Skillz Inc. - Quarter Report: 2023 June (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 June 30, 2023


☐			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.)

6625 Badura Avenue

Las Vegas, Nevada

89118

(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 August 1, 2023, the registrant had outstanding 17,742,226 shares of Class A common stock and 3,430,063 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			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Mine Safety Disclosures			37
Item 5. Other Information			37
Item 6. Exhibits			37
Signatures			38

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, 2022, as supplemented by our other Securities and Exchange Commission filings, including among other things:

•Our future growth depends on our ability to attract and retain end-users, and do so in a cost-effective manner;

•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;

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

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•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 a global pandemic in a timely manner could materially affect how we and our business partners are operating;

•Failure to timely and effectively remediate the material weaknesses in our internal controls over financial reporting or additional material weaknesses or other deficiencies in the future; and

•Failure to mitigate the commercial, reputational and regulatory risks to our business that may arise as a consequence of our need to restate our financial statements.

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 for the year ended December 31, 2022, 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 on Form 10-Q. 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)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	324,779	$	362,516
Marketable securities, current	27,319		127,268
Accounts receivable, net	9,658		7,177
Prepaid expenses and other current assets	6,038		4,722
Total current assets	367,794		501,683

Non-current assets:
Property, plant and equipment, net	13,437		2,991
Operating lease right-of-use assets, net	164		472
Marketable securities, non-current	6,097		56,728
Non-marketable equity securities	55,649		55,649


Restricted cash as other long-term assets	3,176		2,920
Other long-term assets	1,072		852
Total non-current assets	79,595		119,612
Total assets	$	447,389	$	621,295

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,195	$	1,696

Operating lease liabilities, current	1,786		2,133

Other current liabilities	58,339		45,666
Total current liabilities	64,320		49,495

Non-current liabilities:
Operating lease liabilities, non-current	11,174		11,942
Common stock warrant liabilities, non-current	138		289
Long-term debt, non-current	123,148		272,781
Other long-term liabilities	1,138		8,387
Total non-current liabilities	135,598		293,399
Total liabilities	199,918		342,894

Stockholders’ equity:
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Common stock $0.0001 par value; 31 million shares authorized; Class A common stock – 25 million shares authorized; 18 million and 18 million shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively; Class B common stock – 6 million shares authorized; 3 million shares issued and outstanding as of June 30, 2023 and December 31, 2022	41		41
Additional paid-in capital	1,178,290		1,153,031
Accumulated other comprehensive loss	(172)		(1,563)
Accumulated deficit	(930,688)		(873,108)
Total stockholders’ equity	247,471		278,401
Total liabilities and stockholders' equity	$	447,389	$	621,295

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue	$	40,166	$	71,757	$	84,549	$	163,621
Costs and expenses:
Cost of revenue	3,650		9,003		8,232		18,203
Research and development	8,966		18,253		17,847		36,903
Sales and marketing	33,085		73,731		68,003		191,076
General and administrative	30,098		26,881		58,168		119,604

Total costs and expenses	75,799		127,868		152,250		365,786
Loss from operations	(35,633)		(56,111)		(67,701)		(202,165)
Gain on extinguishment of debt	15,205		—		15,205		—
Interest expense, net	(1,712)		(7,596)		(5,207)		(15,753)
Change in fair value of common stock warrant liabilities	152		1,023		151		5,485
Other income (expense), net	11		(82)		50		(109)
Loss before income taxes	(21,977)		(62,766)		(57,502)		(212,542)
Provision for (benefit from) income taxes	10		(155)		79		(367)
Net loss	$	(21,987)	$	(62,611)	$	(57,581)	$	(212,175)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(1.05)	$	(3.07)	$	(2.75)	$	(10.48)

Weighted average shares outstanding:
Basic and diluted	20,990,780		20,407,887		20,939,723		20,246,176


Other comprehensive income (loss):
Change in unrealized loss on available-for-sale investments, net of tax	394		(577)		1,391		(2,623)
Total other comprehensive income (loss):	394		(577)		1,391		(2,623)
Total comprehensive loss	$	(21,593)	$	(63,188)	$	(56,190)	$	(214,798)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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


	Common stock		Additional paid-in capital			Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
		Shares			Amount
Balance at December 31, 2021		20,437,692	$	40		$	1,043,600	$	(248)	$	(434,233)	$	609,159
Issuance of common stock upon exercise of stock options and release of restricted stock units		43,997	—			236		—		—		236

Stock-based compensation		—	—			77,879		—		—		77,879
Other comprehensive loss		—	—			—		(2,046)		—		(2,046)
Other, net		—	—			(64)		—		—		(64)
Net loss		—	—			—		—		(149,564)		(149,564)
Balance at March 31, 2022		20,481,689	$	40		$	1,121,651	$	(2,294)	$	(583,797)	$	535,600
Issuance of common stock upon exercise of stock options and release of restricted stock units		474,977	1			616		—		—		617

Stock-based compensation		—	—			13,431		—		—		13,431
Other comprehensive loss		—	—			—		(577)		—		(577)
Net loss		—	—			—		—		(62,611)		(62,611)
Balance at June 30, 2022		20,956,666	$	41		$	1,135,698	$	(2,871)	$	(646,408)	$	486,460

Balance at December 31, 2022		21,068,697	$	41		$	1,153,031	$	(1,563)	$	(873,108)	$	278,401
Issuance of common stock upon exercise of stock options and release of restricted stock units		61,124	—			33		—		—		33

Stock-based compensation		—	—			10,548		—		—		10,548
Other comprehensive income		—	—			—		997		—		997
Other, net		—	—			—		—		—		—
Net loss		—	—			—		—		(35,593)		(35,593)
Balance at March 31, 2023		21,129,821	$	41		$	1,163,612	$	(566)	$	(908,701)	$	254,386
Issuance of common stock upon exercise of stock options and release of restricted stock units		40,271	—			34		—		—		34

Stock-based compensation		—	—			14,644		—		—		14,644
Other comprehensive income		—	—			—		394		—		394
Other, net		—	—			—		—		—		—
Net loss		—	—			—		—		(21,987)		(21,987)
Balance at June 30, 2023		21,170,092	$	41		$	1,178,290	$	(172)	$	(930,688)	$	247,471

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six Months Ended June 30,
	2023		2022
Operating Activities
Net loss	$	(57,581)	$	(212,175)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,372		11,384
Stock-based compensation	25,192		91,310
Gain on extinguishment of debt	(15,205)		—
Accretion of unamortized debt discount and amortization of debt issuance costs	1,428		2,016

Amortization of premium (accretion of discount) for marketable securities	591		2,781
Deferred income taxes	—		(481)
Change in fair value of common stock warrant liabilities	(151)		(5,485)
Impairment charges	455		—
Changes in operating assets and liabilities:
Accounts receivable, net	(2,481)		2,530
Prepaid expenses and other assets	(1,792)		(5,076)
Operating lease right-of-use assets, net	308		1,197
Accounts payable	2,499		(17,223)

Operating lease liabilities	(1,115)		(1,087)
Other accruals and liabilities	5,423		(14,705)
Net cash used in operating activities	(41,057)		(145,014)
Investing Activities
Purchases of property and equipment, including internal-use software	(11,622)		(346)

Purchases of marketable securities	—		(327,504)
Proceeds from maturities of marketable securities	98,903		325,078
Proceeds from sales of marketable securities	52,477		79,084

Net cash provided by investing activities	139,758		76,312
Financing Activities
Principal payments on finance leases obligations	(394)		(1,495)
Payments for debt issuance costs	—		(1,998)
Payments for extinguishment of debt	(135,855)		—


Net proceeds from exercise of stock options and issuance of common stock	67		852



Net cash used in financing activities	(136,182)		(2,641)
Net change in cash, cash equivalents and restricted cash	(37,481)		(71,343)
Cash, cash equivalents and restricted cash – beginning of year	365,436		244,252
Cash, cash equivalents and restricted cash – end of period	$	327,955	$	172,909
Supplemental cash flow data:
Cash paid during the period for:
Interest	$	12,211	$	15,097
Noncash investing and financing activities:

Deferred offering costs and issuance costs in accounts payable and accrued liabilities	$	—	$	(7)

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. Basis of Presentation

Business

Skillz (the “Company” or “Skillz”) operates a competitive mobile gaming 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.

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”).

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 six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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 for the fiscal year ended December 31, 2022, as filed with the SEC on March 31, 2023.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed 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 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, end user incentive program, stock-based compensation, valuation of common stock warrants and indirect tax liabilities. 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 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

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, 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. Entry fees used to enter paid competitions can include net cash deposits, cash from prior winnings, and end-user incentives. The game developers earn revenue share from monthly net cash deposits received from end-users, calculated based on paid entry fees attributable to their games as a percentage of total entry fees. End-user incentives are not paid for by game developers. In addition, the Company accounts for end-user incentives either as a reduction of revenue or as sales and marketing expense as noted below.

