Skillz Inc. - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______

Commission file number: 001-39243

SKILLZ INC.

(Exact name of registrant as specified in its charter)

Delaware

84-4478274

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

PO Box 445

San Francisco, California

94104

(Address of Principal Executive Offices)

(Zip Code)

(415) 762-0511

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.0001 per share	SKLZ	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 1, 2021, the registrant had outstanding 339,335,182 shares of Class A common stock and 68,717,138 shares of Class B common stock.

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SKILLZ INC.

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			Page

Note Regarding Forward Looking Statements

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			41

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Mine Safety Disclosures			42
Item 5. Other Information			42
Item 6. Exhibits			43
Signatures			44

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about Skillz Inc. (“we,” “us,” “our,” or the “Company”) and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding guidance, our future results of operations or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “going to,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this report.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, as supplemented by our other Securities and Exchange Commission filings, including among other things:

•Our rapid growth may not be sustainable and depends on our ability to attract and retain end-users.

•Our business could be harmed if we fail to manage our growth effectively.

•We have a history of losses and we may be unable to achieve profitability.

•We rely on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform.

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•A limited number of games account for a substantial portion of our revenue.

•We rely on third-party service providers including cloud computing services, payment processors, and infrastructure service providers, and if we cannot manage our relationships with such providers or lose access to such services, our business, financial condition, results of operations and prospects could be adversely affected.

•Failure to maintain our brand and reputation could harm our business, financial condition and results of operations.

•The broader entertainment industry is highly competitive and our existing and potential users may be attracted to competing forms of entertainment.

•Our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business.

•Failure to obtain, maintain, protect or enforce our intellectual property rights could harm our business, results of operations and financial condition.

•Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and results of operations.

•The occurrence of a data breach or other failure of our cybersecurity.

•Failure to properly contain COVID-19 or another global pandemic in a timely manner could materially affect how we and our business partners are operating.

•Exercise of our outstanding warrants would result in dilution to our stockholders.

•The valuation of our warrants could increase the volatility in our net loss.

These statements are based on our historical performance and on our current plans, estimates and projections in light of information currently available to us, and therefore you should not place undue reliance on them. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and we undertake no obligation to update them in light of new information or future events, except as required by law.

You should carefully consider the above factors, as well as the factors discussed in other risks described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2020, as supplemented by our other Securities and Exchange Commission filings. The factors identified above should not be construed as an exhaustive list of factors that could affect our future results and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. If any of these trends, risks or uncertainties actually occurs or continues, our business, revenue and financial results could be harmed, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

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PART I

ITEM 1. FINANCIAL STATEMENTS

SKILLZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except for number of shares and par value per share amounts)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	540,308	$	262,728
Accounts receivable, net	12,725		—
Prepaid expenses and other current assets	17,309		10,491
Total current assets	570,342		273,219
Property and equipment, net	10,852		5,292
Investments in non-marketable equity securities	55,628		—
Intangible assets, net	83,241		—
Goodwill	87,230		—
Other long-term assets	3,839		3,910
Total assets	$	811,132	$	282,421
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,047	$	22,039
Accrued professional fees	—		5,699
Other current liabilities	70,157		19,618
Total current liabilities	80,204		47,356

Long-term common stock warrant liabilities	12,318		178,232
Other long-term liabilities	14,274		46
Total liabilities	106,796		225,634
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of September 30, 2021 and December 31, 2020	—		—
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 339 million and 292 million shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively; Class B common stock – 125 million shares authorized; 69 million and 78 million shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	40		37
Additional paid-in capital	1,025,017		295,065

Accumulated deficit	(320,721)		(238,315)
Total stockholders’ equity	704,336		56,787
Total liabilities and stockholders’ equity	$	811,132	$	282,421

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(1)

(Unaudited, in thousands, except for number of shares and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	102,072	$	59,955	$	275,240	$	162,392
Costs and expenses:
Cost of revenue	7,647		3,102		16,289		8,806
Research and development	13,162		4,369		30,584		13,253
Sales and marketing	114,531		73,187		310,377		172,381
General and administrative	48,376		7,861		101,092		24,336
Total costs and expenses	183,716		88,519		458,342		218,776
Loss from operations	(81,644)		(28,564)		(183,102)		(56,384)
Interest expense, net	(87)		(24)		(136)		(1,297)
Change in fair value of common stock warrant liabilities	113,601		—		81,898		—
Other income (expense), net	(22)		(14,216)		108		(20,749)
Income (loss) before income taxes	31,848		(42,804)		(101,232)		(78,430)
(Benefit) provision for income taxes	(18,933)		47		(18,826)		100
Net income (loss)	$	50,781	$	(42,851)	$	(82,406)	$	(78,530)



Net income (loss) per share attributable to common stockholders – basic	$	0.13	$	(0.14)	$	(0.22)	$	(0.27)
Weighted average common shares outstanding – basic	395,053,445		298,713,456		379,450,553		288,958,713






Net loss attributable to common stockholders – diluted	$	(62,820)	$	(42,851)	$	(164,304)	$	(78,530)
Net loss per share attributable to common stockholders – diluted	$	(0.16)	$	(0.14)	$	(0.43)	$	(0.27)
Weighted average common shares outstanding – diluted	396,030,131		298,713,456		385,451,806		288,958,713

(1) Retroactively restated for the reverse recapitalization as described in Notes 1 and 3.

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(1)

(Unaudited, in thousands, except for number of shares)


	Preferred stock			Common stock			Additional paid-in capital		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	—	$	—	286,074,923	$	29	$	108,892	$	(90,256)	$	18,665
Issuance of common stock upon exercise of stock options	—	—		829,348	—		241		—		241
Stock-based compensation	—	—		—	—		357		—		357
Net loss	—	—		—	—		—		(15,522)		(15,522)
Balance at March 31, 2020	—	—		286,904,271	29		109,490		(105,778)		3,741
Issuance of redeemable convertible Series E preferred stock	—	—		15,091,869	2		64,877		—		64,879
Issuance of common stock upon exercise of stock options	—	—		1,029,833	—		130		—		130
Issuance of common stock upon exercise of stock options with promissory note	—	—		12,700,357	1		—		—		1
Repurchase of common stock	—	—		(270,599)	—		—		(543)		(543)
Stock-based compensation	—	—		—	—		5,546		—		5,546
Net loss	—	—		—	—		—		(20,157)		(20,157)
Balance at June 30, 2020	—	—		315,455,731	32		180,043		(126,478)		53,597
Issuance of redeemable convertible Series E preferred stock	—	—		2,739,398	—		33,428		—		33,428
Issuance of common stock upon exercise of stock options	—	—		2,102,672	—		302		—		302
Issuance of common stock upon exercise of stock options with promissory note	—	—		—	—		—		—		—
Repurchase of common stock	—	—		(186,775)	—		—		(695)		(695)
Repurchase of preferred stock	—	—		(296,733)	—		—		(1,211)		(1,211)
Stock-based compensation	—	—		—	—		3,662		—		3,662
Net loss	—	—		—	—		—		(42,851)		(42,851)
Balance at September 30, 2020	—	$	—	319,814,293	$	32	$	217,435	$	(171,235)	$	46,232

Balance at December 31, 2020	—	$	—	369,797,524	$	37	$	295,065	$	(238,315)	$	56,787
Issuance of common stock upon exercise of stock options	—	—		268,426	—		12		—		12
Issuance of common stock upon exercise of warrants and other, net	—	—		8,741,863	—		172,519		—		172,519
Net cash contributions from follow-on offering	—	—		17,000,000	2		402,238		—		402,240
Stock-based compensation	—	—		—	—		10,945		—		10,945
Net loss	—	—		—	—		—		(53,592)		(53,592)
Balance at March 31, 2021	—	—		395,807,813	39		880,779		(291,907)		588,911
Issuance of common stock upon exercise of stock options	—	—		235,054	—		97		—		97
Issuance of common stock upon exercise of warrants and other, net	—	—		628,576	—		9,625		—		9,625
Stock-based compensation	—	—		—	—		15,774		—		15,774
Net loss	—	—		—	—		—		(79,595)		(79,595)
Balance at June 30, 2021	—	—		396,671,443	39		906,275		(371,502)		534,812
Issuance of common stock upon exercise of stock options	—	—		4,393,149	—		3,056		—		3,056
Issuance of common stock upon exercise of warrants and other, net	—	—		2,236,383	1		32,967		—		32,968
Issuance of common stock for business combination	—	—		4,401,633	—		66,907		—		66,907

Stock-based compensation	—	—		—	—		15,812		—		15,812
Net income	—	—		—	—		—		50,781		50,781
Balance at September 30, 2021	—	$	—	407,702,608	$	40	$	1,025,017	$	(320,721)	$	704,336

(1) Retroactively restated for the reverse recapitalization as described in Notes 1 and 3.

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
		2021		2020
Operating Activities
Net loss		$	(82,406)	$	(78,530)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,093		1,092
Stock-based compensation		42,531		9,565
Accretion of unamortized discount and amortization of issuance costs		28		548
Fair value adjustment of financial instruments		—		20,808
Impairment charge		—		3,395
Deferred income taxes		(18,825)		—
Change in fair value of common stock warrant liabilities		(81,898)		—
Changes in operating assets and liabilities:
Accounts receivable, net		975		—
Prepaid expenses and other assets		(7,217)		(3,858)

Deferred offering costs		—		(13,507)
Accounts payable		(3,445)		3,078
Accrued professional fees		(3,989)		12,199
Loss contingency accrual		11,557		—
Other liabilities		33,270		15,466
Net cash used in operating activities		(103,326)		(29,744)
Investing Activities
Purchases of property and equipment, including internal-use software		(2,068)		(3,009)
Investment in non-marketable equity securities		(54,748)		—
Business combination, net of cash acquired		(83,987)		—
Net cash used in investing activities		(140,803)		(3,009)
Financing Activities
Payments of capital lease obligations		(946)		—
Payments for debt issuance costs		—		(201)
Payments under debt agreements		—		(10,000)
Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs		402,139		—
Payments made towards offering costs		(13,221)		(653)
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs		—		76,617
Proceeds from exercise of stock options and issuance of common stock		3,166		673
Proceeds from exercise of common stock warrants, net of redemptions		130,571		—
Payments made to repurchase common stock and preferred stock		—		(2,450)
Net cash provided by financing activities		521,709		63,986
Net change in cash, cash equivalents and restricted cash		277,580		31,233
Cash, cash equivalents and restricted cash – beginning of year		265,648		28,548
Cash, cash equivalents and restricted cash – end of year		$	543,228	$	59,781
Supplemental cash flow data:
Cash paid during the period for:
Interest		$	161	$	800
Noncash investing and financing activities:

Issuance of common stock for business combination		$	67,051	$	—
Remeasurement of redeemable convertible preferred stock		$	—	$	865,952
Settlement of the Redeemable convertible Series E preferred stock forward contract liability		$	—	$	21,688
Deferred offering costs in accounts payable and accrued liabilities		$	—	$	12,795

Warrant liability reclassified to additional paid-in capital		$	84,016	$	—

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

1. Description of the Business and Basis of Presentation

Business

Skillz is a mobile eSports platform, driving the future of entertainment by accelerating the convergence of sports, video games and media. The Company’s principal activities are to develop and support a proprietary online-hosted technology platform that enables independent game developers to host tournaments and provide competitive gaming activity (“Competitions”) to end-users worldwide.

