6,861 | $5,854 | | Prepaid expenses | $6,740 | $3,772 | | Other current assets | $1,380 | $865 | | Total | $14,981 | $10,491 | Property and Equipment, Net (in thousands) | Item | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Capitalized internal-use software | $6,568 | $6,167 | | Total property and equipment | $8,792 | $8,133 | | Accumulated depreciation and amortization | $(3,394) | $(2,841) | | Property and equipment, net | $5,398 | $5,292 | Other Current Liabilities (in thousands) | Item | March 31, 2021 | December 31, 2020 | | :------------------------------ | :------------- | :---------------- | | Accrued sales and marketing expenses | $13,340 | $7,204 | | Accrued compensation | $6,330 | $3,825 | | End-user liability, net | $4,479 | $2,789 | | Other current liabilities | $29,860 | $19,618 | 5. Fair Value Measurements This note details fair value measurements of financial instruments, classifying Public Common Stock Warrants as Level 1 and Private Common Stock Warrants as Level 3, reporting their fair values - Cash and cash equivalents of $612.6 million (March 31, 2021) and $262.7 million (December 31, 2020) are classified within Level 1 of the fair value hierarchy[104] Fair Value of Public and Private Common Stock Warrants (in thousands) | Liability | March 31, 2021 (Level 1) | March 31, 2021 (Level 3) | March 31, 2021 (Total) | December 31, 2020 (Level 1) | December 31, 2020 (Level 3) | December 31, 2020 (Total) | | :-------------------------- | :----------------------- | :----------------------- | :--------------------- | :-------------------------- | :-------------------------- | :------------------------ | | Public Common Stock Warrants | $62,490 | — | $62,490 | $124,545 | — | $124,545 | | Private Common Stock Warrants | — | $49,888 | $49,888 | — | $53,687 | $53,687 | | Total fair value | $62,490 | $49,888 | $112,378 | $124,545 | $53,687 | $178,232 | - The fair value of Private Warrants liability decreased by $3.8 million during the three months ended March 31, 2021[105] 6. Commitments and Contingencies The company is involved in various legal claims, but management believes their resolution will not materially impact its financial position, operations, or cash flows - The company records a liability when a loss from legal matters is probable and estimable; otherwise, it discloses a reasonably possible loss[106] - Management does not expect pending legal matters to have a material adverse impact on the company's financial condition, results of operations, or cash flows as of March 31, 2021[106] 7. Common Stock Warrants This note details outstanding Public and Private Warrants, their exercise price, expiration, and redemption conditions, also reporting Public Warrant exercises during Q1 2021 - As of March 31, 2021, there were 8.2 million Public Warrants and 5.0 million Private Warrants outstanding, each exercisable at $11.50 per share[108][109][110] - During the three months ended March 31, 2021, 9.1 million Public Warrants were exercised, generating $104.6 million in proceeds, recorded as a warrant exercise receivable[108] - Public Warrants expire on December 16, 2025, and may be redeemed by the company if the Class A common stock price equals or exceeds $18.00 for 20 trading days within a 30-trading day period[109] 8. Stockholders' Equity This note describes the company's authorized capital stock, including Class A and Class B common stock with differing voting rights, and details the March 2021 public offering - The company is authorized to issue 635 million shares, comprising 500 million Class A common stock (one vote per share), 125 million Class B common stock (20 votes per share), and 10 million preferred stock[112][113] - In March 2021, the company completed a public offering, issuing 17,000,000 shares of Class A common stock for $408.0 million (before $5.9 million issuance costs)[114] - Certain stockholders also sold 19.8 million shares in the public offering, incurring $6.8 million in transaction costs for the company[114][116] 9. Stock-Based Compensation This note summarizes stock-based compensation expense for Q1 2021 and 2020, details the 2020 Omnibus Incentive Plan, and provides activity for stock options and restricted stock units Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Research and development | $1,207 | $205 | | Sales and marketing | $1,838 | $116 | | General and administrative | $7,900 | $36 | | Total | $10,945 | $357 | - The 2020 Omnibus Incentive Plan, effective December 2020, permits granting stock-based awards, including options and RSUs, with up to 47.8 million shares reserved, subject to annual increases[118][119] - As of March 31, 2021, unrecognized stock-based compensation expense was $180.4 million, to be recognized over a weighted-average period of 3.42 years[125] 10. Income Taxes This note reports the income tax provision and effective tax rates for Q1 2021 and 2020, noting the company's historical loss position and full valuation allowance Income Tax Provision (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Income tax provision | $42 | $25 | | Effective tax rate | -0.082% | -0.162% | - The company maintains a full valuation allowance for all its deferred tax assets due to its historical overall loss position[127] 11. Related-Party Transactions This note states no significant related-party transactions occurred in Q1 2021 or 2020, other than executive stock option grants and a secondary sale - No significant related-party transactions occurred, except for stock option grants to executives and a secondary sale as part of the follow-on offering[128] 12. Net Loss Per Share This note details the computation of basic and diluted net loss per share for Class A and Class B common stock, adjusted for reverse recapitalization, and lists antidilutive equivalents Net Loss Per Share Computation (in