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 the amounts withheld by the Company is not subject to significant judgment. Certain of the Company’s larger developer agreements provide the Company with the right to receive additional consideration from the game developer related to user acquisition costs incurred by the Company to provide its Monetization Services. The amount and timing of the additional consideration the Company expects to receive is uncertain and based on the future performance of the respective developer’s games. The Company has not included these amounts of additional consideration in the transaction price related to its Monetization Services as it is not probable that a significant reversal of cumulative revenue recognized related to these amounts will not occur.

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 recognize 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 the Company’s 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 did not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of June 30, 2023 and 2022.

Games provided by two developer partners accounted for 43% and 37% of the Company’s revenue from Monetization Services in the three and six months ended June 30, 2023, respectively. Games provided by two developer partners accounted for 38% and 42% in the three and six months ended June 30, 2022, 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.

The Company’s primary end-user incentive is Bonus Cash (“Bonus Cash”), which is a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid-entry fee contests. Bonus Cash used as entry fees for paid competitions can include newly issued Bonus Cash and/or Bonus Cash that had been returned from prior winnings to an end-user. The Company recognizes the entire cost of Bonus Cash as a sales and marketing expense or a reduction of revenue (as

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

discussed below) only when the Bonus Cash is lost in a competition, as that is the point at which the Company incurs the cost of the Bonus Cash and when revenue is recognized from such Bonus Cash. When Bonus Cash used as entry fees for a paid competition is returned to an end-user as winnings, the Company does not record a sales and marketing expense or a reduction of revenue for such Bonus Cash. Further, if the Bonus Cash is returned to an end-user and is used to enter subsequent competitions and the end-user continues to win, the Company does not record any sales and marketing expense or a reduction of revenue each time the Bonus Cash is returned to the winning end-user.

•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 redeemed for prizes, including Bonus Cash prizes. 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 until it is won by another end-user.

For the three months ended June 30, 2023 and 2022, the Company recognized a reduction of revenue of $7.2 million and $13.1 million, respectively, related to these end-user incentives. For the six months ended June 30, 2023 and 2022, the Company recognized a reduction of revenue of $15.2 million and $29.5 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 June 30, 2023 and 2022, the Company recognized sales and marketing expense of $15.8 million and $27.7 million, respectively, related to these end-user incentives. For the six months ended June 30, 2023 and 2022, the Company recognized sales and marketing expense of $32.6 million and $65.8 million, respectively, related to these end-user incentives.

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.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Total engagement marketing accounted for as sales and marketing expense recognized in the three months ended June 30, 2023 and 2022 was $17.1 million and $31.4 million, respectively. Total engagement marketing accounted for as sales and marketing expense recognized in the six months ended June 30, 2023 and 2022 was $34.7 million and $74.1 million, respectively.

Cost of Revenue

Cost of revenue primarily comprises of third-party payment processing fees, server costs, amortization of developed technology, personnel expenses, direct software costs, amortization of internal use software, hosting expenses, and allocation of shared facility and other costs.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash, commercial paper, money market funds and U.S government agency securities 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 of $3.2 million mainly relates to the letter of credit for the Company’s headquarters in San Francisco.

A reconciliation of the Company’s cash and cash equivalents in the condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows is as follows:


	June 30,		December 31,
	2023		2022
Cash and cash equivalents	$	324,779	$	362,516
Restricted cash included in other long-term assets	3,176		2,920
Cash, cash equivalents and restricted cash	$	327,955	$	365,436

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, restricted cash, and marketable securities. Although the Company deposits its cash with multiple well-established financial institutions, the deposits, at times, may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. Marketable securities primarily consist of corporate debt securities, asset backed securities and debt instruments issued by foreign governments. The Company limits the amount of credit exposure to any one issuer and monitors the financial condition of the financial institutions on a regular basis.

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 credit losses. The allowance for credit losses is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when there are specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. At June 30, 2023, the Company’s allowance for credit losses on accounts receivable was not significant 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)

Fair Value Measurement

The Company applies fair value accounting for 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.

Certain financial instruments, including debt, are not measured at fair value on a recurring basis in the consolidated balance sheets. The fair value of debt was estimated using primarily level 2 inputs, including quoted market prices or present value of future payments discounted by the market interest rates or the fixed rates based on current rates offered to the Company for debt with similar terms and maturities.

Long-Lived Assets

Long-lived assets consist of property and equipment with estimable useful lives subject to depreciation and 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. When impairment indicators are identified, the Company assesses its long-lived assets for impairment. 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.

On March 15, 2023, the Company completed the purchase of an office building in Las Vegas, Nevada for $11.5 million, with $10.5 million and $1.0 million allocated to building and land components, respectively. The Company intends to use the building as the Company’s future headquarters. The building will be depreciated on a straight-line basis over its estimated useful life of 39 years. The land is not subject to depreciation.

During the six months ended June 30, 2022, the Company recognized $8.1 million of amortization expense associated with finite-lived intangible assets, including developed technology, customer relationships, trademarks and tradenames, in the condensed consolidated statements of operations and comprehensive loss. As these finite-lived intangible assets were fully impaired and written off as of December 31, 2022, the Company did not recognize amortization expense during the six months ended June 30, 2023.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Investments

The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as non-current marketable securities. Dividend and interest income are recognized when earned.

Marketable securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, the Company employs a systematic methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.

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 and would be measured at fair value. 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 condensed consolidated statements of operations and comprehensive loss 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 condensed consolidated statements of operations and comprehensive loss. The Company separately presents investments in non-marketable equity securities within long-term assets on the condensed consolidated balance sheets.

Advertising and Promotional Expense

Advertising and promotional expenses are included in sales and marketing expenses within the condensed consolidated statements of operations and comprehensive loss and are expensed when incurred. Excluding marketing promotions related to the Company’s end-user incentive programs, advertising expenses were $8.3 million and $30.4 million for the three months ended June 30, 2023 and 2022, respectively, and $17.1 million and $90.6 million for the six months ended June 30, 2023 and 2022, respectively.

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, Stock-

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Based Compensation, for more information. The Company accounts for forfeitures as they occur. If an employee stock-based award is canceled without the concurrent grant or offer of a replacement award, the cancellation is treated as a settlement for no consideration and any previously unrecognized compensation cost shall be recognized at the cancellation date. Stock-based awards granted to employees are primarily stock options and restricted stock units.

The Company has primarily granted restricted stock units (“RSUs”), which have a service-based (and in certain circumstances, performance-based) vesting condition over a four-year period, to its employees and members of the Board of Directors since the start of 2021. The Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's common stock on the date of the grant.

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 Company’s limited market trading history, it has estimated the volatility of its common stock on the date of grant of awards with market conditions based on the weighted average historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimated the expected term of its awards with market conditions based on various exercise scenarios, as these awards are not considered “plain vanilla.” The Company utilized a risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated 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

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 six months ended June 30, 2023, the Company continued to operate as a single operating and reportable segment as the CODM reviews financial information presented on a consolidated basis for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.

Recently Issued Accounting Pronouncements adopted

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, instead of fair value at the acquisition date in accordance with Topic 805. The amendments in ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance effective January 1, 2023 and it did not have an impact on the Company’s financial position, results of operations including per-share amounts, or cash flow statements.

Other recent accounting pronouncement issued, not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated statements upon future adoption.

3. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Credit card processing reserve	$	1,000	$	1,000
Prepaid expenses	3,896		2,234
Other current assets	1,142		1,488
Prepaid expenses and other current assets	$	6,038	$	4,722

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Property, Plant and Equipment, Net

Property, plant and equipment consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Land	$	980	$	—
Building	10,541		—
Capitalized internal-use software	9,126		9,126
Computer equipment and servers	1,392		1,291
Furniture and fixtures	278		278
Leasehold improvements	114		114

Finance lease right-of-use assets	17		10
Total property, plant and equipment	22,448		10,819
Less: Accumulated Depreciation	9,011		7,828
Property, plant and equipment, net	$	13,437	$	2,991

Other Current Liabilities

Other current liabilities consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Accrued sales and marketing expenses	$	2,090	$	4,409
Accrued compensation	7,472		4,991
Accrued publisher fees	3,235		4,442
End-user liability, net	6,791		8,984
Accrued developer revenue share	1,391		2,017
Short-term lease obligation	1,425		1,525
Accrued legal expenses	14,291		1,984
Accrued interest expense	554		1,236
Indirect tax liabilities	11,446		10,909
Other accrued expenses	9,644		5,169
Other current liabilities	$	58,339	$	45,666

The increase in accrued legal expense was driven by the reclassification of accrued litigation expense from long term liabilities to other current liabilities in the first quarter of 2023, based on anticipated resolution date update.