The Company was originally incorporated in Delaware on March 2, 2020 as a special purpose acquisition company under the name Flying Eagle Acquisition Corp. (“FEAC”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving FEAC and one or more businesses. On December 16, 2020 (the “Closing”), the Company consummated the merger agreement (the “Merger Agreement”) dated September 1, 2020, by and among, FEAC, Merger Sub Inc., a Delaware corporation (“Merger Sub”), Skillz Inc., a Delaware corporation (“Old Skillz”) and Andrew Paradise (the “Founder”), solely in his capacity as the representative of the stockholders of Old Skillz.

Pursuant to the terms of the Merger Agreement, a business combination between FEAC and Old Skillz was effected through the merger of Merger Sub with and into Old Skillz, with Old Skillz surviving as the surviving company and a wholly-owned subsidiary of FEAC (the “Merger” and collectively with the other transaction described in the Merger Agreement, the “FEAC Business Combination”). On the closing date of the business combination, FEAC changed its name to Skillz Inc. (the “Company” or “Skillz”) and Old Skillz changed its name to Skillz Platform Inc. The Company’s common stock is now listed on the NYSE under the symbol “SKLZ” and warrants to purchase the common stock at an exercise price of $11.50 per share were listed on the NYSE under the symbol “SKLZ.WS.”

Skillz Platform Inc. was originally formed as Professional Gaming, LLC on March 28, 2012, changed its name to Lookout Gaming, LLC on May 18, 2012, and to Skillz LLC on January 31, 2013, before converting to a Delaware corporation with the name Skillz Inc. on April 29, 2013.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).

Pursuant to the Merger Agreement, the merger between Merger Sub and Old Skillz was accounted for as a reverse recapitalization in accordance with U.S. GAAP (the “Reverse Recapitalization”). Under this method of accounting, FEAC was treated as the “acquired” company and Old Skillz was treated as the acquirer for financial reporting purposes.

Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization. The net assets of FEAC are stated at historical cost, with no goodwill or other intangible assets recorded.

Old Skillz was determined to be the accounting acquirer based on the following predominant factors:

•Old Skillz’s existing stockholders have the greatest voting interest in the Company;

•The largest individual minority stockholder in the Company is an existing stockholder of Old Skillz;

•Old Skillz’s directors represented the majority of the new board of directors of the Company;

•Old Skillz’s senior management is the senior management of the Company; and

•Old Skillz is the larger entity based on historical revenue and has the larger employee base.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The consolidated assets, liabilities and results of operations prior to the Reverse Recapitalization are those of Old Skillz. The shares and corresponding capital amounts and losses per share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio of 0.7471 established in the Business Combination.

Unaudited Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020, as filed with the SEC on May 13, 2021.

Comprehensive Loss

Through September 30, 2021, there are no components of comprehensive loss which are not included in net loss; therefore, a separate statement of comprehensive loss has not been presented.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Estimates are used in several areas including, but not limited to, stock-based compensation, valuation of Public and Private Common Stock Warrants, the fair values of goodwill and intangible assets and the useful lives of the Company’s intangible assets. The Company bases these estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.

Revenue Recognition

The Company generates substantially all its revenues by providing a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. Skillz provides developers with a software development kit (“SDK”) that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer.

The Company recognizes revenue for its services in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Revenues from Contracts with Customers

The Company applies the five-step model to achieve the core principle of ASC 606. The Company determined that its customer in the provision of its technology platform and services is the game developer. The Company’s ordinary activities consist of providing game developers services through access to its technology platform using the Skillz SDK. The SDK acts as an application programming interface enabling communication of data between Skillz and the game developers, which when integrated with the developer’s game content, facilitates end-user registration into Competitions, managing and hosting end-user Competition accounts, matching players of similar skill levels, collecting end-user entry fees, distributing end-user prizes,

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

resolving end-user disputes pertaining to their participation in Competitions, and running third-party marketing campaigns (“Monetization Services”).

The Company provides Monetization Services to game developers enabling them to offer competitive games to their end-users. These activities are not distinct from each other as the Company provides an integrated service enabling the game developers to provide the competitive game service to the end-users, and as a result, they do not represent separate performance obligations. The Company is entitled to a revenue share based on total entry fees for paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide the Monetization Services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash deposits received from end-users. End-user incentives are not paid for by game developers. In addition, the Company reduces revenue for end-user incentives which are treated as a reduction of revenue.

The Company collects the entry fees and related charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is not subject to significant judgment.

Revenue is recognized at the time the performance obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that the Company expects to receive in exchange for the Monetization Services. The Company recognizes revenue upon completion of a game, which is when its performance obligation to the game developer is satisfied. The Company does not have contract assets or contract liabilities as the payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, the Company has the right to receive payment for the services rendered. The Company’s agreements with game developers can generally be terminated for convenience by either party upon thirty days prior written notice, and in certain of our larger developer agreements, the developer, if required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition does not extend beyond the contractual notification period. The Company does not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of September 30, 2021 and 2020.

Games provided by two developer partners accounted for 43% and 37% of the Company’s revenue in the three months ended September 30, 2021 and 56% and 31% of the Company’s revenue in the three months ended September 30, 2020. Games provided by two developer partners accounted for 43% and 39% of the Company’s revenue in the nine months ended September 30, 2021 and 63% and 25% of the Company’s revenue in the nine months ended September 30, 2020. In the three and nine months ended September 30, 2021 and 2020, the Company generated less than 12% and 10% of its revenue from users outside of North America, respectively.

End-User Incentive Programs

To drive traffic to the platform, the Company provides promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction of revenue at the later of when revenue is recognized or when the Company pays or promises to pay the incentive. Promotions and incentives recorded as sales and marketing expense are recognized when the related cost is incurred by the Company. In either case, the promotions and incentives are recognized when they are used by end-users to enter into a paid Competition.

•Marketing promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based on the Company’s agreement with its developers, the Company considers that the game developers have a valid expectation that certain incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements.

An example of an incentive for which the game developer has a valid expectation is Ticketz, which are a virtual currency earned for every Competition played based on the amount of the entry fee (“Ticketz”). Ticketz can be

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

redeemed for prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). Another example is initial deposit Bonus Cash which is a promotional incentive that can be earned in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future paid entry fee Competitions and cannot be withdrawn by end-users.

For the three months ended September 30, 2021 and 2020, the Company recognized a reduction of revenue of $18.7 million and $13.0 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2021 and 2020, the Company recognized a reduction of revenue of $54.9 million and $36.6 million, respectively, related to these end-user incentives.

•Marketing promotions accounted for as sales and marketing expense. When the Company concludes that the game developers do not have a valid expectation that the incentive will be offered, the Company records the related cost as sales and marketing expense. The Company’s assessment is based on an evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements. These promotions are offered to end-users to draw, re-engage, or generally increase end-users’ use of the Company’s platform.

An example of this type of incentive is limited-time Bonus Cash offers, which are targeted to specific end-users, typically those who deposit more frequently or have not made a deposit recently, via email or in-app promotions. The Company targets groups of end-users differently, offering specific promotions it thinks will best stimulate engagement. Similar to Bonus Cash earned from a redemption of Ticketz or an initial deposit, limited-time Bonus Cash can only be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users. The Company also hosts engagement marketing leagues run over a period of days or weeks, which award league prizes in the form of cash or luxury goods to end-users with the most medals at the end of the league. End-users accumulate medals by winning Skillz enabled paid entry fee Competitions. Skillz determines whether or not to run a league, what prizes should be awarded, over what time period the league should run, and to which end-users the prizes should be paid, all at its discretion. The league parameters vary from one league to the next and are not reasonably known to the game developers. League prizes in the form of cash can be withdrawn or used by end-users to enter into future paid entry fee Competitions.

For the three months ended September 30, 2021 and 2020, the Company recognized sales and marketing expense of $47.0 million and $24.2 million, respectively, related to these end-user incentives. For the nine months ended September 30, 2021 and 2020, the Company recognized sales and marketing expense of $122.6 million and $61.4 million, respectively, related to these end-user incentives. Including all other engagement marketing programs, total engagement marketing included in sales and marketing expense was $50.0 million and $26.6 million for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020 total engagement marketing was $130.9 million and $67.2 million, respectively.

Refunds

From time to time, the Company issues credits or refunds to end-users that are unsatisfied by the level of service provided by the game developer. There is no contractual obligation for the Company to refund such end-users nor is there a valid expectation by the game developers for the Company to issue such credits or refunds to end-users on their behalf. The Company accounts for credits or refunds, which are not recoverable from the game developer, as sales and marketing expenses when incurred.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash and money market funds with maturities of three months or less when purchased.

Restricted cash maintained under an agreement that legally restricts the use of such funds is not included within cash and cash equivalents and is reported within other long-term assets. Restricted cash is comprised of $2.9 million which is pledged in the form of a letter of credit for the Company’s new headquarters in San Francisco.

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

A reconciliation of the Company’s cash and cash equivalents in the Condensed Consolidated Balance Sheet to cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows is as follows:


	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	540,308	$	262,728
Restricted cash included in other long-term assets	2,920		2,920
Cash, cash equivalents and restricted cash	$	543,228	$	265,648

Accounts Receivable, Net

Accounts receivable, net, is comprised of trade accounts receivable recorded at the invoiced amounts for programmatic media campaigns, net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding. At September 30, 2021, the Company’s reserve recorded for uncollectible accounts receivable was not significant to the condensed consolidated financial statements.

Fair Value Measurement

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2 — Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3 — Unobservable inputs reflecting management’s estimate of assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Business Combinations

The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. The Company uses the acquisition method of accounting and allocates the purchase price, including the fair value of any non-cash consideration, to the identifiable assets and liabilities of the relevant acquired business at their acquisition date fair values. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Determining the fair value of assets acquired and liabilities assumed requires the Company to perform valuations with significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expense in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level, which is the same or one level below the operating segment. The Company has one operating segment: Skillz Platform, Inc. The Company identifies its reporting unit by assessing whether there are components of its operating segment which constitute businesses for which discrete financial information is available and reviewed regularly by segment managers. The Company tests goodwill for impairment at least annually during the fourth fiscal quarter, or more frequently if indicators of impairment exist during the fiscal year. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, loss of key customers, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.

When testing goodwill for impairment, the Company first performs a qualitative assessment. If the Company determines it is not more likely than not a reporting unit’s fair value is less than its carrying amount, then no further analysis is necessary. If the Company determines it is more likely than not that a reporting unit’s fair value is less than its carrying amount, then the Company compares the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If, however, the fair value of the reporting unit is less than its carrying amount, then such balance would be recorded as an impairment loss. Any impairment loss is limited to the carrying amount of goodwill allocated to the reporting unit.

Impairment of Long-Lived Assets

Long-lived assets consist of property, plant equipment and intangible assets with estimable useful lives subject to depreciation and amortization. Intangible assets consist of purchased intangible assets including developed technology, customer relationships, trademarks and tradenames and are amortized over their useful lives ranging from one to eight years using the straight-line method of amortization. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.

Investment in Non-Marketable Equity Securities

The Company has elected to measure its existing investments in non-marketable equity securities at cost, less impairments, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for the identical or similar securities of the same issuer (“measurement alternative”). This election is reassessed each reporting period to determine whether non-marketable equity securities have a readily determinable fair value, in which case they would no longer be eligible for this election. The Company evaluates its non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. Impairment indicators might include, but would not necessarily be limited to, a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, a significant adverse change in the regulatory, economic, or technological environment of the investee, a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar securities for an amount less than the carrying amount of the investments in those securities. If an impairment exists, a loss is recognized in the consolidated statements of operations for the amount by which the carrying value exceeds the fair value of the investment. Gains and losses resulting from the remeasurement of non-marketable equity securities, including impairment, are recorded through other income (expense), net in the consolidated statement of operations. The Company separately presents investments in non-marketable equity securities within long-term assets on the consolidated balance sheets.

