skillz(SKLZ) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended September 30, 2022, detailing financial position, operations, cash flows, and related accounting notes Balance Sheet Highlights | Financial Statement | Key Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | :--- | | Balance Sheet | Total Assets | $772.4 million | $1,022.8 million | | | Total Liabilities | $340.1 million | $399.1 million | | | Total Stockholders' Equity | $432.3 million | $623.7 million | Income Statement Highlights (Q3) | Income Statement (Q3) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | | | Revenue | $60.3 million | $102.1 million | | | Loss from Operations | $(75.3) million | $(81.6) million | | | Net (Loss) / Income | $(78.5) million | $50.8 million | | | Diluted EPS | $(0.19) | $(0.16) | Cash Flow Statement Highlights | Cash Flow Statement | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | | | Net cash used in operating activities | $(166.8) million | $(103.3) million | | | Net cash provided by (used in) investing activities | $176.0 million | $(140.8) million | | | Net cash (used in) / provided by financing activities | $(10.7) million | $521.7 million | - In Q3 2022, the company recorded a non-cash intangible asset impairment charge of $47.6 million, primarily related to developed technology and customer relationships from the Aarki acquisition[96] Notes to the Condensed Consolidated Financial Statements These notes detail accounting policies and significant financial events, including revenue concentration, intangible asset impairment, restructuring charges, and accelerated stock-based compensation - Revenue is highly concentrated, with games from two developer partners each accounting for 40% of the Company's revenue from Monetization Services in Q3 2022[41] - The company recorded restructuring charges of $1.9 million in Q3 2022 and $4.5 million for the nine months ended September 30, 2022, primarily for severance and benefits related to workforce reductions[99] - On September 1, 2022, the Company redeemed $10.5 million of its senior secured notes, resulting in a gain on extinguishment of debt of $2.6 million[120] - On March 14, 2022, the CEO Performance Award was canceled, resulting in the recognition of the remaining unrecognized compensation cost of $65.1 million during the first quarter of 2022[153] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a strategic shift towards profitable growth, resulting in a 41% Q3 2022 revenue decline, a $47.6 million impairment, and improved Adjusted EBITDA, with sufficient liquidity for the next year - The company is shifting its focus from top-line growth to driving higher efficiency from marketing investments and achieving profitability[182][206] Key Operating Metrics | Key Operating Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Gross Marketplace Volume (GMV) | $360.4 million | $610.9 million | -41% | | Paying Monthly Active Users (PMAUs) | 320 thousand | 509 thousand | -37% | | Monthly Active Users (MAUs) | 1,665 thousand | 2,985 thousand | -44% | - In Q3 2022, the company recorded a non-cash intangible asset impairment charge of $47.6 million related to the Aarki acquisition, due to a revised financial outlook and slower-than-expected realization of cost-saving synergies[184][201] Adjusted EBITDA Reconciliation | Reconciliation to Adjusted EBITDA (in thousands) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net (loss) / income | $(78,547) | $50,781 | | Adjustments (Stock-based comp, D&A, Impairment, etc.) | $63,146 | $(92,522) | | Adjusted EBITDA | $(15,401) | $(41,741) | Results of Operations Q3 2022 revenue declined 41% to $60.3 million due to reduced marketing spend, while operating expenses decreased across R&D, Sales & Marketing, and G&A, alongside a $47.6 million impairment charge - Q3 2022 revenue decreased by $41.8 million (41%) YoY, attributed to lower user retention and significant decreases in user acquisition spend (down $36.6 million) and engagement marketing spend (down $26.2 million)[205] - Sales and marketing costs for Q3 2022 decreased by 55% YoY to $51.8 million, driven by a 66% decrease in User Acquisition (UA) marketing and a 52% decrease in engagement marketing[216] - General and administrative costs for the nine months ended Sep 30, 2022 increased 38% YoY, primarily due to a $56.1 million increase in stock-based compensation, which includes a $65.1 million charge from the cancellation of the CEO's performance stock units[221] Liquidity and Capital Resources As of September 30, 2022, liquidity included $239.9 million in cash and $318.4 million in marketable securities, with $166.8 million net cash used in operations, deemed sufficient for the next twelve months - As of September 30, 2022, principal sources of liquidity were $239.9 million in cash and cash equivalents and $318.4 million in marketable securities[247] - Net cash used in operating activities was $166.8 million for the nine months ended September 30, 2022, an increase from $103.3 million in the prior year period[253][255] - The company may continue to retire or purchase its outstanding debt, having redeemed $10.5 million of its 2021 senior secured notes on September 1, 2022[250][251] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its cash and marketable securities, though a 10% rate change is not expected to be material, and foreign currency risk is immaterial - The company is exposed to interest rate risk on its cash, cash equivalents ($239.9 million), and marketable securities ($318.4 million)[273] - Management believes an immediate 10% change in interest rates would not materially affect the fair market value of its investments due to their low-risk profile[273] - Foreign currency risk was not material for the nine months ended September 30, 2022 and 2021[274] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in IT general controls and management review controls, with ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of September 30, 2022[276] - Material weaknesses persist in two areas: (1) Information technology general controls (ITGCs) over access and program changes, and (2) Controls designed to properly evaluate certain accounting processes involving management review[279] - Remediation efforts are ongoing, including designing and implementing improved processes for user access, program changes, and reinforcing management review control training[280] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 11, detailing a legal proceeding where a jury verdict of $11.6 million was reduced to $4.35 million, with both parties appealing - For information on legal proceedings, the report refers to Note 11, "Contingencies and Commitments"[287] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[288] Other Part II Items (Items 2, 3, 4, 5, 6) This section confirms no unregistered equity sales, no defaults on senior securities, no mine safety disclosures, and lists exhibits filed with the report - Item 2: No unregistered sales of equity securities and use of proceeds[289] - Item 3: No defaults upon senior securities[290] - Item 6: A list of exhibits filed with the report is provided[293]