4. Fair Value Measurements

As of June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022 were $324.8 million and $362.5 million, respectively, and were comprised of cash on hand, money market funds, and highly liquid investments with original contractual maturity dates of three months or less. Cash and money market funds are classified within Level 1 of the fair value hierarchy. Highly liquid investments such as commercial papers and corporate bonds are classified within Level 2 of the fair value hierarchy.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:


	As of June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-Sale Investments
Asset-backed securities	$	—	$	6,136	$	—	$	6,136

Corporate notes and bonds	—		27,280		—		27,280



Total assets	$	—	$	33,416	$	—	$	33,416
Liabilities:
Common Stock Warrants
Private Common Stock Warrants	$	—	$	—	$	138	$	138
Total liabilities	$	—	$	—	$	138	$	138


	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-Sale Investments
Asset-backed securities	$	—	$	58,192	$	—	$	58,192

Corporate notes and bonds	—		110,298		—		110,298
Commercial paper	—		10,479		—		10,479
Foreign government securities	—		5,027		—		5,027
US government and agency securities	86,898		—		—		86,898
Total assets	$	86,898	$	183,996	$	—	$	270,894
Liabilities:
Common Stock Warrants
Private Common Stock Warrants	$	—	$	—	$	289	$	289
Total liabilities	$	—	$	—	$	289	$	289

Available-for-Sale Investments

Available-for-sale investments were classified within Level 1 or Level 2 because the Company’s use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The market values of Level 2 investments are determined based on observable inputs for the securities other than quoted prices, such as interest rates, yield curves, and credit spreads, or quoted prices for identical or similar securities in markets that are not considered active. There were no transfers between levels during the periods presented.

Private Common Stock Warrants

The Private Warrants were classified within Level 3 as they were valued based on a Black-Scholes 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.

The following sets forth the activity for Private Warrants:


	Private Warrants
Balance at December 31, 2022	$	289
Fair market value adjustment	(151)
Balance at June 30, 2023	$	138

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

5. Investments

Investment Components

The components of investments were as follows:


	As of June 30, 2023
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset-backed securities	$	6,186	$	—	$	(50)	$	6,136	$	—	$	39	$	6,097

Corporate notes and bonds	27,402		—		(122)		27,280		—		27,280		—

Money market funds	285,499		—		—		285,499		285,499		—		—


Total investments	$	319,087	$	—	$	(172)	$	318,915	$	285,499	$	27,319	$	6,097


	As of December 31, 2022
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset-backed securities	$	58,455	$	1	$	(264)	$	58,192	$	—	$	1,464	$	56,728

Corporate notes and bonds	111,592		—		(1,294)		110,298		—		110,298		—
Commercial paper	10,477		2		—		10,479		—		10,479		—
Money market funds	232,448		—		—		232,448		232,448		—
Foreign government securities	5,064		—		(37)		5,027		—		5,027		—
US government and agency securities	86,869		29		—		86,898		86,898		—		—
Total investments	$	504,905	$	32	$	(1,595)	$	503,342	$	319,346	$	127,268	$	56,728

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 June 30, 2023 and December 31, 2022 and was classified within “non-marketable equity securities” in the condensed consolidated balance sheets. 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 six months ended June 30, 2023.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Unrealized Losses on Marketable Securities

Marketable securities with continuous unrealized losses for less than 12 months and 12 months or more and their related fair values were as follows:


	As of June 30, 2023
	Less than 12 Months				12 Months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Asset-backed securities	$	1,292	$	(2)	$	4,376	$	(48)	$	5,668	$	(50)

Corporate notes and bonds	—		—		27,280		(122)		27,280		(122)




Total investments	$	1,292	$	(2)	$	31,656	$	(170)	$	32,948	$	(172)


	As of December 31, 2022
	Less than 12 Months				12 Months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Asset-backed securities	$	52,412	$	(229)	$	4,656	$	(35)	$	57,068	$	(264)

Corporate notes and bonds	55,864		(571)		54,434		(723)		110,298		(1,294)


Foreign government securities	—		—		5,027		(37)		5,027		(37)

Total investments	$	108,276	$	(800)	$	64,117	$	(795)	$	172,393	$	(1,595)

Marketable Securities Maturities


	Adjusted		Estimated
	Cost Basis		Fair Value
June 30, 2023
Due in one year or less	$	27,442	$	27,319
Due after one year through five years	6,146		6,097
Due after five years through ten years	—		—
Total	$	33,588	$	33,416

6. Long-Term Debt

Components of long-term debt were as follows as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
2021 Senior Secured Notes, non-current	$	129,671	$	289,500
Unamortized discount and issuance costs	(6,523)		(16,719)
Long-term debt, non-current	$	123,148	$	272,781

Open Market Debt Repurchases

During the six months ended June 30, 2023, the Company’s repurchased approximately $159.8 million of its senior secured notes. In connection with the repurchase, the Company’s recognized a gain on extinguishment of $15.2 million on the consolidated statements of operations. The gain primarily reflected the payment discounts as the notes were redeemed for total consideration below the notes par value of the notes as well as the write-off of unamortized debt issuance costs and discounts. The Company’s recognized the gain on debt extinguishment of $15.2 million adjusted for the non-cash write-off of unamortized

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

discounts of $6.2 million and unamortized debt issuance costs of $2.6 million on the condensed consolidated statements of cash flows for the six months ended June 30, 2023.

2021 Senior Secured Notes

In December 2021, the Company entered into a $300 million of 10.25% secured notes in a private placement to certain institutional buyers. The interest is payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. At issuance, the effective interest rate on the notes was 12.14%. The notes will mature on December 15, 2026, unless repurchased or redeemed earlier. On September 1, 2022, the Company repurchased $10.5 million of the principal amount of the 2021 Senior Secured Notes at 69.5% for $7.3 million plus accrued interest of $0.2 million. This resulted in a gain on extinguishment of debt of $2.6 million as the notes were redeemed for total consideration below par value of the notes as well as the write-off of unamortized debt issuance costs and discounts. After giving effect to the 2022 and the 2023 open market repurchases, as of June 30, 2023, $129.7 million of the senior secured notes remained outstanding and the effective interest rate is 12.09%. The secured notes contain customary covenants restricting the Company’s ability to incur debt, incur liens, make distributions to stockholders, make certain transactions with our affiliates, as well as certain other financial covenants. The Company was in compliance with all covenants as of June 30, 2023.

In accounting for the senior secured notes, unamortized discount and issuance costs were deducted from the carrying value in the condensed consolidated balance sheets. Issuance costs was recognized as interest expense over the five-year term of the senior secured notes. The senior secured notes are classified as Level 2 financial instruments, and its fair value is presented for disclosure purposes only. The Company determined the fair value of the notes was $105.7 million as of June 30, 2023 based on secondary market quotes.

Interest is paid semi-annually. Accrued interest as of June 30, 2023 was $0.6 million and was recorded within other current liabilities in the Company’s condensed consolidated balance sheets. $12.1 million cash was paid for interest in the quarter ended June 30, 2023.

The following table outlines maturities of the principle related to the Company’s long-term debt as of June 30, 2023:


	Amount
2023 (excluding the six months ended June 30, 2023)	$	—
2024	—
2025	—
2026	129,671
Total	$	129,671

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 its 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, other than as disclosed herein, is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s financial position, as of June 30, 2023. 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 the San Francisco Superior Court in California for claims including breach of contract, retaliation and wrongful termination. The case was tried in August and September 2021. The jury found in favor of the former employee and rendered a verdict against the Company for $11.6 million in compensatory damages, and the Company recorded a loss contingency accrual of $7.1 million and corresponding general and administrative expenses in such amount in the third quarter of 2021. In April 2022, the judge in the case

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

determined, in light of the Company’s post-verdict motions, that the instructions given to the jury at trial were defective. Accordingly, the judge ordered a new trial on damages or, alternatively, permitted the plaintiff accept a reduced verdict in the amount of $4.35 million, which the plaintiff subsequently levied from the Company’s bank account. On May 25, 2022, the Company filed an appeal from the judgment seeking, in part, entry of judgment in the Company's favor notwithstanding the verdict. The plaintiff accepted the reduced verdict, and filed an appeal from the judgment on June 7, 2022, seeking in part, to reinstate the jury's original verdict (or an award less than the original verdict but greater than $4.35 million final judgment) and challenge the trial court’s conclusion that stock options are not “wages,” which was the basis for dismissing his wrongful termination and retaliation claims. Management believes the most likely outcome is that this will go back to trial which will be resolved during the calendar year 2024.

8. 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, except 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 June 30, 2023, after giving effect to the reverse stock split described below, the Company has authorized a total of 41 million shares, consisting of (i) 31 million shares of common stock, par value $0.0001 per share (“common stock”), including 25 million shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), 6 million shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), and (ii) 10 million shares of preferred stock, par value 0.0001 per share (“preferred stock”).