Advertising and Promotional Expense

Advertising and promotional expenses are included in sales and marketing expenses within the consolidated statements of operations and are expensed when incurred, not including marketing promotions related to the Company’s end-user incentive programs. Advertising expenses were $55.2 million and $43.6 million during the three months ended September 30, 2021 and 2020, respectively, and $156.6 million and $96.2 million during the nine months ended September 30, 2021 and 2020, respectively.

Redeemable Convertible Preferred Stock

Prior to the Business Combination, preferred stock that was redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the Company was classified outside of permanent equity. Convertible preferred stock that was probable of becoming redeemable in the future was recorded at its maximum redemption amount at each balance sheet date, with adjustments to the redemption amount recorded through equity.

All redeemable convertible preferred stock previously classified outside of permanent equity was retroactively adjusted, converted into common stock, and reclassified to permanent equity as a result of the Business Combination. Additionally, changes to the redemption values of the redeemable convertible preferred stock were eliminated as a result of the retroactive adjustment. The Company recorded changes to the redemption value of its redeemable convertible preferred stock of $866.0 million in the year-to-date period ended September 30, 2020. The changes to the redemption values of the redeemable convertible preferred stock were previously accounted for as adjustments to net loss available to common stockholders for each of the respective periods ended. For further details regarding the accounting for the Business Combination, see Note 3.

Public and Private Common Stock Warrant Liabilities

As part of FEAC’s initial public offering, FEAC issued to third party investors 69.0 million units, consisting of one share of Class A common stock of FEAC and one-fourth of one warrant, at a price of $10.00 per unit. Each whole warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously with the closing of FEAC’s initial public offering, FEAC completed the private sale of 10,033,333 warrants to FEAC’s sponsor at a purchase price of $1.50 per warrant (the “Private Warrants”). In connection with the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 Private Warrants. Each Private Warrant allows the sponsor to

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

purchase one share of Class A common stock at $11.50 per share. Subsequent to the Business Combination, zero Public Warrants and 4,535,728 Private Warrants remained outstanding as of September 30, 2021.

The Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable until after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

The Company evaluated the Public and Private Common Stock Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, (“ASC 815-40”), and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public and Private Common Stock Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of the Company’s Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company concluded that the Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of operations at each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they were valued based on their trading price as of each reporting date.

The Private Warrants were valued using the Black-Scholes-Merton Option (“BSM”) pricing model that is based on the individual characteristics of the warrants on the valuation date, which include the Company’s stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including its long-term debt, preferred stock and stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives and freestanding derivative financial instruments that are classified as assets or liabilities are recognized at fair value with changes in fair value recognized as a component of other income (expense), net in the consolidated statements of operations.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based awards based on estimated grant-date fair values recognized over the requisite service period. For awards that vest solely based on a service condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. The compensation expense related to awards with performance conditions is recognized over the requisite service period when the performance conditions are probable of being achieved. The compensation expense related to awards with market conditions is recognized on an accelerated attribution basis over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved, and is not reversed if the market condition is not satisfied. See Note 9 for more

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(Unaudited, amounts in tables are in thousands, unless otherwise noted)

information. The Company accounts for forfeitures as they occur. Stock-based awards granted to employees are primarily stock options.

The fair value of stock options that vest solely based on a service condition is determined by the BSM pricing model on the date of grant. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the BSM model, including the deemed fair value of common stock, expected term, expected volatility, risk-free interest rate, and dividend yield. These judgments are made as follows:

•Fair value of common stock —Subsequent to the Business Combination, the fair value of the Company’s common stock is based on the closing market price on the date of grant. Prior to the Business Combination, the absence of an active market for the Company’s common stock required the Company to estimate the fair value of common stock for purposes of granting stock options and for determining stock-based compensation expense for the periods presented.

The Company considered numerous factors in assessing the fair value of common stock prior to the Business Combination, including:

•The results of contemporaneous unrelated third-party valuations of the Company’s common stock

•The prices of the recent redeemable convertible preferred stock sales by the Company to investors

•The rights, preferences, and privileges of preferred stock relative to those of common stock

•Market multiples of comparable public companies in the industry as indicated by their market capitalization and guideline merger and acquisition transactions

•The Company’s performance and market position relative to competitors, which may change from time to time

•The Company’s historical financial results and estimated trends and prospects for the Company’s future performance

•The economic and competitive environment

•The financial condition, results of operations, and capital resources

•The industry outlook

•The valuation of comparable companies

•The likelihood and timeline of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions

•Any adjustments necessary to recognize a lack of marketability for the Company’s common stock

•Precedent sales of or offers to purchase the Company’s capital stock

•Expected term — The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

•Expected volatility — Given the limited market trading history prior to the Business Combination and no public market for the Company’s shares prior to the Business Combination, the expected volatility rate is based on an average historical stock price volatility of comparable publicly-traded companies in the industry group.

•Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option.

•Expected dividend yield — The Company has not paid and does not expect to pay dividends. Consequently, the Company uses an expected dividend yield of zero.

For awards with market conditions, the Company determines the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of a qualifying event, expected capital raise percentage and market capitalization milestones. Given the limited market trading history subsequent to the Business Combination and no public market for the Company’s shares prior to the Business Combination, the Company estimates the volatility of common stock on the date of grant based on the weighted

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average historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimates the expected term based on various exercise scenarios, as these awards are not considered “plain vanilla.” The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates the expected date of a qualifying event, the expected capital raise percentage and the expected achievement date of market capitalization milestones based on management’s expectations at the time of measurement of the award’s value.

Segments

As a result of the acquisition of Aarki, the Company is currently evaluating the impact to its operating and reportable segment based on how the business will be managed going forward. Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. During the three and nine months ended September 30, 2021, the Company continued to operate as a single operating and reportable segment as the CODM reviews financial information presented on a consolidated basis, at the Company level, for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.

As of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020, the Company did not have material revenue earned or assets located outside of the United States.

Recently Issued Accounting Pronouncements Not Yet Adopted

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. Effective as of December 31, 2021, the Company is expected to become a large accelerated filer and is expected to cease to be an EGC. As a result, the Company will no longer be able to use the extended transition period for complying with new or revised accounting standards.

In January 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. ASU 2020-01 clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The amendments should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Company does not expect the adoption of this standard to result in a material impact to the consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for public companies, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s fiscal year. The Company does not expect the adoption of this standard to result in a material impact to the consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with

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the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of operations as the costs related to the hosting fees. For public business entities, this standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, this standard is effective for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted for all entities, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. The Company will be required to adopt this standard in its annual period ending December 31, 2021 and is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 (Topic 326), Financial Instruments — Credit Losses. ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13 for non-public companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company will be required to adopt this standard in its annual report for the period ending December 31, 2021 and does not expect the adoption of this standard to result in a material impact to the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases, and issued subsequent amendments to the initial guidance or implementation guidance including ASU 2017-13, 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively, including ASU 2016-02, “ASC 842”), which supersedes the guidance in topic ASC 840, Leases. The new standard requires lessees to classify leases as either finance or operating based on whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether related expenses are recognized based on the effective interest method or on a straight-line basis over the term of the lease. For any leases with a term of greater than 12 months, ASU 2016-02 requires lessees to recognize a lease liability for the obligation to make the lease payments arising from a lease, and a right-of-use asset for the right to use the underlying asset for the lease term. An election can be made to account for leases with a term of 12 months or less similar to existing guidance for operating leases under ASC 840. The new standard will also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For non-public entities, ASU No. 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is in the final stage of its assessment of the new standard and is currently evaluating the quantitative impact of adoption, and the related disclosure requirements. The Company expects that the adoption will result in the recognition of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on the Company’s balance sheet. The Company does not expect the adoption of Topic 842 to have a material impact to the statements of operations or to have any impact on its cash flows from operating, investing, or financing activities.

3. Business Combinations

Business Combination with Flying Eagle Acquisition Corp.

As discussed in Note 1, on December 16, 2020, the Company consummated the Merger Agreement dated September 1, 2020, with Old Skillz surviving the merger as a wholly owned subsidiary of the Company.

Shares of Old Skillz common stock issued and outstanding were canceled and converted into the right to receive 0.7471 shares (the "Exchange Ratio") of common stock. Unless otherwise stated, the Exchange Ratio was applied to the number of shares and share prices of Old Skillz throughout these consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

At the effective time of the FEAC Business Combination (the “Effective Time”), and subject to the terms and conditions of the Merger Agreement, holders of 359,518,849 shares of Old Skillz (“Stock Election Shares”) received merger consideration in the form of 191,932,860 shares of the Company’s Class A common stock and 76,663,551 shares of the Company’s Class B common stock, and holders of 75,786,931 shares of Old Skillz (“Cash Election Shares”) received cash consideration of $566,204,152.

Pursuant to the Merger Agreement, Eagle Equity Partners II, LLC (the “Sponsor”) delivered 10,000,000 of its shares of FEAC Class B common stock into escrow that were subject to forfeiture if certain earnout conditions described more fully in the Merger Agreement were not satisfied. The earnout conditions have been fully satisfied and, in March 2021, the Earnout Shares (as defined below) were released from escrow in accordance with the terms of the Merger Agreement. When the earnout conditions were fully satisfied, 5,000,000 of such shares were released to the Sponsor in the form of shares of the Company’s Class A common stock (the “Sponsor Earnout Shares”), and the other 5,000,000 shares were released to the Old Skillz stockholders (the “Skillz Earnout Shares”, and collectively with the Sponsor Earnout Shares, the “Earnout Shares”), who received shares of the Company’s common stock as a result of the FEAC Business Combination in the form of shares of Class A common stock of the Company (other than the Founder and a trust for the benefit of his family members, who received shares of Class B common stock of the Company). The Earnout Shares are accounted for as equity classified equity instruments, were included as merger consideration as part of the Reverse Recapitalization, and recorded in additional paid-in capital.

In connection with the FEAC Business Combination, certain institutional investors (the “Investors”) purchased from the Company an aggregate of 15,853,052 shares of Class A common stock (the “Private Placement”), for a purchase price of $10.00 per share and an aggregate purchase price of $158.5 million (the “Private Placement Shares”), pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into effective as of September 1, 2020.

The FEAC Business Combination is accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, FEAC was treated as the “acquired” company and Old Skillz is treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the FEAC Business Combination was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization. The net assets of FEAC were stated at historical cost, with no goodwill or other intangible assets recorded.

Upon the closing of the FEAC Business Combination, the Company's certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of all classes of capital stock to 635,000,000 shares, $0.0001 par value per share, of which, 500,000,000 shares are designated as Class A common stock, 125,000,000 shares are designated as Class B common stock, and 10,000,000 shares are designated as preferred stock.

Acquisition of Aarki, Inc.

On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and acquired 100% of the outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company transferred $162.3 million in consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform will result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers. The financial results of Aarki have been included in the Company’s consolidated financial statements since the date of the acquisition.

The Company has included the financial results of Aarki in the consolidated financial statements from the date of acquisition. During the three and nine months ended September 30, 2021, Aarki contributed revenue of $5.4 million and a net loss of $2.8 million.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The following table summarizes the fair value of the purchase price to acquire Aarki:


Description	Amount
Cash	$	95,296
Common stock issued (1)	67,051
Total purchase price	$	162,347

_______________

(1) The fair value of the Skillz Class A Common Stock issued in the merger is based on 4,401,663 shares issued on the July 16, 2021 acquisition date at the closing price of the Company’s common stock on such date of $15.23 per share.

