skillz(SKLZ) - 2021 Q4 - Annual Report

PART I Business Overview Skillz Inc. operates a proprietary platform for competitive mobile gaming, monetizing through prizes and supporting developers - Skillz's platform monetizes user engagement primarily through prizes, creating a compelling alternative for developers and users compared to traditional in-game advertisements or purchases[22] - The company's SDK includes over 200 features in a less than 16-megabyte package, enabling seamless over-the-air updates and social features like in-game chat, friends, tournaments, and leagues[23][25] - As of December 31, 2021, Skillz had over 10,000 registered game developers who have launched game integrations on its system[35] - Skillz enables cash prizes in 41 U.S. states and the District of Columbia, covering approximately 90% of the U.S. population, by using proprietary algorithms to ensure games are skill-based and comply with applicable laws[56] - The company acquired Aarki in 2021, a technology-driven marketing platform, to enhance user acquisition efficiencies[48] Overview Our Platform Our Developer Community Our Gamer Community Gaming for Good Games on Our Platform Our Distribution Our Marketing Our Customer Advocacy Our People Our Competition Our Intellectual Property Government Regulation and Compliance Corporate Information Available Information Risk Factors Skillz Inc. faces risks from growth sustainability, key game reliance, competition, operational vulnerabilities, evolving regulations, and financial challenges - A limited number of games (Solitaire Cube, 21 Blitz, Blackout Bingo) and their developers (Tether, Big Run) accounted for a substantial portion of revenue (72% in 2021, 81% from Tether and Big Run combined), posing a risk if these games become less popular or are removed[73] - The company has a history of net losses, with an accumulated deficit of $419.7 million as of December 31, 2021, and may not achieve profitability in the near future[144] - Skillz relies heavily on Amazon Web Services (AWS) for its technology infrastructure, making it vulnerable to failures or disruptions in AWS services[105][106] - The company's business is subject to evolving U.S. and foreign laws regarding skill-based gaming, consumer protection, and data privacy (e.g., GDPR, CCPA), with potential for increased scrutiny, regulation, and operating costs[99][100][101][130][131] - As of December 31, 2021, the aggregate indebtedness under senior secured notes was $300 million, which could adversely affect financial health and strategic execution[179] SUMMARY RISK FACTORS Risks Related to Our Business and Industry Risks Related to Ownership of Our Class A Common Stock Risks Related to Our Indebtedness Unresolved Staff Comments The company has no unresolved staff comments from the SEC Properties Skillz's principal operations are in San Francisco with a remote workforce, supplemented by leased offices in Portland, Las Vegas, and global sites - Principal business operations are in San Francisco, California, with a primarily remote workforce since 2020 due to COVID-19[186] - Acquired leases for offices and data centers globally, including in the U.S. and Hong Kong, and a 4,850 sq ft Philippines office, through the Aarki acquisition in 2021[186] Legal Proceedings Skillz faces ongoing legal proceedings, including a securities class action and a former employee lawsuit with an $11.6 million jury verdict - Securities class action lawsuits (Jedrzejczyk v. Skillz Inc., et al., and Shultz v. Skillz Inc., et al.) were filed in May and June 2021, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, and Sections 11, 12(a)(2), and 15 of the Securities Act[188] - A former employee's lawsuit for breach of contract, retaliation, and wrongful termination resulted in a jury verdict of $11.6 million in compensatory damages against the company in September 2021[489] Mine Safety Disclosures This item is not applicable to Skillz Inc PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Skillz Inc.'s Class A common stock is listed on NYSE, with no public market for Class B, no cash dividends, and details on unregistered equity sales - Class A common stock (SKLZ) listed on NYSE since December 17, 2020; no public market for Class B common stock[192] - As of February 24, 2022, there were 553 holders of record for Class A common stock and one for Class B common stock[193] - The company has not paid and does not intend to pay cash dividends on common stock for the foreseeable future[194] - In connection with the Aarki acquisition on July 16, 2021, Skillz issued 4.4 million shares of Class A common stock (valued at approximately $67.1 million) as part of the consideration[203] Market Information for Common Stock Holders of our Common Stock Dividend Policy Securities Authorized for Issuance Under Equity Compensation Plans Stock Performance Graph Unregistered Sales of Equity Securities Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Skillz Inc. reported 67% revenue growth in 2021, but net loss widened due to increased operating expenses; the Aarki acquisition targets user acquisition efficiency Key Financial Highlights (2021 vs 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :--------------------------------- | :------------------ | :------------------ | :--------- | | Revenue | $384,089 | $230,115 | 67% | | Cost of Revenue | $24,711 | $12,281 | 101% | | Research and Development | $46,017 | $23,225 | 98% | | Sales and Marketing | $465,457 | $251,941 | 85% | | General and Administrative | $135,026 | $42,289 | 219% | | Net Loss | $(181,377) | $(145,510) | 25% | | Adjusted EBITDA | $(181,488) | $(66,113) | 174% | Key User Metrics (2021 vs 2020 vs 2019) | Metric | 2021 | 2020 | 2019 | | :--------------------------------- | :----- | :----- | :----- | | Average MAUs (millions) | 3 | 2.6 | 1.6 | | ARPU | $10.90 | $7.50 | $6.30 | | Paying MAU to MAU Ratio | 17% | 13% | 10% | | Paying MAU (millions) | 0.5 | 0.3 | 0.2 | | Monthly ARPPU | $62 | $59 | $62 | - The acquisition of Aarki, Inc. on July 16, 2021, for $162.3 million (comprised of $95.3 million cash and $67.1 million in Class A common stock), is expected to drive significant efficiencies in user acquisition costs[213] - Cash deposits represented approximately 10% of total entry fees in 2021, while prior cash winnings not withdrawn accounted for approximately 81% of total entry fees[215] - In December 2021, the company issued $300 million in senior secured notes due 2026 with an annual interest rate of 10.25%, payable semi-annually[256] Overview Our Financial Model Key Components of Results of Operations Changes from Prior Period Reports Results of Operations Non-GAAP Financial Measures Liquidity and Capital Resources Contractual Obligations and Commitments Critical Accounting Estimates Quantitative and Qualitative Disclosures About Market Risk Skillz Inc. faces interest rate risk on its $241.3 million cash and $501.7 million marketable securities, with no material foreign currency risk identified - As of December 31, 2021, cash and cash equivalents totaled $241.3 million, and marketable securities totaled $501.7 million, primarily invested in money market funds, corporate debt, U.S. government securities, and commercial paper[287] - An immediate 10% change in interest rates is not expected to have a material effect on the fair market value of cash, cash equivalents, and marketable securities due to the low-risk profile of investments[287] - No material foreign currency risk was identified for the years ended December 31, 2021 and 2020[288] Interest Rate Risk Foreign Currency Risk Financial Statements and Supplementary Data This section presents Skillz Inc.'s audited consolidated financial statements, with an unqualified opinion on financials but an adverse opinion on internal controls due to material weaknesses - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting as of December 31, 2021, due to material weaknesses[295][296][306] Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :-------------------------- | :------------------ | :------------------ | | Total Assets | $1,022,825 | $282,421 | | Total Liabilities | $399,125 | $225,634 | | Total Stockholders' Equity | $623,700 | $56,787 | Consolidated Statements of Operations and Comprehensive Loss Highlights (in thousands) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Revenue | $384,089 | $230,115 | $119,872 | | Total Costs and Expenses | $671,211 | $329,736 | $144,700 | | Loss from Operations | $(287,122) | $(99,621) | $(24,828) | | Net Loss | $(181,377) | $(145,510) | $(23,605) | | Basic Net Loss per Share | $(0.47) | $(0.49) | $(0.09) | | Diluted Net Loss per Share | $(0.69) | $(0.49) | $(0.09) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2021 | 2020 | 2019 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net cash used in operating activities | $(180,154) | $(56,232) | $(21,937) | | Net cash used in investing activities | $(643,924) | $(3,246) | $(3,223) | | Net cash provided by financing activities | $802,682 | $296,578 | $31,168 | Reports of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There were no changes in or disagreements with accountants on accounting and financial disclosures Evaluation of Disclosure Controls and Procedures Skillz management concluded disclosure controls were ineffective as of December 31, 2021, due to material weaknesses in ITGCs and management review documentation; remediation efforts are underway - Disclosure controls and procedures were deemed not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting[544] - Identified material weaknesses include ineffective ITGCs (user access and program change management) and insufficient documentation for management review in certain accounting processes[551] - Remediation efforts are underway, focusing on improving ITGCs and enhancing management review control training and documentation[551] - The previously reported material weakness related to warrant accounting has been remediated as of December 31, 2021[552] Evaluation of Disclosure Controls and Procedures Management's Report on Internal Control Over Financial Reporting Material Weaknesses Remediation of Material Weaknesses Changes in Internal Control over Financial Reporting Limitations on Effectiveness of Controls and Procedures Other Information This item reports that there is no other information required to be disclosed Disclosures Regarding Foreign Jurisdictions that Prevent Inspections This item reports that there are no disclosures regarding foreign jurisdictions that prevent inspections PART III Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, and corporate governance from the definitive Proxy Statement Executive Compensation This section incorporates by reference executive compensation details, including summary compensation and equity awards, from the definitive Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information on security ownership of beneficial owners, management, and related stockholder matters from the definitive Proxy Statement Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information on certain relationships, related transactions, and director independence from the definitive Proxy Statement Principal Accountant Fees and Services This section incorporates by reference information on principal accountant fees and services from the definitive Proxy Statement PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements and a detailed table of exhibits Financial Statements Exhibits Form 10-K Summary This item indicates that no Form 10-K Summary is provided Signatures This section contains the required signatures for the Annual Report on Form 10-K, affirming authorization and responsibility by key executives and directors - The report is signed by Andrew Paradise (CEO and Chairman), Ian Lee (CFO), Stanley Mbugua (Chief Accounting Officer), Casey Chafkin (Chief Revenue Officer and Director), and other directors[578][582]