Reverse Stock Split

On June 23, 2023, the Company’s effectuated the one-for twenty reverse stock split of its issued and outstanding shares of Common Stock. As a result of the reverse stock split, every 20 shares of issued and outstanding Common Stock were combined and converted into one issued and outstanding share of Common Stock, and the number of authorized shares of Common Stock was reduced proportionately. The par value per share of Common Stock remains unchanged. The Company’s Class A Common Stock began trading on a split-adjusted basis on the NYSE at market open on June 26, 2023. All share and per-share amounts have been retrospectively adjusted to reflect the impact of the reverse stock split.

9. Stock-Based Compensation

The following table summarizes stock-based compensation expense recognized for the three and six months ended June 30, 2023 and 2022 as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Research and development	$	545	$	2,863	$	1,751	$	5,151
Sales and marketing	2,509		1,561		4,413		4,454
General and administrative	11,590		9,007		19,028		81,705
Total stock-based compensation expense	$	14,644	$	13,431	$	25,192	$	91,310

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 Flying Eagle Acquisition Corporation, a Delaware

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

corporation (“FEAC”) 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. RSUs are also granted under the 2020 Plan. These awards typically have a cliff vesting period of one 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 FEAC 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 5,392,022 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 750,000 shares which may be of Class A and/or Class B common stock, 3,694,871 shares of Class A common stock and 947,151 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 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 six months ended June 30, 2023 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, 2022	1,422,876	812,293	$	263.00	7.27	$	1,145	2,505,328	$	24.60
Additional shares authorized	1,053,433	—	—
Options and restricted stock units granted	(488,880)	—	—					488,880	11.59
Options exercised and restricted stock units released	—	(7,953)	7.11					(93,442)	65.78
Options and restricted stock units canceled	207,713	(7,852)	29.91					(199,861)	36.04
Balance at June 30, 2023	2,195,142	796,488	$	267.86	6.78	$	938	2,700,905	$	20.03


Exercisable at June 30, 2023		190,912	5.63		4.63	933

Unvested at June 30, 2023		605,564	350.53		7.45	6

The number of RSUs granted and outstanding does not include 1.0 million performance-based RSUs which the Company issued as of June 30, 2023, as the performance-based RSUs are not deemed granted for accounting purposes because the performance-based RSUs are subjected to the further approval on the performance criteria. Additionally, the stock option and RSU activity presented in the table above does not include activity related to the 2022 CFO Restricted Stock Unit and Performance award, 2022 CEO Restricted Stock Unit and Performance Award, 2021 CEO Performance Award and Founders' Option Agreements, described below.

As of June 30, 2023, unrecognized stock-based compensation expense related to unvested stock options, restricted common stock, RSUs, performance-based RSUs and performance stock units was $81.6 million. The weighted-average period over which such compensation expense will be recognized is 2.7 years.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The aggregate intrinsic value of options exercised was $0.02 million and $13.0 million during the three months ended June 30, 2023 and 2022, respectively, and $0.04 million and $15.2 million during the six months ended June 30, 2023 and 2021,respectively.

2022 CFO Restricted Stock Unit and Performance Award

The Company granted the Company’s President and Chief Financial Officer (“CFO”) a restricted stock unit award covering shares of the Class A common stock with a grant date value equal to $15.0 million, comprised of 0.5 million restricted stock units. Such grant vests 25% on the first anniversary of CFO’s start date and the remainder vests in 12 substantially equal quarterly installments, in each case subject to continuous service with the Company through each applicable vesting date, provided that the grant vests in full if the CFO is terminated without cause following a change of control of the Company. On September 30, 2022, the number of shares became fixed, as such the restricted stock unit award was re-measured based on the fair value of an underlying share of the Class A common stock, which was equal to $10.7 million, and the Company then reclassified the liability classified award to additional paid-in capital. During the three and six months ended June 30, 2023, the Company recognized $0.6 million and $1.3 million, respectively, in compensation expense related to this grant. As of June 30, 2023, the unrecognized stock-based compensation cost related to the non-vested CFO restricted stock unit award was $8.2 million. The Company expects this cost to be recognized over a remaining weighted-average period of approximately 3.25 years.

In addition, the Company issued to the CFO a performance stock unit award covering shares of the Class A common stock with a fair value of $5.0 million as of the issuance date, comprised of 0.2 million performance stock units. Such award vests over four one-year periods, with pro-rata vesting for the first and last performance periods, in each case subject to continuous service with the Company through each applicable vesting date and the attainment of certain corporate performance goals. The Company did not award any performance stock units for the year ended 2022. As of June 30, 2023, the award was not considered granted for accounting purposes because the performance-based units are subjected to the further approval on the performance criteria, the unrecognized stock-based compensation cost for this CFO performance stock unit award was $4.5 million.

2022 CEO Restricted Stock Unit and Performance Award

The Company granted the Company’s Chief Executive Officer (“CEO”) a restricted stock unit award covering shares of the Class A common stock with a grant date value equal to $25.9 million, comprised of 1.4 million restricted stock units. Such grant vests 25% on the first anniversary of January 1, 2023 and the remainder vests in 12 substantially equal quarterly installments, in each case subject to continuous service with the Company through each applicable vesting date, provided that the grant vests in full if the CEO is terminated without cause following a change of control of the Company. During the three and six months ended June 30, 2023, the Company recognized $0.9 million and $1.8 million, respectively, in compensation expense related to this grant. As of June 30, 2023, the unrecognized stock-based compensation cost related to the non-vested CEO restricted stock unit award was $12.5 million. The Company expects this cost to be recognized over a remaining weighted-average period of approximately 3.49 years.

In addition, the Company issued to the CEO a performance stock unit award covering shares of the Class A common stock with a fair value of $8.6 million as of the issuance date, comprised of 0.5 million performance stock units. Such award vests over four one-year periods, in each case subject to continuous service with the Company through each applicable vesting date and the attainment of certain corporate performance goals. The Company did not award any performance stock units for the year ended 2022. As of June 30, 2023, the award was not considered granted for accounting purposes because the performance-based units are subjected to the further approval on the performance criteria, the unrecognized stock-based compensation cost for this CEO performance stock unit award was $6.5 million.

2021 CEO Performance Award

In September 2021, the Company granted the CEO, an award of up to 0.8 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 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 performance stock units were 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 vested if and when the Company’s market capitalization equals or exceeds the

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 was calculated based on the trailing 60-trading day 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. The Company’s market capitalization baseline was 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 $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.

On March 14, 2022 (“cancellation date”), the Board of Directors and the CEO, entered into an agreement to cancel this CEO Performance Award. The Company determined that the cancellation of the CEO Performance Award was a settlement for no consideration and not accompanied by a concurrent grant (or offer to grant) of a replacement award. As a result, the Company recorded the remaining unrecognized compensation costs related to the CEO Performance Award of $65.1 million during three months ended March 31, 2022.

Founders’ Option Agreements

In December 2020, the Company entered into option agreements with each of the CEO and Chief Strategy Officer (“CSO”) (the “Option Agreements”) awarding options to purchase (i) 498,000 shares of Class B common stock to the CEO and (ii) 102,000 shares of Class A common stock to the CSO with an exercise price of $353.60. The options will vest in three equal increments as follows (i) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the volume weighted average price on the NYSE over a ten (10) trading day period of underlying Class A common stock (“VWAP”) equals or exceeds 3.0x the VWAP of the shares as of the Closing Date (as defined in the Options Agreements), (ii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 4.0x the VWAP of the shares as of the Closing Date; and (iii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 5.0x the VWAP of the shares as of the Closing Date.

The $93.4 million grant date fair value of the Founders’ Options 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. The significant inputs to the valuation included the Class A stock price and the risk-free interest rate as of the grant date, as well as the estimated volatility of the Class A common stock. For the three and six months ended June 30, 2023 and 2022, the Company recognized $4.8 million and $9.6 million, respectively, in compensation expense related to these grants. As of June 30, 2023, the unrecognized stock-based compensation cost related to the Option Agreements was $44.1 million.

10. Income Taxes

The Company’s provision for (benefit from) income taxes was $0.01 million and $(0.16) million for the three months ended June 30, 2023 and 2022, respectively. This represents an effective tax rate for the respective periods of (0.05)% and 0.25%. The Company’s provision for (benefit from) income taxes was $0.1 million and $(0.4) million for the six months ended June 30, 2023 and 2022, respectively. This represents an effective tax rate for the respective periods of (0.14)% and 0.17%. The Company has historically been in an overall loss position and is only subject to state and foreign taxes. The Company maintains a valuation allowance for substantially all of its net deferred tax assets. The effective tax rate differs from the federal statutory rate due to the valuation allowance, as well as due to foreign taxes and state taxes.