The following is an allocation of the purchase price as of July 16, 2021, the acquisition closing date, based on an estimate of the fair value of the assets acquired and liabilities assumed by the Company in the acquisition:


Description	Amount
Cash and cash equivalents	$	11,309
Accounts receivable, net	13,700
Prepaid expenses and other current assets	356
Property, plant and equipment, net	5,075
Intangible assets, net	86,800
Other long-term assets	91
Accounts payable	(445)
Accrued professional fees	(3,145)
Other current liabilities	(16,471)
Deferred tax liabilities	(20,460)
Other long-term liabilities	(1,693)
Identifiable net assets acquired	75,117
Goodwill	87,230
Total purchase price	$	162,347

The following is a summary of identifiable intangible assets acquired and their expected lives:


Type	Weighted-average useful life (in years)	Fair Value
Developed technology	8	$	60,400
Customer relationships	3	26,200
Trademark and trade name	0.3	200
Total identifiable intangible assets acquired		$	86,800

Assumptions in the Allocation of Purchase Price

The Company prepared the purchase price allocation for Aarki and considered or relied upon reports of a third party valuation expert to calculate the fair value of identifiable intangible assets. Estimates of fair value require management to make significant estimates and assumptions. The goodwill recognized is attributable primarily to the acquired workforce, expected cost-saving synergies and other benefits that the Company believes will result from use of the Aarki technology-driven marketing platform with the operations of Skillz. The goodwill recorded in connection with the Aarki acquisition is not expected to be deductible for tax purposes.

Certain liabilities included in the purchase price allocation are based on management’s best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. Updates to the

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

valuations of certain assets acquired and liabilities assumed and including our evaluation of certain tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. The Company expects to complete the purchase price allocations within 12 months of the acquisition date.

The fair value of the identified intangible assets acquired from the Aarki acquisition was estimated using income approaches. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the developed technology was determined using the multi-period excess earnings method (“MPEEM”). MPEEM is an income approach to the fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash-flow stream. MPEEM isolates the expected future discounted cash-flow stream to its net present value. Significant factors considered in the calculation of the developed technology intangible asset were the projected revenue, gross margins, operating expenses, technology migration curve and research and development costs attributed to maintenance of the acquired technology, along with the discount rate used to derive the estimated present value of future cash flows. The fair value of customer relationships was estimated using the "with and without" income approach, which measures the difference between cash flows generated assuming the existence of the current customer relationships and the cash flows assuming those relationships do not exist and are replaced over time. Estimated costs on projected revenues, excluding acquired contract backlog, were made using historical data pertaining to sales to new and existing customers. The Company valued the finite-lived trademark and trade name using the relief-from-royalty method income approach. The Company applied judgment which involved the use of significant assumptions with respect to its income forecast such as the level and timing of future cash flows. We believe the level and timing of expected future cash flows appropriately reflects market participant assumptions.

Transaction Costs

The Company incurred transaction costs of approximately $6.0 million and $7.0 million for the three and nine months ended September 30, 2021, respectively, in connection with the business combination for legal, accounting and other professional services fees. These costs are included in the general and administrative expenses on the consolidated statement of operations. Direct and incremental transaction costs related to equity offerings that would not otherwise have been incurred are treated as a reduction of the cash proceeds and are deducted from the Company’s additional paid-in capital. Accordingly, $0.1 million was incurred related to equity issuance costs for the three and nine months ended September 30, 2021 in connection with the issuance of Skillz Class A shares to the Aarki stockholders.

Pro-Forma Financial Information

The financial information in the table below summarizes the combined results of operations of the Company and Aarki, on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2020 or of results that may occur in the future.

The table below presents the pro forma revenue and net loss of the Company for the three and nine ended September 30, 2021 and 2020. These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. The pro forma results include adjustments primarily related to purchase accounting adjustments, acquisition costs and other non-recurring charges incurred which are included in the earliest period presented.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	103,416	$	67,003	$	290,420	$	183,440
Net loss	$	38,684	$	(44,898)	$	(97,557)	$	(77,291)

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

4. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2021 and December 31, 2020:


	September 30,		December 31,
	2021		2020
Credit card processing reserve	$	8,638	$	5,854
Prepaid expenses	4,979		3,772
Other current assets	3,692		865
Prepaid expenses and other current assets	$	17,309	$	10,491

Property and Equipment, Net

Property and equipment consisted of the following as of September 30, 2021 and December 31, 2020:


	September 30,		December 31,
	2021		2020
Capitalized internal-use software	$	6,569	$	6,167
Computer equipment and servers	5,416		631
Furniture and fixtures	360		184
Leasehold improvements	114		114
Construction in progress	2,877		1,037
Total property and equipment	15,336		8,133
Accumulated depreciation and amortization	(4,484)		(2,841)
Property and equipment, net	$	10,852	$	5,292

Depreciation and amortization expense related to property and equipment was $4.5 million and $0.5 million during the three months ended September 30, 2021 and 2020, respectively, and $4.6 million and $1.1 million during the nine months ended September 30, 2021 and 2020, respectively.

Intangible Assets, Net

The components of intangible assets consisted of the following as of September 30, 2021:


	Weighted Average Remaining Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	7.79	$	60,400	$	(1,573)	$	58,827
Customer relationships	2.79	26,200		(1,819)		24,381
Trademark and trade name	0.04	200		(167)		33
Intangible assets, net		$	86,800	$	(3,559)	$	83,241

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The following table sets forth the activity related to finite-lived intangible assets:


	Nine Months Ended September 30,
	2021
Beginning balance at December 31, 2020	$	—
Additions	86,800
Amortization	(3,559)
Ending balance at September 30, 2021	$	83,241

The following table summarizes amortization expense associated with finite-lived intangible assets recognized in the consolidated statements of operations for the three and nine months ended September 30, 2021 as follows:


	Three and Nine Months Ended September 30,
	2021
Cost of revenue	$	1,573
Sales and marketing	1,819
General and administrative	167
Total amortization expense	$	3,559

The following table outlines the estimated future amortization expense related to finite intangible assets as of September 30, 2021:


	Amount
2021	$	4,104
2022	16,283
2023	16,283
2024	12,281
2025	7,550
Thereafter	26,740
Total	$	83,241

Goodwill

The following table presents details of the Company’s goodwill for the nine months ended September 30, 2021:


	Goodwill
Balance at December 31, 2020	$	—
Goodwill acquired	87,230
Balance as of September 30, 2021	$	87,230

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Other Current Liabilities

Other current liabilities consisted of the following as of September 30, 2021 and December 31, 2020:


	September 30,		December 31,
	2021		2020
Accrued sales and marketing expenses	$	22,438	$	7,204
Accrued compensation	14,458		3,825
Accrued publisher fees	12,736		—
End-user liability, net	4,358		2,789
Accrued developer revenue share	1,505		907
Short-term lease obligations	3,956		—
Other accrued expenses	10,706		4,893
Other current liabilities	$	70,157	$	19,618

5. Fair Value Measurements

As of September 30, 2021 and December 31, 2020, the recorded values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of the instruments.

Cash and cash equivalents held by the Company as of September 30, 2021 and December 31, 2020 were $540.3 million and $262.7 million, respectively, and were comprised of cash on hand and money market funds classified within Level 1 of the fair value hierarchy.

Public and Private Common Stock Warrants


	Fair Value Measurements as of September 30, 2021
Liabilities included in:	Level 1		Level 2		Level 3		Total

Private Common Stock Warrants	—		—		12,318		12,318
Total fair value	$	—	$	—	$	12,318	$	12,318


	Fair Value Measurements as of December 31, 2020
Liabilities included in:	Level 1		Level 2		Level 3		Total
Public Common Stock Warrants	$	124,545	$	—	$	—	$	124,545
Private Common Stock Warrants	—		—		53,687		53,687
Total fair value	$	124,545	$	—	$	53,687	$	178,232

The Public Warrants were classified within Level 1 as they are publicly traded and had an observable market price in an active market. The Private Warrants were classified within Level 3 as they were valued based on a BSM pricing model, which involved the use of certain unobservable inputs, such as expected volatility estimated based on the average historical stock price volatility of comparable companies. As of December 31, 2020, the fair value of the Private Warrants liability was $53.7 million. During the three and nine months ended September 30, 2021, the fair value of the Private Warrants liability decreased by $48.4 million and $41.4 million, respectively. As of September 30, 2021, the fair value of the Private Warrants liability was $12.3 million.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

6. Investments in Non-Marketable Equity Securities

The Company’s non-marketable equity securities are investments in privately held companies without readily determinable fair values. The carrying value of the Company’s investments without readily determinable fair values was $55.6 million as of September 30, 2021 and is classified within “Investments in non-marketable equity securities” in our consolidated balance sheets. The Company did not have any investments without readily determinable fair value as of December 31, 2020. The Company did not record any adjustments to the carrying value of its non-marketable equity securities accounted for under the measurement alternative, and did not recognize any gains or losses related to the sale of non-marketable equity securities in the three and nine months ended September 30, 2021.

7. Commitments and Contingencies

Legal Matters

The Company is a party to certain claims, suits, and proceedings which arise in the ordinary course and conduct of our business and has certain unresolved claims pending, the outcomes of which are not determinable at this time. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s opinion, resolution of pending matters is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s financial position, as of September 30, 2021. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the results of operations, cash flows, or financial position in a particular period. However, based on the information known by the Company, except as set forth herein, any such amount is either immaterial or it is not possible to provide an estimated range of any such possible loss.

On May 15, 2019, a former employee of the Company filed a suit against the Company in California for claims including breach of contract, retaliation and wrongful termination. The case was tried in September 2021 and the jury ruled in favor of the former employee and rendered a verdict against the Company for $11.6 million in compensatory damages. Accordingly, the Company has recorded a loss contingency accrual and corresponding general and administrative expense for this amount. The Company believes that the jury verdict is the result of significant trial error and seeks to overturn the verdict in post-trial motions before the court and, if necessary, appeal the matter.

8. Common Stock Warrants

As of September 30, 2021, the Company had zero Public Warrants and 4,535,728 Private Warrants outstanding. During the nine months ended September 30, 2021, 11,361,683 and 480,938 of Public Warrants and Private Warrants, respectively, were exercised for total proceeds of $130.6 million.

As part of FEAC’s initial public offering, 17,250,000 Public Warrants were sold. The Public Warrants entitle the holder thereof to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustments. The Public Warrants were only exercisable for a whole number of shares of Class A common stock. No fractional shares were issued upon exercise of the warrants. The Public Warrants had an expiration date of 5:00 p.m. New York City time on December 16, 2025, or earlier upon redemption or liquidation. The Public Warrants were listed on the NYSE under the symbol “SKLZ.WS.”

The Company was permitted to call the Public Warrants for redemption starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than 30 days’ prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of Class A common stock equaled or exceeded $18.00 per share for any $20.00 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sent the notice of redemption to the warrant holders, provided there was an effective registration statement covering the shares of Class A common stock issuable upon exercise of the warrants at such time.

On July 16, 2021, the Company announced the redemption of all Public Warrants that remained outstanding on August 16, 2021. On August 16, 2021, 5,888,294 Public Warrants remained unexercised at 5pm New York City time, and such warrants expired and were no longer exercisable, and the holders of those Public Warrants are entitled to receive only the redemption price of $0.01 per warrant.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Simultaneously with FEAC’s initial public offering, FEAC consummated a private placement of 10,033,333 Private Placement Warrants with FEAC’s sponsor. In connection with the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 private placement warrants. Each outstanding Private Placement Warrant is exercisable for one share of Class A common stock at a price of $11.50 per share, subject to adjustment.

