skillz(US:SKLZ)2022-05-05 16:00PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited Q1 2022 financials show 12% revenue growth, but a net loss widened to $148.1 million from increased expenses and stock-based compensation Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $114,558 | $241,332 | | Marketable securities (current & non-current) | $539,291 | $501,684 | | Total assets | $932,536 | $1,022,825 | | Total liabilities | $380,898 | $399,125 | | Total stockholders' equity | $551,638 | $623,700 | Condensed Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Revenue | $93,438 | $83,677 | | Total costs and expenses | $238,042 | $135,145 | | Loss from operations | $(144,604) | $(51,468) | | Net loss | $(148,113) | $(53,592) | | Net loss per share, basic & diluted | $(0.37) | $(0.15) / $(0.16) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(83,450) | $(39,153) | | Net cash used in investing activities | $(40,744) | $(659) | | Net cash (used in) provided by financing activities | $(2,580) | $389,662 | Notes to the Condensed Consolidated Financial Statements Notes detail accounting policies, business combinations, and financial instruments, highlighting high revenue concentration, Aarki acquisition, $300 million debt, legal contingency, and substantial stock-based compensation - The company's business model is a mobile eSports platform that enables game developers to host tournaments and monetize their content through a revenue-sharing agreement3236 - Revenue concentration remains high, with two developer partners accounting for a combined 79% of revenue in Q1 2022 (41% and 38% respectively), compared to 83% in Q1 202143 - The acquisition of Aarki, Inc. was completed in July 2021 for $162.3 million, resulting in $86.8 million of identifiable intangible assets and $86.4 million of goodwill as of March 31, 2022788081 - In December 2021, the company issued $300 million in 10.25% senior secured notes due 2026107 - A lawsuit from a former employee resulted in a jury verdict of $11.6 million. In April 2022, a judge ordered a new trial on damages or allowed the plaintiff to accept a reduced verdict of $4.35 million115 - Total stock-based compensation expense was $77.9 million in Q1 2022, a sharp increase from $10.9 million in Q1 2021. This was primarily driven by the cancellation of the CEO Performance Award, which resulted in an accelerated expense recognition of $65.1 million127139 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2022 performance, noting 12% revenue growth to $93.4 million, but a significant increase in operating losses to $144.6 million due to higher costs, especially a 240% rise in G&A from a large stock-based compensation charge Overview Skillz operates a mobile eSports marketplace with 3.2 million MAUs in Q1 2022, heavily relying on its top three games which accounted for 71% of revenue Key Operating Metrics | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Monthly Active Users (MAUs) | 3.2 million | 2.7 million | | Paying MAUs | 0.6 million | 0.5 million | | Paying MAU to MAU Ratio | 18% | 17% | | Average Revenue Per User (ARPU) | $9.65 | $10.35 | - Revenue concentration from top titles remains significant, with three games from two developers (Tether Studios and Big Run Studios) accounting for 71% of revenue in Q1 2022155 Results of Operations Q1 2022 revenue increased 12% YoY to $93.4 million, but total costs surged 76% to $238.0 million, driven by a 240% rise in G&A expenses due to a $65.1 million stock-based compensation charge, leading to a $144.6 million operating loss Comparison of Operating Expenses (in thousands) | Expense Category | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Cost of Revenue | $9,265 | $4,256 | 118% | | Research and Development | $18,653 | $7,282 | 156% | | Sales and Marketing | $117,332 | $96,323 | 22% | | General and Administrative | $92,792 | $27,284 | 240% | - The 240% increase in General and Administrative costs was primarily driven by a $65.5 million increase in stock-based compensation, which included a one-time $65.1 million charge related to the cancellation of the CEO's performance stock units178 - Sales and marketing costs increased by 22%, driven by a 10% rise in user acquisition spending ($59.7 million) and a 17% increase in engagement marketing ($42.1 million)177 Non-GAAP Financial Measures Adjusted EBITDA, a non-GAAP measure, showed a nearly doubled loss of $61.0 million in Q1 2022, primarily adjusted for stock-based compensation, depreciation, amortization, and warrant liabilities Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net loss | $(148,113) | $(53,592) | | Stock-based compensation | $77,925 | $10,945 | | Depreciation and amortization | $5,539 | $555 | | Change in fair value of common stock warrant liabilities | $(4,462) | $2,108 | | Other adjustments | $8,105 | $8,855 | | Adjusted EBITDA | $(61,021) | $(31,129) | Liquidity and Capital Resources As of March 31, 2022, Skillz had strong liquidity with $114.6 million in cash and $539.3 million in marketable securities, despite operating cash burn doubling to $83.5 million, with management asserting sufficient resources for the next year - The company's principal sources of liquidity as of March 31, 2022, were $114.6 million in cash and cash equivalents and $539.3 million in marketable securities188 - Net cash used in operating activities more than doubled to $83.5 million in Q1 2022 from $39.2 million in Q1 2021, driven by a larger net loss192194 - In December 2021, the company raised $300 million through the private placement of senior secured notes due 2026 with a 10.25% interest rate190 Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on cash and marketable securities, but management believes a 10% rate change would not materially impact due to low-risk investments, and foreign currency risk is immaterial - The company's main market risk is interest rate risk on its cash, cash equivalents, and marketable securities portfolio203204 Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of March 31, 2022, due to material weaknesses in IT general controls and management review controls, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of the end of the period due to existing material weaknesses206 - The material weaknesses relate to: 1) IT general controls over user access and program changes, and 2) insufficient documentation of management review controls209 - Remediation efforts are underway, including designing and implementing improved processes and controls for IT systems and reinforcing training for management review controls210 PART II - OTHER INFORMATION Legal Proceedings Refers to Note 9 for legal matters, detailing a former employee lawsuit where a judge offered to reduce an $11.6 million jury verdict to $4.35 million or order a new trial - The company is involved in a legal proceeding with a former employee. A judge has ordered a new trial on damages or alternatively permitted the plaintiff to accept a reduced verdict of $4.35 million, down from an initial $11.6 million jury award115216 Risk Factors No material changes to risk factors have occurred since the 2021 Annual Report on Form 10-K - There have been no material changes to the company's risk factors since its 2021 Annual Report on Form 10-K217