11. Related-Party Transactions

The Company did not have any material related party transactions in the six months ended June 30, 2023.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

12. Net Loss Per Share

The Company computes net 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 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 loss per Class A common stock and Class B common stock (in thousands, except for share and per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net loss – basic and diluted	$	(21,987)	$	(62,611)	$	(57,581)	$	(212,175)
Denominator:
Weighted average common shares outstanding – basic and diluted	20,990,780		20,407,887		20,939,723		20,246,176
Net loss per share attributable to common stockholders – basic and diluted	$	(1.05)	$	(3.07)	$	(2.75)	$	(10.48)

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


	As of June 30,
	2023	2022
Common stock warrants	226,786	226,786
Common stock options	946,792	1,201,993

Restricted stock units	2,700,905	660,685
Total	3,874,483	2,089,464

13. Geographical Information

No sales to a country other than the United States accounted for more than 10% of revenue for the three and six months ended June 30, 2023 or 2022. Revenue, classified by the major geographic areas where the end users were located when they entered paid competitions, was as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	33,569	$	53,646	$	71,005	$	121,656
Other countries	6,597		18,111		13,544		41,965
Total	$	40,166	$	71,757	$	84,549	$	163,621

Property and equipment, net and operating lease right-of-use assets by geography was as follows:


	June 30,		December 31,
	2023		2022
United States	$	13,208	$	3,058
Other countries	393		405
Total	$	13,601	$	3,463

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

14. Subsequent Events

On July 7, 2023, the Company entered into a Loan and Security Agreement (together, the “Credit Agreement”) whereby it would lend Big Run Studios approximately $2 million to refinance Big Run’s existing credit facility. The purpose of the transaction is to support Big Run in expanding their upcoming game launch to include additional variants in order to expand into the exciting new category of skill-based slots.

The designated rate on the credit facility is 11.5%, with interest for the first six months being paid, at Big Run’s option each month, (1) in cash or (2) in-kind and compounded monthly to the principal. The interest-only period may be extended by six months upon mutual written agreement between Big Run and Skillz. After the interest-only period, principal and interest shall be payable monthly in equal installments. The default rate is 16.5% per annum. Late charges will be assessed at 5% of the payment amount overdue if not paid within five business days of its due date.

The credit facility will mature on June 1, 2025, subject to applicable permitted prepayments; provided that upon the occurrence of a six month extension of the interest-only period, the maturity shall also be extended by six additional months to December 1, 2025.

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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. (for purposes of this section, “Skillz,” “we,” “us” and “our”). MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Part I, Item IA, “Risk Factors” in our Annual Report and Part II, Item 1A, “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Reverse Stock Split

At the Company’s 2023 Annual Meeting of Stockholders held on June 20, 2023, the Company’s stockholders approved a proposal to authorize a reverse stock split of the Company’s Class A Common Stock and Class B Common Stock (together, the “Common Stock”), at a ratio within the range of 1-for-10 to 1-for-20 shares. On June 22, 2023, the Board approved the Final Ratio of 1-for-20. The reverse stock split became effective on June 23, 2023 upon filing of a Certificate of Amendment.

On June 23, 2023, we effected the one-for twenty reverse stock split of our issued and outstanding shares of Common Stock. As a result of the reverse stock split, every 20 shares of issued and outstanding Common Stock were combined and converted into one issued and outstanding share of Common Stock, and the number of authorized shares of Common Stock was reduced proportionately. The par value per share of Common Stock remains unchanged. The Company’s Class A Common Stock began trading on a split-adjusted basis on the NYSE at market open on June 26, 2023. All share and per-share amounts in this quarterly report on Form 10-Q have been retrospectively adjusted to reflect the impact of the reverse stock split.

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 June 30, 2023, the platform had 1.1 million monthly active users (“MAUs”) and hosts an average of over 3.2 million daily tournaments, including 0.64 million paid entry daily tournaments, offering over $68 million in prizes each month. Since our inception in 2012, over 16,000 registered game developers have launched a game integration on our platform. As of June 30, 2023, over 500 developers had a game on our platform with at least one installed user.

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.

Historically, our top games and related developers have accounted for a substantial portion of our revenue earned from the Skillz platform. For the three months ended June 30, 2023 and 2022, the games Solitaire Cube, 21 Blitz (each developed by Tether Studios, LLC (“Tether”)) and Blackout Bingo (developed by Big Run Studios Inc. (“Big Run”)) combined accounted for 70% and 71% of our revenue, respectively. For the three months ended June 30, 2023 and 2022, Tether accounted for 43% and 38% of our revenue, respectively. For the three months ended June 30, 2023 and 2022, Big Run accounted for 37% and 42% of our revenue, respectively. For the six months ended June 30, 2023 and 2022, the games Solitaire Cube, 21 Blitz and Blackout

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Bingo combined accounted for 70% and 71% of our revenue, respectively. For the six months ended June 30, 2023 and 2022, Tether accounted for 43% and 38% of our revenue, respectively. For the six months ended June 30, 2023 and 2022, Big Run accounted for 37% and 42% of our revenue, respectively.

Our top titles rotate over time as more games generate success on the Skillz platform. In the six months ended June 30, 2023, the number of games that generated over $1 million of annualized Gross Marketplace Volume (“GMV”) increased 26% to 44 from 35 in the six months ended June 30, 2022.

The following supplemental financial information table summarizes key operating metrics for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gross marketplace volume (“GMV”) (000s)(1)	$	255,229	$	432,209	$	532,861	$	984,343
Paying monthly active users (“PMAUs”) (000s)(2)	196		421		205		495
Monthly active users (“MAUs”) (000s)(3)	1,068		2,234		1,122		2,732
Average GMV per paying monthly active user(4)	$	433.3	$	342.1	$	865.6	$	662.7
Average GMV per monthly active user(5)	$	79.7	$	64.5	$	158.3	$	120.1
Average revenue per paying monthly active user (“ARPPU”)(6)	$	68.2	$	56.8	$	68.7	$	55.3
Average revenue per monthly active user (“ARPU”)(7)	$	12.5	$	10.7	$	12.6	$	10.1
Paying MAU to MAU ratio	18%		19%		18%		18%
Average end-user incentives, included as sales and marketing expense, per paying active user(8)	$	29.08	$	24.88	$	23.38	$	23.38
Average end-user incentives, included as sales and marketing expense, per playing active user(9)	$	5.35	$	4.69	$	10.32	$	4.24

(1) “GMV” or “Gross Marketplace Volume” means the total entry fees paid by users for contests hosted on Skillz’s platform. Total entry fees include entry fees paid by end-users using cash deposits, prior winnings from end-users’ accounts that have not been withdrawn, and end-user incentives used to enter paid entry fee contests.

(2) “Paying Monthly Active Users” or “PMAUs” means the number of end-users who entered into a paid contest hosted on Skillz’s platform at least once in a month, averaged over each month in the period.

(3) “Monthly Active Users” or “MAUs” means the number of playing end-users who entered into a paid or free contest hosted on Skillz’s platform at least once in a month, averaged over each month in the period.

(4) “Average GMV Per Paying Monthly Active User” means the average GMV in a given month divided by Paying MAUs in that month, averaged over the period.

(5) “Average GMV Per Monthly Active User” means the average GMV in a given month divided by MAUs in that month, averaged over the period.

(6) “Average Revenue Per Paying Monthly Active User” or “ARPPU” means the average revenue in a given month divided by Paying MAUs in that month, averaged over the period and does not include a deduction for end-user incentives that are included in sales and marketing expense.

(7) “Average Revenue Per Monthly Active User” or “ARPU” means the average revenue in a given month divided by MAUs in that month, averaged over the period and does not include a deduction for end-user incentives that are included in sales and marketing expense.

(8) Amount reflects the average end-user incentives included in sales and marketing expense in a given month divided by PMAUs in that month, averaged over the period.

(9) Amount reflects the average end-user incentives included in sales and marketing expense in a given month divided by MAUs in that month, averaged over the period.

Engagement marketing is a sales and marketing expense representing rewards and awards that developers do not have a valid expectation of being offered to end-users to engage on the platform. Decreases in engagement marketing could result in lower revenue as paying users no longer receive those end-user incentives, which include Bonus Cash which can only be used to enter into paid contests.

User acquisition (“UA”) marketing is a sales and marketing expense to acquire new paying users to the platform. Assuming acquisition cost per user is constant, decreases in UA marketing typically result in lower revenue as a result of having fewer new paying users. The reduction in UA marketing and engagement marketing expenses during fiscal year 2022 and 2023 has resulted in a substantial reduction in revenue and is expected to continue to result in a reduction in revenue. We are currently unable to reasonably estimate the quantitative impact, or range of impact, that reductions in UA marketing and engagement marketing will have on forward-looking revenue as a result of the number of interrelated factors impacting revenue, including, but not limited to, retention of existing users on the platform, ARPPU, efficacy of various engagement marketing programs on existing users, elasticity of the digital advertising supply curve, and impact of varying levels of player liquidity on the existing user ecosystem.

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Over the course of 2022 and 2023, our focus was on driving higher efficiency from our marketing investment by (1) reducing spend on low-return engagement marketing programs, which we expect will result in lower engagement marketing as a percentage of revenue and (2) driving UA efficiency by optimizing spend across networks and driving higher organic traffic. To the extent we reduce engagement marketing spend, we expect to reduce our Bonus Cash end-user incentives in proportion to such overall engagement marketing reduction.