The Private Warrants are identical to the Public Warrants, except that the Private Warrants and the shares of Class A common stock issuable upon exercise of the Private Warrants will not be transferable, assignable or salable until 30 days after the completion of a business combination, subject to certain limited exceptions. Additionally, the Private Warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’ permitted transferees. If the Private Warrants are held by someone other than their initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

9. Stockholders’ Equity

Common Stock

The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, expect with respect to voting and conversion. Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to 20 votes per share. Shares of Class B common stock are convertible into an equivalent number of shares of Class A common stock and generally convert into shares of Class A common stock upon transfer. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid on a pro rata basis. On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock and Class B common stock.

As of September 30, 2021, the Company has authorized a total of 635 million shares, consisting of 500 million shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), 125 million shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), and 10 million shares of preferred stock, par value $0.0001 per share (“preferred stock”).

In March 2021, the Company completed an underwritten public offering of its Class A common stock and issued 17,000,000 shares of Class A common stock, for an aggregate purchase price of $408.0 million, before issuance costs of $5.9 million. In connection with the public offering, certain stockholders of the Company sold an aggregate of 19,800,000 shares, including the full exercise of the underwriters’ option to purchase an additional 4,800,000 additional shares. The purchase price per share, net of the underwriter discount, was $23.34. The Company incurred transaction costs of $6.8 million in connection with this sale of shares by certain stockholders, which was recorded as expense during the quarter.

10. Stock-Based Compensation

The following table summarizes stock-based compensation expense recognized for the three and nine months ended September 30, 2021 and 2020 as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Research and development	$	1,814	$	523	$	5,237	$	1,544
Sales and marketing	1,637		468		6,025		1,542
General and administrative	12,361		2,671		31,269		6,479
Total stock-based compensation expense	$	15,812	$	3,662	$	42,531	$	9,565

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

Equity Incentive Plans

Skillz Inc. 2020 Omnibus Incentive Plan

In December 2020, the Board of Directors of the Company adopted the Skillz Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective upon consummation of the Business Combination and succeeds the Company’s legacy equity incentive plans. Under the 2020 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are exercisable over a maximum term of 10 years from the date of grant. Restricted stock units (“RSUs”) are also granted under the 2020 Plan. These awards typically have a cliff vesting period of 1 year and continue to vest quarterly thereafter. The 2020 Plan also permits the Company to grant stock-based awards with performance or market conditions. In connection with the closing of the Business Combination, the Company entered into certain option agreements that include vesting conditions contingent upon the attainment of volume weighted average price targets related to the Company’s Class A common stock on the NYSE.

The 2020 Plan permits the Company to deliver up to 47,841,859 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 15,000,000 shares which may be of Class A and/or Class B common stock, 24,669,278 shares of Class A common stock and 8,172,581 shares of Class B common stock. The total number of shares of Class A common stock and Class B common stock that will be reserved and that may be issued under the 2020 Plan will automatically increase on the first trading day of each calendar year, beginning with calendar year 2021, by a number of shares equal to five percent 5% of the total number of shares of Class A common stock and Class B common stock, respectively, outstanding on the last day of the prior calendar year.

Stock Options and Restricted Stock Units

Stock option and RSU activity during the nine months ended September 30, 2021 is as follows (in thousands, except for share, per share, and contractual term data):


		Options Outstanding						Restricted Stock Units
	Number of Shares Available for Issuance Under the Plan	Number of Shares Outstanding Under the Plan	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value		Number of Plan shares outstanding	Weighted-Average Grant Date Fair Value per share
Balance at December 31, 2020	35,500,603	38,404,493	$	5.89	8.27	$	542,074	341,256	$	17.68
Options and restricted stock units granted	(3,743,376)	64,839	12.58					3,678,537	20.28
Options exercised and restricted stock units released	—	(4,896,629)	0.65					(20,303)	17.48
Options and restricted stock units canceled	4,039,561	(3,390,960)	1.22					(648,601)	22.46
Balance at September 30, 2021	35,796,788	30,181,743	$	7.24	7.31	$	172,203	3,350,889	$	19.61

Exercisable at December 31, 2020		14,248,234	$	0.18	6.45	$	282,364
Exercisable at September 30, 2021		13,459,112	0.16		5.37	129,935
Unvested at December 31, 2020		24,156,259	9.25		9.34	259,710
Unvested at September 30, 2021		16,722,631	12.93		8.87	42,268

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

The number of unvested stock options as of September 30, 2021 and December 31, 2020 does not include 9.1 million and 13.3 million shares of restricted common stock, respectively, previously issued upon the early exercise of grants by certain executives.

The number of RSUs granted does not include 0.2 million performance based RSUs which the Company issued in 2021 and 2020, as the performance-based RSUs are not deemed granted for accounting purposes. The number of RSUs granted excludes 16.1 million of performance stock units granted during September 2021 to the Chief Executive Officer. Refer to the 2021 CEO Performance Award disclosure below for further details.

As of September 30, 2021, unrecognized stock-based compensation expense related to unvested stock options, restricted common stock, RSUs, performance-based RSUs and performance stock units was $233.7 million. The weighted-average period over which such compensation expense will be recognized is 3.52 years.

On May 4, 2021, the Company entered into a transition and release agreement providing for Mr. Henry’s retirement from his position as Chief Financial Officer (“CFO”) of the Company, effective June 20, 2021. As part of the transition and release agreement, certain stock options of the CFO were modified to vest through August 10, 2021, the separation date, based on Mr. Henry’s continuous service to the Company in an executive advisor role from June 21, 2021 through the separation date. This modification resulted in $6.4 million of incremental stock-based compensation expense recorded in the condensed consolidated statement of operations through the third quarter of 2021. The Company recognized $2.7 million and $6.4 million of this expense for the three and nine months ended September 30, 2021, respectively.

The aggregate intrinsic value of options exercised was $47.8 million and $20.4 million during the three months ended September 30, 2021 and 2020, respectively, and $59.6 million and $47.8 million during the nine months ended September 30, 2021 and 2020, respectively.

The assumptions used to estimate the fair value of stock options granted and the resulting fair values for the three and nine months ended September 30, 2021 and 2020 were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021(1)	2020	2021(1)	2020
Expected volatility	48.71%	48.65% - 48.9%	48.71%	47.24% - 48.93%
Risk-free interest rate	0.02%	0.35% - 0.41%	0.02%	0.35% - 1.44%
Expected term (in years)	0.25	6.00 - 6.1	0.25	6.00 - 6.25
Expected dividend yield	—	—	—	—
Weighted average estimated fair value of stock options granted during the period	$15.63	$7.95	$15.63	$2.98

(1)For the three and nine months ended September 30, 2021, the above assumptions were used to estimate the fair value of certain stock options previously granted to the CFO, that were modified as part of the transition and release agreement.

2021 CEO Performance Award

In September 2021, the Company granted the Company’s Chief Executive Officer (“CEO”), an award of up to 16.1 million performance stock units (the “CEO Performance Award”) under the Company’s 2020 Plan, pursuant to which the CEO may earn one share of the Company’s Class A Common Stock for each performance stock unit that vests based on the achievement of certain Market Capitalization Milestones (as defined in the award agreement for the CEO Performance Award, the “Award Agreement”).

The performance stock units are divided into four tranches, with each tranche corresponding to a Market Capitalization Milestone ranging from two to five times the Company’s market capitalization baseline. Each tranche will vest if and when the Company’s market capitalization equals or exceeds the corresponding Market Capitalization Milestone at any point during the seven-year performance period following the grant date (the “Performance Period”). For purposes of determining achievement of the Market Capitalization Milestones, the Company’s market capitalization is calculated based on the trailing 60-trading day

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

volume weighted average price per share (“VWAP”) of the Company’s Class A common stock and the average number of outstanding shares during such period. At the end of the Performance Period, a tranche may vest pro-rata using straight-line interpolation. The Company’s market capitalization baseline is calculated using the trailing 30-trading day VWAP of the Company’s Class A common stock on the grant date and the average number of outstanding shares during such period.

The CEO’s service as Chief Executive Officer (or Chairman and Chief Product Officer) of the Company other than (i) by the Company for Cause (as defined in the Award Agreement) or (ii) by the CEO without Good Reason (as defined in the Award Agreement), any unvested tranche will remain outstanding until the earlier of nine months following such termination of service and the end of the Performance Period and will vest if and when the Market Capitalization Milestones are achieved. Any unvested performance stock units will be forfeited automatically upon any other termination of the CEO’s service as Chief Executive Officer (or Chairman and Chief Product Officer) of the Company.

If a Change in Control occurs during the Performance Period, any unvested tranche shall vest as of the effective time of such Change in Control to the extent that the Market Capitalization Milestones are achieved, using the higher of (1) the Company’s 60-trading day VWAP prior to the effective time of the Change in Control and (2) the price per share received by the Company’s stockholders in the Change in Control.

The $70.8 million grant date fair value of the CEO Performance Award was estimated using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition targets may not be satisfied. During the three and nine months ended September 30, 2021, the Company recognized $0.8 million in compensation expense related to this grant. As of September 30, 2021, the unrecognized stock-based compensation cost related to non-vested CEO Performance Award was $70.0 million. The Company expects this cost to be recognized over a remaining weighted-average period of approximately 4.14 years.

Employee Stock Purchase Plan

In June 2021, the Company commenced its first offering period under the Skillz, Inc. Employee Stock Purchase Plan (the employee Stock Purchase Plan), which assists employees in acquiring a stock ownership interest in the Company and encourages them to remain in the employment of the Company. The Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. The employee Stock Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during specified offering periods. No employee may purchase more than $25,000 worth of stock in any calendar year. The price of shares purchased under the Employee Stock Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The total Employee Stock Purchase plan expense for the three and nine months ended September 30, 2021 was $0.1 million and $0.2 million, respectively.

11. Income Taxes

The Company’s income tax (benefit) provision was $(18.9) million and $47 thousand for the three months ended September 30, 2021 and 2020, respectively. This represents an effective tax rate for the respective periods of (59.45)% and (0.11)%. The Company’s income tax (benefit) provision was $(18.8) million and $100 thousand for the nine months ended September 30, 2021 and 2020, respectively. This represents an effective tax rate for the respective periods of 18.60% and (0.13)%. The Company has historically been in an overall loss position and is only subject to state and foreign taxes. The Company maintains a full valuation allowance for all of its deferred tax assets. The purchase accounting for the Aarki acquisition gave rise to a deferred tax liability during the three and nine months ended September 30, 2021; this resulted in a partial release of prior valuation allowance and a discrete benefit of $19.0 million was recorded. The effective tax rate differs from the federal statutory rate due to the discrete benefit from the partial release of the valuation allowance, as well as due to foreign taxes and state taxes.

12. Related-Party Transactions

The Company did not have any significant related party transactions in the three and nine months ended September 30, 2021 and 2020 other than equity awards made to certain executives and the secondary sale as part of the follow-on offering.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in tables are in thousands, unless otherwise noted)

13. Net Income (Loss) Per Share

Net income (loss) per share calculations for all periods prior to the Business Combination have been retrospectively adjusted for the equivalent number of shares outstanding immediately after the Business Combination to effect the reverse recapitalization. Subsequent to the Business Combination, net income (loss) per share was calculated based on the weighted average number of common stock then outstanding.