thousands, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss – Basic | $(53,592) | $(15,522) | | Weighted average common shares outstanding – basic | 356,818,954 | 278,348,903 | | Net loss per share attributable to common stockholders – basic | $(0.15) | $(0.06) | | Net loss – Diluted | $(57,391) | $(15,522) | | Weighted average common shares outstanding – diluted | 359,827,649 | 278,348,903 | | Net loss per share attributable to common stockholders – diluted | $(0.16) | $(0.06) | - Common and preferred stock warrants, common stock options, and restricted stock units totaling 60.8 million (2021) and 44.0 million (2020) were considered antidilutive and excluded from diluted EPS[133] 13. Subsequent Events This note discloses events after the reporting period, including Public Warrant exercises and the Chief Financial Officer's retirement - In April and May 2021, 426,168 Public Warrants were exercised at $11.50 per share[134] - The CFO, Mr Henry, will retire effective June 20, 2021, with an estimated $7.0 million in stock-based compensation expense related to his stock options vesting through the separation date[135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operations, business model, and key metrics, analyzing revenue and expense trends for Q1 2021 versus the prior year Overview Skillz operates a mobile eSports marketplace connecting developers and users, benefiting from network effects, with growth in MAUs, paying MAUs, and ARPU - Skillz operates a marketplace connecting developers and users through competitive gaming, fostering trust and benefiting from a network effect where compelling content attracts users, and a growing audience attracts more developers[137] Key User Metrics (Three Months Ended March 31) | Metric | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Monthly Active Users (MAUs) | 2.7 million | 2.6 million | | Monthly Average Revenue Per User (ARPU) | $10.35 | $5.57 | | Paying MAU to MAU ratio | 17% | 10% | | Paying MAU | 0.5 million | 0.3 million | | Monthly Average Revenue Per Paying User (ARPPU) | $60 | $56 | - Top games (Solitaire Cube, 21 Blitz, Blackout Bingo) accounted for 76% of revenue in Q1 2021, with Tether and Big Run being the primary developer partners[138] - The number of games generating over $1 million in annualized Gross Merchandise Volume (GMV) increased 54% to 40 in Q1 2021 from 26 in Q1 2020[138] Our Financial Model Skillz's financial model monetizes competitive gaming through a Take Rate from player entry fees, supported by strong unit economics, user engagement, and predictable long-term revenue - Revenue is generated by receiving a percentage of player entry fees in paid contests, after deducting end-user prize money, end-user incentives (revenue reduction), and developer profit share (the 'Take Rate')[143][144] - GMV (Gross Merchandise Volume) is composed of approximately 11% cash deposits, 82% prior cash winnings, and 7% end-user incentives for the three months ended March 31, 2021 and 2020[144] - The company expects the average Three-Year Lifetime Value (LTV) of its 2018, 2019, and 2020 cohorts to be 3.8x total user acquisition costs (2.5x after accounting for sales and marketing end-user incentives)[146] - Paying users spent an average of 62 minutes per day in game play on the platform in Q1 2021, demonstrating strong engagement[147] Key Components of Results of Operations This section defines key operational components: Revenue, Cost of Revenue, Research and Development, Sales and Marketing, and General and Administrative expenses, explaining their composition and expected fluctuations - Revenue is derived from monetization services provided to game developers, including end-user registration, player matching, fraud monitoring, and billing/settlement services, with Skillz typically withholding 16% to 20% of total entry fees as commission[149][150][151] - Cost of revenue primarily includes payment processing fees, customer support costs, direct software costs, amortization of internal use software, and server costs[152] - Sales and marketing expenses consist mainly of direct advertising costs and end-user incentives not recorded as a revenue reduction, expected to fluctuate in absolute dollars and as a percentage of revenue[155] - General and administrative expenses are expected to increase due to scaling headcount and costs associated with operating as a public company[157] Results of Operations For Q1 2021, revenue increased by 92% to $83.7 million, but total costs surged by 130%, leading to a net loss of $53.6 million, up from $15.5 million in the prior year Summary of Results of Operations (in thousands, except percentages) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Revenue | $83,677 | $43,559 | 92% | | Cost of revenue | $4,256 | $2,767 | 54% | | Research and development | $7,282 | $4,366 | 67% | | Sales and marketing | $96,323 | $46,825 | 106% | | General and administrative | $27,284 | $4,833 | 465% | | Total costs and expenses | $135,145 | $58,791 | 130% | | Loss from operations | $(51,468) | $(15,232) | 238% | | Net loss | $(53,592) | $(15,522) | 245% | - The increase in sales and marketing costs was primarily due to a 101% increase in user acquisition spend ($54.2 million in 2021 vs $27.0 million in 2020) and a 111% increase in engagement marketing spend ($36.0 million in 2021 vs $17.1 million in 2020)[165] - General and administrative costs surged due to a $10.8 million increase in headcount costs (including $8.2 million stock-based compensation), $9.0 million in professional expenses for the follow-on offering, and $2.4 million in public company-related insurance costs[166] Non-GAAP Financial Measures This section introduces Adjusted EBITDA as a non-GAAP measure for operational performance, providing a reconciliation from net loss by excluding non-cash and non-recurring items - Adjusted EBITDA is defined as net income (loss) excluding