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 rates 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 (cash or Bonus Cash) contests, after deducting end-user prizes (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 winnings (which includes Bonus Cash previously won and returned as winnings), and end-user incentives (which includes Bonus Cash that has been lost during the period). We offer incentives to end-users to drive traffic to the Skillz platform. End-user incentives that are offered on behalf of game developers, such as Ticketz (which can be redeemed for Bonus Cash) and initial deposit Bonus Cash, are accounted for as a reduction of revenue. End-user incentives for which game developers do not have a valid expectation of being offered to end-users to engage on the platform, such as limited-time Bonus Cash offers, are accounted for as a sales and marketing expense. Refer to Note 2, Summary of Significant Accounting Policies, of our condensed consolidated financial statements for further information.

The following table summarizes additional components of GMV, including average GMV per active user and average GMV per paying active user for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
As a percentage of GMV(%)
Prior winnings (1)	81%		81%		81%		81%
Cash deposits (2)	12%		12%		12%		12%
End user incentives (3)	7%		7%		7%		7%
As components of average GMV per paying monthly active user ($)
Prior winnings	$	351.2	$	275.8	$	700.3	$	534.2
Cash deposits	$	50.1	$	41.4	$	103.3	$	78.7
End user incentives	$	31.9	$	24.9	$	62.0	$	49.8
As components of average GMV per monthly active user ($)
Prior winnings	$	64.6	$	52.0	$	128.1	$	96.8
Cash deposits	$	9.2	$	7.8	$	18.9	$	14.3
End user incentives	$	5.9	$	4.7	$	11.3	$	9.0

(1) ‘Prior winnings’ include cash and Bonus Cash that are in the end-user’s account as a result of winnings from competitions.

(2) ‘Cash deposits’ represents currency deposits into the end-user’s Skillz account during the respective period.

(3) ‘End user incentives’ is based on amounts recorded as a reduction of revenue or sales and marketing expense during the respective period. End-user incentives primarily consist of (i) Bonus Cash, (ii) Ticketz (which can be redeemed for Bonus Cash) and (iii) promotional offers. Bonus Cash relates to all Bonus Cash that has been lost during the period (i.e., when the related cost has been incurred by the Company). Refer to Note 2 of our condensed consolidated financial statements for further information.

Prizes include cash, Bonus Cash, physical merchandise and items sponsored by third-parties. Prizes for the six months ended June 30, 2023 consisted of approximately 92% cash and 8% Bonus Cash. Prizes for the six months ended June 30, 2022, consisted of approximately 91% cash and 9% Bonus Cash. Physical merchandise and items sponsored by third-parties were de minimis for the periods presented.

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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.

•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. For the three and six months ended June 30, 2023, 40% and 38% of our salary costs were spent on product development. Our easy-to-integrate SDK contains over 200 features in a less than 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.

•Our unit economics — Our proprietary and highly scalable software platform produces revenue at a low direct cost (i.e. direct software and server costs), contributing to our gross margins. Once acquired, each user cohort contributes to revenue over its life such that at three months, approximately 20% of users in a cohort continue to be paying users and the balance of PMAUs have churned. Thereafter, our retention curve continues to flatten with a limited portion of users continuing to contribute to revenue in each cohort for subsequent years. 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. During the six months ended June 30, 2023, we experienced lower than average user retention driven by reduced user incentives, product feature changes and macroeconomic conditions, which is a continuation of the trend observed in 2022.

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

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•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 winnings in the end-users’ accounts and end-user incentives (specifically Bonus Cash). Skillz 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 monetization services. Revenue related to Bonus Cash is recognized only once when the Bonus Cash is lost. Skillz does not recognize the cost of Bonus Cash when it is returned to the user who won the competition.

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.

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 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. We also incur costs related to the amortization of intangible assets which include developed technology.

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, stock-based compensation and restructuring charges. 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, engagement marketing expenses that are not recorded as a reduction of revenue, UA marketing expenses and amortization of intangible assets which include customer relationships. Sales and marketing expenses also include allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, stock-based compensation and restructuring charges. 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, stock-based compensation and restructuring charges. General and administrative expenses also include expenses related to a loss contingency accrual.

We expect our general and administrative expenses to decrease for the foreseeable future as we reposition the Company for profitability. We do not anticipate that we will grow headcount significantly and expect to reduce certain general and administrative expenses including professional service expenses, investor relations activities, and other administrative services.

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Results of Operations

Comparison of the three months ended June 30, 2023 and 2022


	Three Months Ended June 30,				Increase/(Decrease)
	2023		2022		Amount		Percentage
(In thousands, except for number of shares, per share amounts, and percentages)
Revenue	$	40,166	$	71,757	$	(31,591)	(44)	%
Costs and expenses:
Cost of revenue	3,650		9,003		(5,353)		(59)	%
Research and development	8,966		18,253		(9,287)		(51)	%
Sales and marketing	33,085		73,731		(40,646)		(55)	%
General and administrative	30,098		26,881		3,217		12	%

Total costs and expenses	75,799		127,868		(52,069)		(41)	%
Loss from operations	(35,633)		(56,111)		20,478		(36)	%
Gain on extinguishment of debt	15,205		—		15,205		—	%
Interest expense, net	(1,712)		(7,596)		5,884		(77)	%
Change in fair value of common stock warrant liabilities	152		1,023		(871)		(85)	%
Other income (expense), net	11		(82)		93		(113)	%
Loss before income taxes	(21,977)		(62,766)		40,789		(65)	%
Provision for (benefit from) income taxes	10		(155)		165		(106)	%
Net loss	$	(21,987)	$	(62,611)	$	40,624	(65)	%

Revenue

Revenue was $40.2 million for the three months ended June 30, 2023, compared to $71.8 million for the three months ended June 30, 2022. The decrease of $31.6 million was primarily due to a decrease in the Company’s player base resulting from decreased user acquisition and engagement marketing spend of 74% and 45%, respectively. The reduction in user acquisition and engagement marketing spend was driven to prioritize profitability over revenue growth in fiscal 2023. The Company intentionally reduced spend to achieve better user acquisition efficiency and eliminate low-return engagement marketing programs. ARPU increased 17% over the same period.

Cost of Revenue

Cost of revenue was $3.7 million for the three months ended June 30, 2023, compared to $9.0 million for the three months ended June 30, 2022. The decrease of $5.4 million was primarily due to a reduction in amortization and depreciation expense driven by the write off of intangible assets in the second half of the year-ended December 31, 2022. Additionally, payment processing fees and customer service costs decreased.

Research and Development

Research and development costs were $9.0 million for the three months ended June 30, 2023, compared to $18.3 million for three months ended June 30, 2022. The decrease of $9.3 million was primarily due to a $9.9 million decrease in employee related costs, driven by a reduction in headcount, as a result of the restructuring in June 2022. Additionally, equipment and software expense decreased $0.4 million. This was partially offset by increases of $0.9 million and $0.1 million in professional fees and facility related costs, respectively.

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Sales and Marketing

Sales and marketing costs were $33.1 million for the three months ended June 30, 2023, compared to $73.7 million for the three months ended June 30, 2022. The decrease of $40.6 million was primarily driven by decreases of $22.5 million and $14.3 million in user acquisition and engagement marketing spend, respectively. This intentional decrease was driven by the strategic decision to prioritize profitability over revenue growth in 2023. UA marketing expenses were $7.8 million and $30.3 million in three months ended June 30, 2023 and 2022, respectively. UA marketing as a percentage of revenue decreased to 19% in the three months ended June 30, 2022 from 42% in the three months ended June 30, 2022. Additionally, employee related costs decreased $2.1 million, driven by reduced headcount related to the restructuring during the three months ended June 30, 2022 and other sales and marketing costs decreased $1.7 million.

General and Administrative

General and administrative costs were $30.1 million for the three months ended June 30, 2023, compared to $26.9 million for the three months ended June 30, 2022. The increase of $3.2 million was driven by increased legal fees $5.5 million, temporary staffing costs $2.8 million and other general expenses $0.3 million. This was partially offset by a $3.0 million decrease in employee related costs, due to a reduction in headcount as a result of the restructuring that occurred during the second quarter of 2023. The increase was further reduced by a $1.4 million decrease in professional fees and $0.9 million decrease in insurance expense.

Gain on extinguishment of debt

The gain on debt extinguishment of $15.2 million for the three months ended June 30, 2023 was related to the 2021 Senior Secured Notes. Refer to Note 6, Long-Term Debt, of the notes to the consolidated financial statements for further discussion.

Interest expense, net

Interest expense, net was $1.7 million for the three months ended June 30, 2023, compared to $7.6 million for the three months ended June 30, 2022. The decrease of $5.9 million primarily due to the redemption of a portion of the principal amount of the 2021 Senior Secured Notes in the third quarter of 2022 and the repurchase of debt in the second quarter of 2023. Additionally, interest income decreased by $0.8 million.