The Company computes net income (loss) per share of the Class A common stock and Class B common stock using the two-class method required for participating securities. Basic and diluted income (loss) per share are the same for each class of common stock because they are entitled to the same liquidation and dividend rights. The effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted income (loss) per Class A common stock and Class B common stock (in thousands, except for share and per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator:
Net income (loss) – basic	$	50,781	$	(42,851)	$	(82,406)	$	(78,530)
Denominator:
Weighted average common shares outstanding – basic	395,053,445		298,713,456		379,450,553		288,958,713
Net income (loss) per share attributable to common stockholders – basic	$	0.13	$	(0.14)	$	(0.22)	$	(0.27)

Numerator:
Net income (loss) – basic	$	50,781	$	(42,851)	$	(82,406)	$	(78,530)
Decrease in fair value of public and private common stock warrant liabilities	(113,601)		—		(81,898)		—
Net loss – diluted	$	(62,820)	$	(42,851)	$	(164,304)	$	(78,530)
Denominator:
Weighted average common shares outstanding – basic	395,053,445		298,713,456		379,450,553		288,958,713
Incremental common shares from assumed exercise of public and private common stock warrants	976,686		—		6,001,253		—
Weighted average common shares outstanding – diluted	396,030,131		298,713,456		385,451,806		288,958,713
Net loss per share attributable to common stockholders – diluted	$	(0.16)	$	(0.14)	$	(0.43)	$	(0.27)

The following outstanding common stock equivalents were considered antidilutive, and therefore, excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented (share numbers are not in thousands):


	Number of Securities Outstanding at September 30,
	2021	2020
Common and preferred stock warrants	—	3,635,181
Common stock options	39,273,376	48,670,292
Performance stock units	16,146,630	—
Restricted stock units	3,651,447	—
Total	59,071,453	52,305,473

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Skillz Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K/A for the year ended December 31, 2020, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Overview

We operate a marketplace that connects the world through competition, serving both developers and users. Our platform enables fair, fun and competitive gaming experiences and the trust we foster with users is the foundation upon which our community is built. We believe our marketplace benefits from a powerful network effect: compelling content attracts users to our platform, while the increasing size of our audience attracts more developers to create new interactive experiences on our platform.

Skillz was founded in 2012 by Andrew Paradise and Casey Chafkin with the vision to make eSports accessible to everyone possible. As of the three months ended September 30, 2021, the platform had 3.0 million monthly active users (“MAUs”) and hosts an average of over 6 million daily tournaments, including 2 million paid entry daily tournaments, offering over $150 million in prizes each month. As of September 30, 2021, we had over 10,000 registered game developers on our platform that have launched a game integration.

Our culture is built upon a set of values established by our founders, aligning the company and its employees in a common vision. Our seven values are: Honor; Mission; Collaboration; Productivity; Willingness; Frugality; and Balance. Our approach has focused on trust and fairness for users enabling game developers to focus on what they do best: build great content.

Our technology capabilities are industry-leading and provide the tools necessary for developers to compete with the largest and most sophisticated mobile game developers in the world. Our easy-to-integrate software development kit (“SDK”) and developer console allow our developers to monitor, integrate and update their games seamlessly over the air. We ingest and analyze over 300 data points from each game play session, enhancing our data-driven algorithms and LiveOps systems. Moreover, we have developed a robust platform enabling fun, fair and meaningful competitive gameplay.

For the three months ended September 30, 2021 and 2020, the games Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 71% and 77%, respectively, of our revenue. For the three months ended September 30, 2021, the developers Tether and Big Run accounted for 43% and 37%, respectively, of our revenue. For the three months ended September 30, 2020, Tether and Big Run accounted for 56% and 31%, respectively, of our revenue. For the nine months ended September 30, 2021 and 2020, Solitaire Cube, 21 Blitz and Blackout Bingo account for 73% and 79%, respectively, of our revenue. For the nine months ended September 30, 2021, Tether and Big Run accounted for 43% and 39%, respectively, of our revenue. For the nine months ended September 30, 2020, Tether and Big Run accounted for 63% and 25%, respectively, of our revenue. Our top titles rotate over time as more games generate success on the Skillz platform. In the nine months ended September 30, 2021 and 2020, the number of games that generated over $1 million of annualized GMV has grown by 10 to 45 from 35. GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives.

For the three months ended September 30, 2021 and 2020, we served 3.0 million and 2.7 million MAUs, respectively, and had monthly average revenue per user (“ARPU”) of $11.40 and $7.44, respectively. For the nine months ended September 30, 2021 and 2020, we served 2.7 million and 2.6 million MAUs, respectively, and had monthly ARPU of $11.40 and $6.93, respectively. We monitor the conversion of users to paying users based on the ratio of Paying MAU to MAU. For each of the third quarters of 2021 and 2020, our Paying MAU to MAU ratio was 17% and 13%, respectively and our Paying MAU was 0.51 million and 0.35 million, respectively and our monthly ARPPU was $66.82 and $57.84, respectively. For the nine months ended 2021 and 2020, our Paying MAU to MAU ratio was 18% and 12%, respectively, our Paying MAU was 0.48 million and 0.30 million, respectively, and our ARPPU was $63.65 and $59.72, respectively. We see a substantial opportunity for our developers to expand beyond casual content into other genres of interactive entertainment, from first-person shooters to racing games. In the three and nine months ended September 30, 2021 and 2020, we generated less than 12% and 10% of our revenue from users outside of North America, respectively, leaving us with several large untapped international markets. We see a significant opportunity to build partnerships with brands to sponsor tournaments on our platform to both increase our brand awareness and achieve improvements in profitability through advertiser sponsored prizes.

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On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and acquired 100% of the outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company paid $162.3 million in consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform will result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers. The financial results of Aarki have been included in the Company’s consolidated financial statements since the date of the acquisition. Refer to Note 3, Business Combinations, of the notes to the consolidated financial statements for further discussion.

Our Financial Model

Skillz’s financial model aligns the interests of gamers and developers, driving value for our stockholders. By monetizing through competition, our system eliminates friction that exists in traditional monetization models between the developer and the gamer. The more gamers enjoy our platform, the longer they play, creating more value for Skillz and our developers. By generating higher player to payor conversion, retention and engagement, we are able to monetize users at higher than what our developers would generate through advertisements or in-game purchases.

Our platform allows users to participate in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage of player entry fees in paid contests, after deducting end-user prize money (i.e., winnings from the Competitions), end-user incentives accounted for as reduction of revenue and the profit share paid to developers (the “Take Rate”). GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives.

Cash deposits represented approximately 10% of total entry fees for the three and nine months ended September 30, 2021, and 11% of total entry fees for the three and nine months ended September 30, 2020. Prior cash winnings that have not been withdrawn represented approximately 80% and 81% of total entry fees for the three and nine months ended September 30, 2021, respectively, and 82% of total entry fees for the three and nine months ended September 30, 2020. End-user incentives represented approximately 10% and 9% of total entry fees for the three and nine months ended September 30, 2021, respectively and 7% of total entry fees for the three and nine months ended September 30, 2020. Our model has allowed us to grow users, developers and revenue steadily while driving meaningful operating leverage.

The following are key elements of our financial model:

•The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading to ever-improving gaming experiences. On our platform,1 we estimated the average game play per paying user was 64 and 63 minutes per day during the three months ended September 30, 2021 and 2020, respectively, and 64 and 60 minutes per day during the nine months ended September 30, 2021 and 2020, respectively.

•The scale, growth and partnership of our developers — We have created a platform that drives economic success for our developers. Our end-to-end platform allows developers to focus on creating games by automating and optimizing integral parts of their businesses — from user acquisition and monetization to game optimization. Our built-in payments, analytics, customer support, and live operations platform enables our developers to consistently learn, grow, earn and share in our success.

•Product-first philosophy and data science capabilities — We have built a culture that puts product first, driving our impact with users and developers and then scaling marketing investment. In the three and nine months ended September 30, 2021, 43% and 41%, respectively, of our salary costs was spent on product development. Our easy-to-integrate SDK contains over 220 features in a 16-MB package which allows for over-the-air upgrades. Our intuitive Developer Console dashboard enables our developers to rapidly integrate and monitor the performance of their games. Our LiveOps system enables us to manage and optimize the user experience across the thousands of games on our platform.

We collect over 300 data points during each gameplay session to feed our big data assets which augment all elements of our platform. Our key data science technologies drive our player rating and matching, anti-cheat and anti-fraud, and user experience personalization engine.

1 Based on the average number of tournament entries per day multiplied by 4 minutes per tournament. Skillz tracks the number of games that end users play but does not monitor end user playing time on its platform, and this estimate is based on the time allowed to complete a tournament in the top three games for paying users featured on our platform. Accordingly, the actual time paying users spend per day on the platform may be less than such estimate.

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•Our unit economics — Our proprietary and highly scalable software platform produces revenue at a low direct cost, contributing to our gross margins. Once acquired, each user cohort contributes predictably to revenue over its life. A cohort is all the users acquired in the period presented. A user is considered part of a cohort based on the first time they make a deposit and enter a paid tournament. Once a user is considered part of a cohort, they are always counted in that cohort.

For example, our 2016 cohort contributed $6.0 million in revenue in the first year, $5.3 million in the second year, $5.3 million in the third year, $6.5 million in the fourth year, and $7.2 million in the fifth year. Our 2017 cohort contributed $10.6 million in revenue in the first year, $10.1 million in the second year. $9.2 million in the third year and $9.5 million in the fourth year. Our 2018 cohort contributed $34.1 million in revenue in the first year, $35.2 million in the second year, and $31.5 million in the third year. Our 2019 cohort contributed $69.1 million in revenue in the first year and $64.3 million in the second year. Our 2020 cohort contributed $118.6 million in revenue in the first year.

Key Components of Results of Operations

Revenue

Skillz provides a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement.

By utilizing the Skillz monetization services, game developers can enhance the player experience by enabling them to compete in head-to-head matches, live tournaments, leagues, and charity tournaments and increase player retention through referral bonus programs, loyalty perks, on-system achievements and Bonus Cash. Skillz provides developers with a SDK that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer. Specifically, these monetization services include end-user registration services, player matching, fraud and fair play monitoring, and billing and settlement services. The SDK and Skillz monetization services provide the following key benefits to the developers:

•Streamlined game and tournament management allowing players to register with the developer to compete in games for prizes while earning Skillz loyalty perks;

•Fair play in each tournament via the Skillz suite of fairness tools, including skill-based player matching and fraud monitoring;

•Improved end-user retention by rewarding the most loyal players with Ticketz which can be redeemed in the Skillz virtual store and are earned in every match and can be redeemed for prizes or credits to be used towards future paid entry fee tournaments;

•Marketing campaigns through main-stream online advertising networks and social media platforms to drive end-user traffic to developers’ games within the Skillz ecosystem;

•Systematic calls to end-user action via push notifications to users with game results, promotional offers, and time-sensitive actions; and

•Process end-user payments, billings and settlements on behalf of the developer to enable players to connect their preferred payment method to deposit and enter into the game developers’ multi-player competitions for cash prizes.

Generally, end-users are required to deposit funds into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services, Skillz is responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users pay an entry fee using cash deposits, prior cash winnings in the end-users’ accounts that have not been withdrawn, and end-user incentives (specifically Bonus Cash). Skillz recognizes revenue related to each game regardless of how entry fees are paid. Skillz is responsible for distributing the prize money to the winner on behalf of the game developer. Skillz typically withholds 16% to 20% of the total entry fees when distributing the prize money as a commission. That commission is shared between Skillz and the game developers; however, the game developers’ share is calculated solely based upon entry fees paid by net cash deposits received from end-users, adjusted for certain costs incurred by Skillz to provide monetization services.

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Costs and Expenses

Cost of Revenue

Our cost of revenue consists of variable costs. These include mainly (i) payment processing fees, (ii) customer support costs, (iii) direct software costs, (iv) amortization of internal use software, (v) amortization of intangible assets which include developed technology, and (v) server costs.

We incur payment processing costs on user deposits. We also incur costs directly related to servicing end-user support tickets on behalf of the game developer that are logged by users directly within the Skillz SDK. These support costs include an allocation of the facilities expense, such as rent, maintenance and utilities costs according to headcount, needed to service these tickets. We use a third party as our cloud computing service; we incur server and software costs as a direct result of running our SDK in our developers’ games.

