skillz(US:SKLZ)2023-08-07 16:00PART I - FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents Skillz Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed accounting policy notes Condensed Consolidated Balance Sheets Total assets decreased to $447.4 million from $621.3 million due to reduced cash, while total liabilities fell to $199.9 million from $342.9 million due to debt extinguishment Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $324,779 | $362,516 | | Total current assets | $367,794 | $501,683 | | Total assets | $447,389 | $621,295 | | Liabilities & Equity | | | | Total current liabilities | $64,320 | $49,495 | | Long-term debt, non-current | $123,148 | $272,781 | | Total liabilities | $199,918 | $342,894 | | Total stockholders' equity | $247,471 | $278,401 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q2 2023 revenue decreased 44% to $40.2 million, but net loss significantly narrowed to $22.0 million from $62.6 million, aided by a $15.2 million debt extinguishment gain Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $40,166 | $71,757 | $84,549 | $163,621 | | Loss from operations | ($35,633) | ($56,111) | ($67,701) | ($202,165) | | Gain on extinguishment of debt | $15,205 | $— | $15,205 | $— | | Net loss | ($21,987) | ($62,611) | ($57,581) | ($212,175) | | Net loss per share (Basic & Diluted) | ($1.05) | ($3.07) | ($2.75) | ($10.48) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities for H1 2023 significantly reduced to $41.1 million, with $139.8 million from investing and $136.2 million used in financing for debt extinguishment Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($41,057) | ($145,014) | | Net cash provided by investing activities | $139,758 | $76,312 | | Net cash used in financing activities | ($136,182) | ($2,641) | | Net change in cash | ($37,481) | ($71,343) | Notes to the Condensed Consolidated Financial Statements Notes detail accounting policies, revenue concentration from two developers, a 1-for-20 reverse stock split, debt repurchases, and ongoing legal matters - Games from two developer partners, Tether Studios and Big Run Studios, accounted for a combined 70% of revenue in the first six months of 2023149150 - During the first six months of 2023, the company repurchased approximately $159.8 million of its senior secured notes, recognizing a gain on extinguishment of $15.2 million97 - On June 23, 2023, the company effectuated a 1-for-20 reverse stock split of its common stock, with all share and per-share amounts retrospectively adjusted110 End-User Incentive Costs (in millions) | Incentive Treatment | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Reduction of Revenue | $7.2 | $13.1 | $15.2 | $29.5 | | Sales and Marketing Expense | $15.8 | $27.7 | $32.6 | $65.8 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, detailing a strategic shift to prioritize profitability through reduced marketing spend, leading to lower revenue but improved net loss and Adjusted EBITDA Overview and Key Operating Metrics Key Q2 2023 metrics show user declines (PMAUs 196,000, MAUs 1.1 million) but increased monetization, with ARPPU rising to $68.2 Key Operating Metrics | Metric (in thousands, except per user data) | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Gross marketplace volume (GMV) | $255,229 | $432,209 | | Paying monthly active users (PMAUs) | 196 | 421 | | Monthly active users (MAUs) | 1,068 | 2,234 | | Average revenue per paying monthly active user (ARPPU) | $68.2 | $56.8 | - The company's strategy in 2022 and 2023 has focused on driving higher efficiency from marketing investment by reducing spend on low-return engagement programs and optimizing user acquisition159 Results of Operations Q2 2023 revenue declined 44% due to reduced user acquisition and engagement marketing spend, leading to a 36% improvement in loss from operations - Q2 2023 revenue decreased by $31.6 million (44%) year-over-year, primarily due to intentional, significant cuts in user acquisition and engagement marketing spend to prioritize profitability179 - Sales and marketing expenses for Q2 2023 fell by $40.6 million (55%) year-over-year, driven by a $22.5 million reduction in user acquisition spend and a $14.3 million cut in engagement marketing182 - General and administrative costs increased by $3.2 million (12%) in Q2 2023, mainly due to higher legal fees, partially offset by lower employee-related costs from restructuring183 Non-GAAP Financial Measures Adjusted EBITDA loss improved to $20.2 million in Q2 2023 from $34.0 million in Q2 2022, reflecting enhanced operational performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | ($21,987) | ($62,611) | ($57,581) | ($212,175) | | Adjusted EBITDA | ($20,244) | ($33,994) | ($41,137) | ($96,512) | Liquidity and Capital Resources As of June 30, 2023, liquidity included $324.8 million in cash and $33.4 million in marketable securities, deemed sufficient for the next year - Principal sources of liquidity as of June 30, 2023, were $324.8 million in cash and cash equivalents and $33.4 million in marketable securities207 - After open market repurchases in 2022 and 2023, $129.7 million of the senior secured notes remained outstanding as of June 30, 2023210 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on cash and marketable securities, with foreign currency risk deemed immaterial - The company's main market risk is interest rate risk related to its $324.8 million in cash and cash equivalents and $33.4 million in marketable securities222 Item 4. Controls and Procedures Disclosure controls and procedures were ineffective as of June 30, 2023, due to material weaknesses in risk assessment, ITGCs, and accounting process controls, with remediation ongoing - Disclosure controls and procedures were deemed not effective as of June 30, 2023225 - The ineffectiveness is due to ongoing material weaknesses in three areas: Risk Assessment, Information Technology General Controls (ITGCs), and Internal Controls Over Accounting Processes227228229 - Remediation efforts for 2023 include creating a steering committee, augmenting personnel, redesigning controls around end-user liability and indirect taxes, and continuing enhancements to ITGCs and accounting process controls230232 PART II - OTHER INFORMATION This section provides disclosures on legal proceedings, risk factors, and other required information Other Information (Items 1-6) This section covers legal proceedings by reference to Note 7 and confirms no material changes to previously disclosed risk factors - For details on legal proceedings, the report refers to Note 7 of the financial statements234 - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022235