Other income (expense), net

Other income was $0.01 million for the three months ended June 30, 2023, compared to other expense of $0.1 million for the three months ended June 30, 2022. The increase of $0.1 million was primarily driven by changes in foreign currency rates.

Change in fair value common stock of warrant liabilities

The change in fair value of warrant liabilities for the three months ended June 30, 2023 was $0.2 million, compared to $1.0 million for the three months ended June 30, 2022. Refer to Note 4, Fair Value Measurement, of the notes to the condensed consolidated financial statements for further discussion.

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Results of Operations

Comparison for the six months ended June 30, 2023 and 2022


	Six Months Ended June 30,				Increase/(Decrease)
	2023		2022		Amount		Percentage
(In thousands, except for number of shares, per share amounts, and percentages)
Revenue	$	84,549	$	163,621	$	(79,072)	(48)	%
Costs and expenses:
Cost of revenue	8,232		18,203		(9,971)		(55)	%
Research and development	17,847		36,903		(19,056)		(52)	%
Sales and marketing	68,003		191,076		(123,073)		(64)	%
General and administrative	58,168		119,604		(61,436)		(51)	%

Total costs and expenses	152,250		365,786		(213,536)		(58)	%
Loss from operations	(67,701)		(202,165)		134,464		(67)	%
Gain on extinguishment of debt	15,205		—		15,205		—	%
Interest expense, net	(5,207)		(15,753)		10,546		(67)	%
Change in fair value of common stock warrant liabilities	151		5,485		(5,334)		(97)	%
Other income (expense), net	50		(109)		159		(146)	%
Loss before income taxes	(57,502)		(212,542)		155,040		(73)	%
Provision for (benefit from) income taxes	79		(367)		446		(122)	%
Net loss	$	(57,581)	$	(212,175)	$	154,594	(73)	%

Revenue

Revenue was $84.5 million for the six months ended June 30, 2023, compared to $163.6 million for the six months ended June 30, 2022. The decrease of $79.1 million was primarily due to a decrease in the Company’s player base resulting from decreased user acquisition and engagement marketing spend of 82% and 53%, respectively.. The reduction in user acquisition and engagement marketing spend was driven to prioritize profitability over revenue growth in fiscal 2023. The Company intentionally reduced spend to achieve better user acquisition efficiency and eliminate low-return engagement marketing programs. ARPU increased 25% over the same period.

Cost of revenue

Cost of revenue was $8.2 million for the six months ended June 30, 2023, compared to $18.2 million for the six months ended June 30, 2022. The decrease of $10.0 million was primarily driven by a reduction in amortization and depreciation due to the write off of intangible assets in the second half of the year-ended December 31, 2022, and reductions in payment processing and customer support personnel costs.

Research and development

Research and development costs were $17.8 million for the six months ended June 30, 2023, compared to $36.9 million for the six months ended June 30, 2022. The decrease of $19.1 million was primarily driven by a $20.5 million decrease in employee related costs, due to a reduction in headcount, resulting from the restructure in the second quarter of 2022. Additionally, equipment and software related costs decreased $0.9 million. This was partially offset by increases of $1.9 million and $0.4 million in professional fees and facility related expenses, respectively.

Sales and marketing

Sales and marketing costs were $68.0 million for the six months ended June 30, 2023, compared to $191.1 million for the six months ended June 30, 2022. The decrease of $123.1 million was primarily attributable to decreases in user acquisition and engagement marketing spend of $73.3 million and $39.4 million, respectively. This intentional decrease was driven by the strategic decision to prioritize profitability over revenue growth in 2023. UA marketing expenses were $16.2 million and $89.5

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million in six months ended June 30, 2023 and 2022, respectively. UA marketing as a percentage of revenue decreased to 19% in the six months ended June 30, 2023 from 55% in the six months ended June 30, 2022. Additionally, employee related expenses decreased $7.1 million, primarily driven by reduced headcount as a result of the 2022 restructuring, and amortization expense decreased $4.4 million. This was partially offset by an increase in professional fees of $1.1 million.

General and administrative

General and administrative costs were $58.2 million for the six months ended June 30, 2023, compared to $119.6 million for the six months ended June 30, 2022. The decrease of $61.4 million was primarily driven by a decrease in employee related expenses of $72.7 million, primarily attributable to a $62.7 million decrease in stock-based compensation expense. The decrease in stock-based compensation was primarily driven by the 2022 cancellation of performance stock units previously granted to the CEO without a concurrent grant or offer of a replacement award. As such, the Company recorded the remaining unrecognized compensation costs related to the award during the six months ended June 31, 2022. Other employment related costs decreased $10.0 million due to a reduction in headcount, as a result of the restructuring that occurred in the second quarter of 2022. Additionally, insurance and other general expenses decreased $1.7 million and $0.4 million, respectively. The decreases were offset by increases in legal fees $5.9 million, temporary staffing $4.5 million and professional fees $3.0 million.

Gain on extinguishment of debt

The gain on debt extinguishment of $15.2 million for the six months ended June 30, 2023 was related to the 2021 Senior Secured Notes. Refer to Note 6, Long-Term Debt, of the notes to the consolidated financial statements for further discussion.

Interest expense, net

Interest expense, net was $5.2 million for the six months ended June 30, 2023, compared to $15.8 million for the six months ended June 30, 2022. The decrease of $10.5 million was driven by a $6 million decrease in interest expense as a result of the redemption of a portion of the principal amount of the 2021 Senior Secured Notes in the third quarter of 2022 and the repurchase of debt in the second quarter of 2023. Additionally, interest income decreased $4.5 million due to the maturation of investment securities.

Change in fair value common stock of warrant liabilities

The change in fair value of warrant liabilities was $0.2 million for the six months ended June 30, 2023, compared to $5.5 million for the six months ended June 30, 2022. Refer to Note 4, Fair Value Measurement, of the notes to the condensed consolidated financial statements for further discussion.

Other income (expense), net

Other income was $0.1 million for the six months ended June 30, 2023, compared to other expense of $0.1 million for the six months ended June 30, 2022. The increase of $0.2 million was primarily driven by changes in foreign currency rates.

Provision for (benefit from) income taxes

Provision for income taxes was $0.1 million for the six months ended June 30, 2023, compared to a benefit of $0.4 million for the six months ended June 30, 2022. The increase of $0.4 million was primarily driven by the reversal of net deferred tax liabilities related to the acquisition of Aarki in the prior period.

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), net; change in fair value of common stock warrant liabilities; other income (expense), net; provision for (benefit from) income taxes; depreciation and amortization; stock-based compensation expense and related payroll tax expense; and certain other non-cash or non-recurring

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items impacting net loss from time to time, including, but not limited to impairment charges, loss contingency accruals, restructuring charges and one-time nonrecurring expenses, 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. The Company’s management believes Adjusted EBITDA is useful in evaluating its operating performance and is a similar measure reported by publicly-listed U.S. competitors, and regularly used by security analysts, institutional investors, and other interested parties in analyzing operating performance and prospects. By providing this non-GAAP measure, the Company’s management intends to provide investors with a meaningful, consistent comparison of the Company’s profitability for the periods presented. 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 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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(21,987)	$	(62,611)	$	(57,581)	$	(212,175)
Interest expense, net	1,712		7,596		5,207		15,753
Stock-based compensation(1)	14,644		13,431		25,192		91,310
Change in fair value of common stock warrant liabilities	(152)		(1,023)		(151)		(5,485)
Provision for (benefit from) income taxes	10		(155)		79		(367)
Depreciation and amortization	745		5,846		1,372		11,384
Gain on extinguishment of debt	(15,205)		—		(15,205)		—
Other income (expense), net	(11)		82		(50)		109
Restructuring charges(2)	—		2,933		—		2,933

One-time nonrecurring expenses(3)	—		(93)		—		26
Adjusted EBITDA	$	(20,244)	$	(33,994)	$	(41,137)	$	(96,512)

(1)For the six months ended June 30, 2022, amount includes stock-based compensation recognized for the cancellation of the Chief Executive Officers’ award of 805,977 performance share units granted on September 14, 2021 (the “CEO Performance Stock Units”).

(2)For the three and six months ended June 30, 2022, amount includes restructuring charges related to employee termination benefits.

(3)For the three and six months ended June 30, 2022, amounts represent one-time nonrecurring expenses related to IPO bonuses for certain employees, net of amounts forfeited by terminated employees.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from the sales of capital stock. As of June 30, 2023, our principal sources of liquidity were our cash and cash equivalents in the amount of $324.8 million, which are primarily invested in money market funds and marketable securities with maturities of less than three months, and marketable securities in the amount of $33.4 million.

As of June 30, 2023, the Company had 226,786 Private Warrants outstanding. During the six months ended June 30, 2023, there was no exercise of any Private Warrants.