Research and Development

Research and development expenses consist of software development costs, comprised mainly of product and platform development, server and software costs that support research and development activities, and to a lesser extent, allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation. We expect research and development expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.

Sales and Marketing

Sales and marketing expenses consist primarily of direct advertising costs and end-user incentives that are not recorded as a reduction of revenue and amortization of intangible assets which include customer relationships. Sales and marketing also includes allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.

General and Administrative

General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits and stock-based compensation. General and administrative expenses also includes expenses related to a loss contingency accrual.

We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

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Results of Operations

The following table sets forth a summary of our results of operations for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	102,072	$	59,955	$	275,240	$	162,392
Costs and expenses:
Cost of revenue	7,647		3,102		16,289		8,806
Research and development	13,162		4,369		30,584		13,253
Sales and marketing	114,531		73,187		310,377		172,381
General and administrative	48,376		7,861		101,092		24,336
Total costs and expenses	183,716		88,519		458,342		218,776
Loss from operations	(81,644)		(28,564)		(183,102)		(56,384)
Interest expense, net	(87)		(24)		(136)		(1,297)
Change in fair value of common stock warrant liabilities	113,601		—		81,898		—
Other income (expense), net	(22)		(14,216)		108		(20,749)
Income (loss) before income taxes	31,848		(42,804)		(101,232)		(78,430)
(Benefit) provision for income taxes	(18,933)		47		(18,826)		100
Net income (loss)	$	50,781	$	(42,851)	$	(82,406)	$	(78,530)



Net income (loss) per common share
Net income (loss) per share attributable to common stockholders – basic and diluted	$	0.13	$	(0.14)	$	(0.22)	$	(0.27)
Weighted average common shares outstanding – basic and diluted	395,053,445		298,713,456		379,450,553		288,958,713
Net loss attributable to common stockholders – diluted	$	(62,820)	$	(42,851)	$	(164,304)	$	(78,530)
Net loss per share attributable to common stockholders – diluted	$	(0.16)	$	(0.14)	$	(0.43)	$	(0.27)
Weighted average common shares outstanding – diluted	396,030,131		298,713,456		385,451,806		288,958,713

Revenue


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,				% Change
(In thousands, except percentages)	2021		2020					2021				2020

Revenue	$	102,072	$	59,955		70	%	$	275,240	$	162,392		69	%

Three Months Ended

Revenue increased by $42.1 million, or 70%, to $102.1 million in the three months ended September 30, 2021 from $60.0 million in the three months ended September 30, 2020. The increase was attributable primarily to an increase in Paying MAUs, driven by sales and marketing investment to increase engagement amongst paying users. ARPU increased 53% over the same period.

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Nine Months Ended

Revenue increased by $112.8 million, or 69%, to $275.2 million in the nine months ended September 30, 2021 from $162.4 million in the nine months ended September 30, 2020. The increase was attributable primarily to an increase in paying MAUs, driven by sales and marketing investment to increase engagement amongst paying users. ARPU increased 65% over the same period.

Cost of Revenue


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,			% Change
(In thousands, except percentages)	2021		2020					2021		2020

Cost of revenue	$	7,647	$	3,102		147	%	16,289	8,806		85	%

Three Months Ended

Cost of revenue increased by $4.5 million, or 147%, to $7.6 million in the three months ended September 30, 2021 from $3.1 million in the three months ended September 30, 2020. The increase in cost of revenue was primarily driven by the amortization of acquired developed technology intangible assets. Cost of revenue as a percentage of revenue increased to 7% in the three months ended September 30, 2021 compared to 5% in the three months ended September 30, 2020.

Nine Months Ended

Cost of revenue increased by $7.5 million, or 85%, to $16.3 million in the nine months ended September 30, 2021 from $8.8 million in the nine months ended September 30, 2020. The increase in cost of revenue was primarily driven by the amortization of acquired developed technology intangible assets. Cost of revenue as a percentage of revenue increased to 6% in the nine months ended September 30, 2021 compared to 5% in the nine months ended September 30, 2020.

Research and Development


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,			% Change
(In thousands, except percentages)	2021		2020					2021		2020

Research and development	$	13,162	$	4,369		201	%	30,584	13,253		131	%

Three Months Ended

Research and development costs increased by $8.8 million, or 201%, to $13.2 million in the three months ended September 30, 2021 from $4.4 million in the three months ended September 30, 2020. The increase was primarily driven by a $5.4 million increase in research and development headcount costs, of which $1.3 million was related to stock-based compensation, a $2.6 million increase in contractor costs, a $0.7 million increase in software and computer equipment costs and a $0.1 million increase in facilities costs. Research and development expenses accounted for 13% of revenue in the three months ended September 30, 2021 compared to 7% in the three months ended September 30, 2020.

Nine Months Ended

Research and development costs increased by $17.3 million, or 131%, to $30.6 million in the nine months ended September 30, 2021 from $13.3 million in the nine months ended September 30, 2020. The increase was primarily driven by a $11.2 million increase in research and development headcount costs, of which $3.7 million was related to stock-based compensation, a $4.0 million increase in contractor costs, a $1.9 million increase in server and software costs and a $0.2 million increase in facilities costs. Research and development expenses accounted for 11% of revenue in the nine months ended September 30, 2021 compared to 8% in the nine months ended September 30, 2020.

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Sales and Marketing


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,			% Change
(In thousands, except percentages)	2021		2020					2021		2020

Sales and marketing	$	114,531	$	73,187		56	%	310,377	172,381		80	%

Three Months Ended

Sales and marketing costs increased by $41.3 million, or 56%, to $114.5 million in the three months ended September 30, 2021 from $73.2 million in the three months ended September 30, 2020. The increase was attributable primarily to a 27% increase in spend to acquire new paying users and an 88% increase in engagement marketing spend. User acquisition marketing costs were $55.2 million and $43.6 million in three months ended September 30, 2021 and 2020, respectively. Engagement marketing costs were $50.0 million and $26.6 million in the three months ended September 30, 2021 and 2020, respectively. Engagement marketing as a percentage of revenue increased to 49% in the three months ended September 30, 2021 from 44% in the three months ended September 30, 2020, respectively. This increase reflects investments in marketing programs that resulted in an increase in our engagement marketing cost per user in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Nine Months Ended

Sales and marketing costs increased by $138.0 million, or 80%, to $310.4 million in the nine months ended September 30, 2021 from $172.4 million in the nine months ended September 30, 2020. The increase was attributable primarily to a 63% increase in spend to acquire new paying users and a 95% increase in engagement marketing spend. User acquisition marketing costs were $156.6 million and $96.2 million in the nine months ended September 30, 2021 and 2020, respectively. This increase reflects higher digital advertising costs that resulted in an increase in our acquisition cost per user in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Engagement marketing costs were $130.9 million and $67.2 million in the nine months ended September 30, 2021 and 2020, respectively. Engagement marketing as a percentage of revenue increased to 48% in the nine months ended September 30, 2021 from 41% in the nine months ended September 30, 2020. This increase reflects investments in marketing programs that resulted in an increase in our engagement marketing cost per user in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

General and Administrative


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,			% Change
(In thousands, except percentages)	2021		2020					2021		2020

General and administrative	$	48,376	$	7,861		515	%	101,092	24,336		315	%

Three Months Ended

General and administrative costs increased by $40.5 million, or 515%, to $48.4 million in the three months ended September 30, 2021 from $7.9 million in the three months ended September 30, 2020. The increase was primarily driven by a $14.3 million increase in headcount costs, of which $9.7 million is related to stock-based compensation expense, a $5.9 million increase in professional fees driven by the Company’s acquisition of Aarki, an $11.6 million increase in expense related a loss contingency accrual, and a $8.8 million increase in insurance-related and other public company costs. General and administrative expenses accounted for 47% of revenue in the three months ended September 30, 2021 compared to 13% in the three months ended September 30, 2020.

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Nine Months Ended

General and administrative costs increased by $76.8 million, or 315%, to $101.1 million in the nine months ended September 30, 2021 from $24.3 million in the nine months ended September 30, 2020. The increase was primarily driven by a $35.3 million increase in headcount costs, of which $24.8 million is related to stock-based compensation expense, a $7.3 million increase in professional fees related to the Company’s follow-on offering, a $5.9 million increase in professional fees driven by the Company’s acquisition of Aarki, a $12.1 million increase in public company-related insurance costs and legal costs, a $8.5 million increase in other public company costs and a $11.6 million increase in expense related to a loss contingency accrual, partially offset by a $3.9 million decrease in facilities expenses. General and administrative expenses accounted for 37% of revenue in the nine months ended September 30, 2021 compared to 15% in the nine months ended September 30, 2020.

Interest expense, net


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,			% Change
(In thousands, except percentages)	2021		2020					2021		2020

Interest expense, net	$	(87)	$	(24)		263	%	(136)	(1,297)		(90)	%

Three Months Ended

Interest expense, net increased by $63.0 thousand, or 263%, to $87 thousand in the three months ended September 30, 2021 from $24 thousand in the three months ended September 30, 2020. The increase was primarily driven by interest expense incurred for Aarki equipment leases.

Nine Months Ended

Interest expense, net decreased by $1.2 million, or 90%, to $136 thousand in the nine months ended September 30, 2021 from $1.3 million in the nine months ended September 30, 2020. The decrease was primarily driven by the repayment of the Skillz Platform outstanding debt balance in June 2021.

Change in fair value common stock of warrant liabilities


	Three Months Ended September 30,		% Change	Nine Months Ended September 30,		% Change
(In thousands, except percentages)	2021	2020		2021	2020

Change in fair value of common stock warrant liabilities	113,601	—	NM	81,898	—	NM

The change in fair value of warrant liabilities was due to the decrease in the estimated fair value of the Private Common Stock Warrants and the redemption of Public Common Stock Warrants. Refer to Note 8, Common Stock Warrants, of the notes to the consolidated financial statements for further discussion.

Other income (expense), net


	Three Months Ended September 30,				% Change		Nine Months Ended September 30,		% Change
(In thousands, except percentages)	2021		2020				2021	2020

Other income (expense), net	$	(22)	$	(14,216)	(100)	%	108	(20,749)	(101)	%

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Three Months Ended

Other income (expense), net decreased by $14.2 million, or 100%, to $22 thousand in the three months ended September 30, 2021 from $14.2 million in the three months ended September 30, 2020. The decrease was primarily driven by expense related the fair value adjustment to the Redeemable convertible Series E preferred stock forward contract liability in three months ended September 30, 2020.

Nine Months Ended

Other income (expense), net decreased by $20.9 million, or 101%, to income of $0.1 million in the nine months ended September 30, 2021 from expense of $20.7 million in the nine months ended September 30, 2020. The decrease was primarily driven by expense related to the fair value adjustment to the Redeemable convertible Series E preferred stock forward contract liability in nine months ended September 30, 2020.

(Benefit) provision for income taxes


	Three Months Ended September 30,				% Change	Nine Months Ended September 30,		% Change
(In thousands, except percentages)	2021		2020			2021	2020

(Benefit) provision for income taxes	$	(18,933)	$	47	NM	(18,826)	100	NM

Three Months Ended

Provision for income taxes decreased by $19.0 million to benefit of $18.9 million in the three months ended September 30, 2021 from expense of $47 thousand in the three months ended September 30, 2020. The decrease was primarily driven by a discrete benefit related to the partial release of valuation allowance due to the acquisition of Aarki and accrued state tax liabilities.