interest income (expense), change in fair value of common stock warrant liabilities, other income (expense), income tax provision, depreciation and amortization, stock-based compensation, and certain other non-cash or non-recurring items[173] Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(53,592) | $(15,522) | | Interest expense, net | $24 | $316 | | Stock-based compensation | $10,945 | $357 | | Change in fair value of common stock warrant liabilities | $2,108 | — | | Provision for income taxes | $42 | $25 | | Depreciation and amortization | $555 | $308 | | Other non-operating costs (income) | $(50) | $(51) | | Transaction related expenses | $8,839 | — | | Adjusted EBITDA | $(31,129) | $(14,567) | Liquidity and Capital Resources The company's liquidity is strong, with cash and cash equivalents significantly increasing due to financing activities, including a follow-on offering and warrant exercises - As of March 31, 2021, principal liquidity sources were $612.6 million in cash and cash equivalents, primarily invested in money market funds[176] - Net cash provided by financing activities was $389.7 million for Q1 2021, mainly from $402.8 million in net proceeds from a follow-on offering[179][184] - Net cash used in operating activities was $39.2 million for Q1 2021, primarily due to a net loss of $53.6 million, partially offset by non-cash expenses and changes in operating assets and liabilities[179][181] - The company's existing cash resources are sufficient to cover operating activities for at least one year past the financial statements' issuance date[178] Contractual Obligations and Commitments This section summarizes the company's contractual obligations as of March 31, 2021, primarily consisting of operating lease obligations Contractual Obligations and Other Commitments (in thousands) | Obligation | Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years | | :------------------------ | :---- | :--------------- | :---------- | :---------- | :---------------- | | Operating lease obligations | $23,487 | $1,874 | $4,867 | $4,952 | $11,794 | Off-Balance Sheet Arrangements The company confirms no off-balance sheet financing arrangements or relationships with unconsolidated entities during the periods presented - The company did not have any off-balance sheet financing arrangements or relationships with unconsolidated entities during the periods presented[187] Critical Accounting Policies and Estimates This section refers to the Annual Report on Form 10-K/A for critical accounting policies and estimates, noting no material changes - There have been no material changes to the critical accounting policies and estimates as previously disclosed in the Annual Report on Form 10-K/A filed May 13, 2021[188] Recent Accounting Pronouncements This section directs readers to Note 2 of the consolidated financial statements for information on recent accounting pronouncements - For information about recent accounting pronouncements, their adoption timing, and potential impact, refer to Note 2 to the consolidated financial statements[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, specifically interest rate risk and foreign currency risk, concluding that neither poses a material threat - The company is exposed to market risks, including changes in interest rates and inflation, but an immediate 10% change in interest rates would not materially affect the fair value of its cash and cash equivalents due to their low-risk profile[190][191] - There was no material foreign currency risk for the three months ended March 31, 2021 and 2020[192] Item 4. Controls and Procedures Management concluded that the company's disclosure controls were ineffective as of March 31, 2021, due to a material weakness in warrant accounting, with remediation efforts underway - As of March 31, 2021, the company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting[194] - The material weakness is related to the classification and accounting for warrants issued by Special Purpose Acquisition Companies (SPACs), specifically the application of ASC 815, as clarified by the SEC Staff Statement of April 12, 2021[195] - Remediation efforts include clarifying the accounting of contracts settled in the company's own stock and implementing additional review procedures and enhanced accounting policies[196] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal claims, but management believes their resolution will not materially affect its financial condition or results of operations - The company is a party to certain claims, suits, and proceedings arising in the ordinary course of business[199] - Management believes that the resolution of pending legal matters is not expected to have a material adverse impact on the company's financial condition or results of operations as of March 31, 2021[199] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K/A - There have been no material changes from the risk factors previously disclosed in Amendment No 1 on Form 10-K/A to the Annual Report on Form 10-K for the year ended December 31, 2020[200] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[202] Item 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities during the period - No defaults upon senior securities to report[203] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[204] Item 5. Other Information This section indicates no other information to report - No other information to report[205] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (Sections 302 and 906 of Sarbanes-Oxley Act) and Inline XBRL documents[206] Signatures Report Signatures This section contains the official signatures for the Quarterly Report on Form 10-Q, confirming its submission by the registrant - The report was duly signed on behalf of Skillz Inc by Andrew Paradise, Chief Executive Officer and Chairman, on May 14, 2021[208][209]