In December 2021, the Company offered $300 million in aggregate principal senior secured notes due 2026 in a private offering. The notes were sold in a private placement to qualified institutional buyers. Annual interest started to accrue from December 20, 2021 at a stated rate of 10.25% and will be payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. The notes will mature on December 15, 2026. We used the net proceeds from the offering for general corporate purposes, which included investments in marketable securities classified as available-for-sale. We may also use the proceeds for potential acquisitions of other companies, products, or technologies that we may identify in the future. The notes contain customary covenants restricting our and certain of our subsidiaries’ ability to incur debt, incur liens, make

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distributions to holders of our stock, make certain transactions with our affiliates, as well as certain financial covenants specified in the indentures. After giving effect to the September 1, 2022 and the 2023 open market repurchases, as of June 30, 2023, $129.7 million of the senior secured notes remained outstanding. We were in compliance with all covenants applicable to the notes as of June 30, 2023.

Our existing liquidity resources are sufficient to continue operating activities for at least one year past the issuance date of the condensed consolidated financial statements. Our future cash requirements will depend on many factors, including our rate of revenue growth and the expansion of our sales and marketing activities. We also may invest in or acquire complementary businesses, applications or technologies.

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


	Six Months Ended June 30,
		2023		2022
Net cash used in operating activities		$	(41,057)	$	(145,014)
Net cash provided by investing activities		$	139,758	$	76,312
Net cash used in financing activities		$	(136,182)	$	(2,641)

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 $41.1 million for the six months ended June 30, 2023. The most significant component of our cash used during this period was a net loss of $57.6 million, which included non-cash expenses of $25.2 million related to stock-based compensation which was offset by the gain on debt extinguishment of $15.2 million related to the open market repurchases of our senior notes during the months ended June 30, 2023 and partially offset by net cash inflows of $2.8 million from changes in operating assets and liabilities. The net cash inflows from changes of operating assets and liabilities were primarily the result of increases in other liabilities of $5.4 million and accounts payable of $2.5 million. These cash inflows were slightly offset by decreases in accounts receivable of $2.5 million and of $1.8 million in prepaid expenses and other assets, respectively.

Cash Flows from Investing Activities

Net cash provided by investing activities was $139.8 million for the six months ended June 30, 2023. The net cash provided by investing activities included $52.5 million in proceeds from sales of marketable securities and $98.9 million in proceeds from maturities of marketable securities which were partially offset by purchase of an office building of $11.6 million in Las Vegas, Nevada

Cash Flows from Financing Activities

Net cash used in financing activities was $136.2 million for six months ended June 30, 2023, which was primarily due to principal payments on extinguishment of debt.

Contractual Obligations and Commitments

Our material cash requirements include the following contractual and other obligations.

Leases

We have operating lease arrangements for office space, and finance lease agreements for certain network equipment. As of June 30, 2023, we had lease payment obligations of $20.5 million, of which $4.4 million is payable within 12 months.

Secured Notes and Term Loan

Refer to “Liquidity and Capital Resources” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q for more information.

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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 Annual Report as there have been no material changes.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our condensed 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 June 30, 2023, we had cash and cash equivalents of $324.8 million, which consisted of money market fund accounts and commercial papers for which the fair market value would be affected by changes in the general level of U.S. interest rates. As of June 30, 2023, we had marketable securities of $33.4 million, which primarily consisted of corporate debt and asset backed securities, for which the fair market value would be affected by changes in the general level of interest rates. We limit the amount of credit exposure to any one issuer. Our investments carry a degree of interest rate risk. 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 and marketable securities.

Foreign Currency Risk

There was no material foreign currency risk for the six months ended June 30, 2023 and 2022.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of June 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective as a result of previously disclosed material weaknesses in our internal control over financial reporting as described below.

Notwithstanding the material weaknesses, management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Form 10-Q, in conformity with GAAP.

Material Weaknesses

As previously disclosed in our management’s report on internal control over financial reporting within then Annual Report we identified material weaknesses in our internal control over financial reporting with respect to the following:

1.Risk assessment

2.Information technology general controls

3.Internal control over accounting processes

Risk Assessment

We were unable to maintain an effective risk assessment process based on the criteria established in the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. The Company’s risk assessment process did not adequately identify financial statement risks related to the Company’s exposure to indirect taxes that impacted the indirect tax liability in our December 31, 2022 consolidated balance sheet and resulted in a restatement of our previously issued consolidated financial statements. In addition, we did not timely identify third party service organizations on which we rely that were not planning to issue System Organization Controls (SOC) reports, or issued SOC reports with qualified opinions. Consequently, we did not implement mitigating internal controls to adequately respond to the related financial statement risks. As of June 30, 2023, the risk assessment-related material weakness remediation efforts were not completed and, therefore, the material weakness previously identified continued to exist as of June 30, 2023.

Information Technology General Controls (ITGCs)

ITGCs in the areas of access and program change over information technology (IT) systems that support the Company’s financial reporting processes were not designed or operating effectively. Specifically, the Company did not maintain sufficient: (a) user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (b) program change management controls to ensure that IT program and data changes affecting financial information technology applications and underlying records are identified, tested, authorized, and implemented appropriately. As a result, the Company’s related IT dependent manual and application controls that rely upon the affected ITGCs, or information coming from IT systems with affected ITGCs were also deemed ineffective. As of June 30, 2023, the ITGC-related material weakness remediation efforts were not completed and, therefore, the material weakness previously identified continued to exist as of June 30, 2023.

Internal Controls Over Accounting Processes

Controls designed to properly evaluate certain accounting processes, including where management review was involved, did not operate effectively due to the lack of sufficient documentation or evidence retained to demonstrate management’s review across accounting processes. In addition, as noted in the Risk Assessment section above, we were unable to design and implement controls to prevent and detect misstatements across several accounting processes, including related to the Company’s accounting for its end-user liability balance in our December 31, 2022 balance sheet, and resulted in a restatement of our previously issued consolidated financial statements. The material weakness remediation efforts for the foregoing were not completed as of June 30, 2023. Therefore, there continued to be insufficient documentation or evidence retained to demonstrate management’s review across accounting processes as of June 30, 2023.

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Remediation of Material Weaknesses

In 2023, our remediation efforts will include the following:

•Creation of a Steering Committee that will oversee a material weaknesses remediation working group, establish organizational priorities and identify and allocate resources needed for the remediation of control deficiencies underlying the material weaknesses discussed above.

•Augmentation of personnel and resources involved in the design and performance of internal control over financial reporting as deemed necessary by the working group and by the Steering Committee.

•Redesign controls around end-user liability and implement additional controls around indirect taxes. Specifically:

◦Our existing controls around end-user liability did not reconcile the balance between our general ledger system and subledger system that tracks player activity. We will alter the design of our controls to ensure we reconcile the player liability balance between the two systems, and that all differences are understood and/or recorded accurately.

◦We will implement additional controls to ensure we have regular communication with our tax service providers to ensure any tax exposure that could be material to the financial statements is understood, calculated, and recorded in a timely manner.

•Continuation of internal control enhancements started in 2022 related to ITGCs and Internal Controls over Accounting Processes:

◦ITGC: renew emphasis on designing and implementing improved processes and controls for requesting, authorizing, and reviewing user access to key information systems which impact our financial reporting. This will include the addition of new control activities associated with user access provisioning within key applications, as well as certain controls which review user access and activity logs. Additionally, redesigning permissions associated with role-based access to the general ledger as well as designing and implementing compensating controls. We will also design and implement improved processes and controls over program changes within key information systems which impact our financial reporting.

◦Internal Controls over Accounting Processes: reinforcing management review control training for the accounting department to strengthen documentation and retention of evidence to be commensurate with risks associated with accounting processes involving complexity, subjectivity, and estimation uncertainties for specific transactions.

We believe that these remediation actions, when fully implemented, will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. However, material weaknesses are not considered remediated until the new controls have been operational for a sufficient period of time, are tested, and management concludes that these controls are operating effectively. We are committed to the continuous improvement of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or, in appropriate circumstances, not complete certain of the remediation work described above.

Changes in Internal Control over Financial Reporting

Except as noted above associated with the material weaknesses and corresponding remediation procedures as described above, there was no change in our internal control over financial reporting during the second quarter of 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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 our Annual Report on Form 10-K for the year ended December 31, 2022.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

Exhibit Description

Form

Exhibit

Filing Date

3.1*

Fourth Amended and Restated Certificate of Incorporation

10.1*

Amendment No. 1 to the Skillz Inc. 2020 Employee Stock Purchase Plan

10.2*

Amendment No. 1 to the Skillz Inc. 2020 Omnibus Incentive Plan

10.3*

Amendment No. 1 to the Aarki, Inc. 2010 Stock Plan

10.4

Advisory Agreement, dated June 2, 2023, between Skillz Inc. and Charlotte Edelman

8-K

10.1

6/2/2023

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 eighth day of August, 2023.


			SKILLZ INC.

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

			By:			/s/ Jason Roswig
			Name:			Jason Roswig
			Title:			President and Chief Financial Officer