Nine Months Ended

Provision for income taxes decreased by $18.9 million to benefit of $18.8 million in the nine months ended September 30, 2021 from expense of $100 thousand in the nine months ended September 30, 2020. The decrease was primarily driven by a discrete benefit related to the partial release of valuation allowance due to the acquisition of Aarki and accrued state tax liabilities.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively with GAAP financial information, may be helpful to investors in assessing our operating performance. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Adjusted EBITDA

“Adjusted EBITDA” is defined as net income (loss), excluding interest income (expense); change in fair value of common stock warrant liabilities; other income (expense), net; income tax provision; depreciation and amortization; stock-based compensation expense and related payroll tax expense; and certain other non-cash or non-recurring items impacting net income (loss) from time to time, including, but not limited to fair value adjustments for certain financial liabilities (including derivatives) associated with debt and equity transactions, impairment charges, acquisition related expenses for transaction costs and loss contingency accruals, as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating Adjusted EBITDA we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should

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not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table reconciles net loss to Adjusted EBITDA for the periods indicated (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	50,781	$	(42,851)	$	(82,406)	$	(78,530)
Interest expense, net	87		24		136		1,297
Stock-based compensation	15,812		3,662		42,531		9,565
Change in fair value of common stock warrant liabilities	(113,601)		—		(81,898)		—
(Benefit) provision for income taxes	(18,933)		47		(18,826)		100
Depreciation and amortization	4,991		457		6,093		1,092
Impairment charge (2)	—		—		—		3,395
Other (income) expense, net(3)	22		14,216		(108)		20,749
Acquisition related expenses(4)	6,039		—		6,999		—
Loss contingency accrual (5)	11,557		—		11,557		—
One-time nonrecurring expenses (1)	1,504		—		11,930		—
Adjusted EBITDA	$	(41,741)	$	(24,445)	$	(103,992)	$	(42,332)

(1)For the three and nine months ended September 30, 2021, amounts represent one-time nonrecurring expenses related to the follow-on offering and executive severance expense.

(2)For the nine months ended September 30, 2020, amount represents an impairment charge of a lease deposit and prepayment in connection with a lease agreement related to our facilities in San Francisco.

(3)For the nine months ended September 30, 2020, other non-operating costs (income) include net remeasurement losses of $20.8 million related to fair value adjustments of financial instruments held by the Company, primarily attributable to the redeemable convertible Series E preferred stock option contract liability.

(4)For the three and nine months ended September 30, 2021, amounts represent acquisition related expenses for our Aarki acquisition.

(5)For the three and nine months ended September 30, 2021, amount represents a loss contingency accrual related to a litigation matter relating to a former employee as discussed in Note 7, Commitments and Contingencies.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from the sales of capital stock. As of September 30, 2021, our principal sources of liquidity were our cash and cash equivalents in the amount of $540.3 million, which are primarily invested in money market funds.

As of September 30, 2021, the Company had zero Public Warrants and 4,535,728 Private Warrants outstanding. During the nine months ended September 30, 2021, 11,361,683 and 480,938 Public Warrants and Private Warrants, respectively, were exercised for total proceeds of $130.6 million.

As of the date of this statement, our existing cash resources are sufficient to continue operating activities for at least one year past the issuance date of the condensed consolidated financial statements.

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The following table provides a summary of cash flow data (in thousands):


	Nine Months Ended September 30,
		2021		2020
Net cash used in operating activities		$	(103,326)	$	(29,744)
Net cash used in investing activities		$	(140,803)	$	(3,009)
Net cash provided by financing activities		$	521,709	$	63,986

Cash Flows from Operating Activities

Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities was $103.3 million for the nine months ended September 30, 2021. The most significant component of our cash used during this period was a net loss of $82.4 million, which included non-cash income of $81.9 million for the change in fair value related to Public and Private Common Stock Warrants, a $18.8 million deferred income tax benefit, non-cash expenses of $42.5 million related to stock-based compensation, $6.1 million related to depreciation and amortization, accretion of unamortized discounts and amortization of issuance costs, and net cash inflows of $31.2 million from changes in operating assets and liabilities. The net cash inflows from changes of operating assets and liabilities were primarily the result of an increase in other liabilities of $33.3 million, primarily related to an increase in accrued sales and marketing costs.

Net cash used in operating activities was $29.7 million for the nine months ended September 30, 2020. The most significant component of our cash used during this period was a net loss of $78.5 million, which included non-cash expenses of $20.8 million for the change in fair value related to Series E preferred stock forward contract liability, $9.6 million related to stock-based compensation, $3.4 million related to impairment charges, $1.6 million related to depreciation, amortization, and net cash inflows of $13.4 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of an increase in other liabilities of $27.7 million, primarily related to an increase in accrued sales and marketing costs.

Cash Flows from Investing Activities

Net cash used in investing activities was $140.8 million for the nine months ended September 30, 2021. The net cash used in investing activities included the $84.0 million acquisition of Aarki, net of cash acquired, $54.7 million investments in non-marketable equity securities, and $2.1 million in purchases of property and equipment, including internal-use software.

Net cash used in investing activities was $3.0 million for the nine months ended September 30, 2020. The net cash used in investing activities related to purchases of property and equipment, including internal-use software.

Cash Flows from Financing Activities

Net cash provided by financing activities was $521.7 million for nine months ended September 30, 2021, which was primarily due to $402.1 million in net proceeds from the issuance of common stock in connection with the Company’s follow-on offering and $130.6 million of proceeds from the exercise of common stock warrants, partially offset by $13.2 million in payments made towards offering costs.

Net cash provided by financing activities was $64.0 million for the nine months ended September 30, 2020, which was primarily due to net proceeds from the issuance of redeemable convertible Series E preferred stock of $76.6 million and net proceeds from the exercise of stock options of $0.7 million, offset by $10.2 million of debt repayments and payments towards issuance costs under our debt facilities, and $2.5 million of repurchases of common and preferred stock.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and other commitments as of September 30, 2021, and the years in which these obligations are due:


	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years

Operating lease obligations	$	22,238	$	625	$	4,867	$	4,952	$	11,794
Capital lease obligations	4,862		2,964		1,898		—		—
Total lease obligations	$	27,100	$	3,589	$	6,765	$	4,952	$	11,794

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

See critical accounting policies and estimates in our Form 10-K/A filed May 13, 2021 as there have been no material changes except for the following:

Business Combinations

The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. We use the acquisition method of accounting and allocate the purchase price, including the fair value of any non-cash consideration, to the identifiable assets and liabilities of the relevant acquired business at their acquisition date fair values. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Determining the fair value of assets acquired and liabilities assumed requires us to perform valuations with significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expense in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level, which is the same or one level below the operating segment. We have one operating segment: Skillz Platform, Inc. We identify our reporting unit by assessing whether there are components of the operating segment which constitute businesses for which discrete financial information is available and reviewed regularly by segment managers. We test goodwill for impairment at least annually during the fourth fiscal quarter, or more frequently if indicators of impairment exist during the fiscal year. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, loss of key customers, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.

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When testing goodwill for impairment, we first perform a qualitative assessment. If we determine it is not more likely than not a reporting unit’s fair value is less than our carrying amount, then no further analysis is necessary. If we determine it is more likely than not that a reporting unit’s fair value is less than its carrying amount, then we compare the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If, however, the fair value of the reporting unit is less than its carrying amount, then such balance would be recorded as an impairment loss. Any impairment loss is limited to the carrying amount of goodwill allocated to the reporting unit.

Impairment of Long-Lived Assets

Long-lived assets consist of property, plant equipment and intangible assets with estimable useful lives subject to depreciation and amortization. Intangible assets consist of purchased intangible assets including developed technology, customer relationships, trademarks and tradenames and are amortized over their useful lives ranging from one to eight years using the straight-line method of amortization. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.

Investment in Non-Marketable Equity Securities

We have elected to measure our existing investments in non-marketable equity securities at cost, less impairments, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for the identical or similar securities of the same issuer (“measurement alternative”). This election is reassessed each reporting period to determine whether non-marketable equity securities have a readily determinable fair value, in which case they would no longer be eligible for this election. We evaluate our non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. Impairment indicators might include, but would not necessarily be limited to, a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, a significant adverse change in the regulatory, economic, or technological environment of the investee, a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar securities for an amount less than the carrying amount of the investments in those securities. If an impairment exists, a loss is recognized in the consolidated statements of operations for the amount by which the carrying value exceeds the fair value of the investment. Gains and losses resulting from the remeasurement of non-marketable equity securities, including impairment, are recorded through other income (expense), net in the consolidated statement of operations. We separately present investments in non-marketable equity securities within long-term assets on the consolidated balance sheets.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market and other risks, including the effects of changes in interest rates, inflation, as well as risks to the availability of funding sources.

Interest Rate Risk

The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2021, we had cash and cash equivalents of $540.3 million, which primarily consisted of money market fund accounts for which the fair market value would be affected by changes in the general level of U.S. interest rates. However, due to the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.

Foreign Currency Risk

There was no material foreign currency risk for the nine months ended September 30, 2021 and 2020.

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ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of September 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

On April 12, 2021, the staff of the SEC issued an SEC Staff Statement (“the SEC Staff Statement”) in which the SEC Staff clarified its interpretations of certain generally accepted accounting principles related to warrants issued by Special Purpose Acquisition Companies (“SPACs”). Prior to the SEC Staff Statement, we believed that our warrant accounting was consistent with generally accepted accounting principles. Our belief was supported by the fact that most other SPACs and parties who have merged with SPACs similarly interpreted the warrant accounting principles at issue. However, based on the clarifications expressed in the SEC Staff Statement which resulted in the restatement discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2020, the Company’s management and the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2020, there was a material weakness in controls related to the classification and accounting for warrants issued by a SPAC, which did not operate effectively to appropriately apply the provisions of ASC 815.

Remediation of Material Weakness

To remediate the material weakness, the Company studied and clarified its understanding of the accounting of contracts that may be settled in the Company’s own stock, such as warrants, as equity of the entity or as an asset or liability as highlighted in the SEC Staff Statement, and implemented additional review procedures and enhanced its accounting policy related to the accounting for such contracts to determine proper accounting in accordance with GAAP as clarified by the SEC Staff Statement. Based on actions taken, as well as the evaluation of the design and operating effectiveness of these new controls, management believes that the material weakness has been remediated, subject to the ongoing evaluation of the design and operating effectiveness of these controls in connection with its annual assessment of internal control over financial reporting.

Changes in Internal Control

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting other than the changes described above related to the material weakness related to the accounting for the warrants issued by SPACs and the acquisition of Aarki.

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PART II

ITEM 1. LEGAL PROCEEDINGS

Refer to note 7, “Contingencies and Commitments,” in this Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In connection with the acquisition of Aarki, aggregate consideration paid by the Company was approximately $162.3 million, which consisted of approximately $95.3 million in cash with the remaining approximately $67.1 million comprised of 4.4 million shares of Skillz Class A common stock. The shares of Skillz Class A common stock issued in connection with the acquisition were issued in reliance upon exemptions from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and/or Regulation D promulgated thereunder, based upon appropriate representations and certifications that Skillz has received from Aarki and each Aarki stockholder receiving Skillz Class A common stock. The issuance of any additional shares of Skillz Class A common stock in connection with the payment of any contingent merger consideration described above is also expected to be exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and/or Regulation D promulgated thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No.

Exhibit Description

Form

Exhibit

Filing Date

10.1

Offer Letter, signed by Skillz Inc. and Stanley Mbugua, dated September 2, 2021

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH**

Inline XBRL Taxonomy Extension Schema Document

101.CAL**

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

Inline XBRL Definition Linkbase Document

101.LAB**

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith.

**Submitted electronically with the report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the ninth day of November, 2021.


			SKILLZ INC.

			By:			/s/ Andrew Paradise
			Name:			Andrew Paradise
			Title:			Chief Executive Officer and Chairman