Filed Pursuant to Rule 424(b)(3)
Registration No. 333-252868
PROSPECTUS SUPPLEMENT NO. 2
(to prospectus dated March 18, 2021)
SKILLZ INC.
Up to 38,616,576 Shares of Class A Common
Stock
Up to 5,016,666 Warrants
This prospectus supplement is being filed to
update and supplement the information contained in the prospectus dated March 18, 2021 (and as may be further supplemented or
amended from time to time, the “Prospectus”), with the information contained in (i) Amendment No. 1 to our Annual Report
on Form 10-K, which we filed with the Securities and Exchange Commission (“SEC”) on May 12, 2021 (the “Amended
Annual Report”) and (ii) our Quarterly Report on Form 10-Q, which we filed with the SEC on May 13, 2021 (the “Quarterly
Report”). Accordingly, we have attached the Amended Annual Report and the Quarterly Report to this prospectus supplement.
The Prospectus and this prospectus supplement
relates to: (a) the issuance by us of up to an aggregate of up to 22,266,643 shares of our Class A common stock, par value $0.0001
per share (“Class A common stock”), which consists of (i) up to 5,016,666 shares of Class A common stock that
are issuable upon the exercise of private placement warrants (the “Private Placement Warrants”) originally issued in a private
placement in connection with the IPO (as defined below) of Flying Eagle Acquisition Corp., a Delaware corporation (“FEAC”),
at an exercise price of $11.50 per share of Class A common stock, and (ii) up to 17,249,977 shares of Class A common stock
that are issuable upon the exercise of 17,249,977 warrants issued in connection with the IPO (the “Public Warrants,” and together
with the Private Placement Warrants, the “Warrants”) and (b) the resale from time to time by the Selling Securityholders named
in this prospectus (the “Selling Securityholders”) of (i) 5,016,666 Private Placement Warrants, (ii) up to 5,016,666
shares of Class A common stock that may be issued upon exercise of the Private Placement Warrants, (iii) 6,350,203 shares of
Class A common stock held by the Sponsor and certain of its transferees (the “Sponsor Shares”) and (iv) 9,999,730
shares of Class A common stock (including 1,427,112 shares of Class A common stock issuable upon conversion of Class B
common stock, par value $0.0001 per share ) that were released from escrow on March 5, 2021 based upon the achievement of certain stock
price targets (the “Earnout Shares”).
This prospectus supplement updates and supplements
the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus,
including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there
is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this
prospectus supplement.
Our Class A common stock is traded on the New
York Stock Exchange under the symbol “SKLZ.” On May 14, 2021, the closing price of our Class A common stock was $15.41 per
share.
Investing in our securities involves risks
that are described in the “Risk Factors” section beginning on page 6 of the Prospectus. Neither the SEC nor any state securities
commission has approved or disapproved of the securities to be issued under the Prospectus or determined if the Prospectus or this prospectus
supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is May 17, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2020
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______to______
Commission file number: 001-39243
SKILLZ INC.
(Exact name of registrant as specified in its
charter)
Delaware
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46-2682070
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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PO Box 445
San Francisco, California
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94104
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(Address of Principal Executive Offices)
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(Zip Code)
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(415) 762-0511
Registrant's telephone number, including area
code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Class A common stock, par value $0.0001
per share
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SKLZ
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New York Stock Exchange
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Warrants to purchase one share of Class A
common stock, each at an exercise price of
$11.50 per share
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SKLZ.WS
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New York Stock Exchange
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Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
¨ No ¨
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
¨ No ¨
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
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¨
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Emerging growth company
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¨
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ¨
The aggregate market value of voting stock held by non-affiliates of
the Registrant on March 5, 2021, based on the closing price of $27.45 for shares of the Registrant’s Class A common stock
as reported by the New York Stock Exchange, was approximately $8.0 billion. Shares of common stock beneficially owned by each
executive officer, director, and holder of more than 10% of our common stock have been excluded in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 5, 2021, the registrant had outstanding 291,753,871
shares of Class A common stock and 78,090,663 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Skillz Inc.'s definitive Proxy Statement filed with the
Securities and Exchange Commission on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held May 26, 2021 are incorporated by reference into Part III of this Form 10-K/A.
Explanatory Note
Skillz Inc. (together with its subsidiaries, “we”,
“our” or “us”) is filing this Annual Report on Form 10-K/A (Amendment No. 1), or this Annual Report,
to amend our Annual Report on Form 10-K for the year ended December 31, 2020, originally filed with the Securities and Exchange
Commission, (“SEC”), on March 12, 2021, or the Original Filing, to restate our consolidated financial statements for
the year ended December 31, 2020. This Annual Report also amends certain other items in the Original Filing, as listed in “Items
Amended in this Annual Report” below and described in “Note 3—Restatement of Consolidated Financial Statements”
to the accompanying consolidated financial statements included herein.
Background of Restatement
On April 12, 2021, the staff of the SEC issued
a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition
Companies (“SPACs”)” (the “SEC Staff Statement”). In the SEC Staff Statement, the SEC staff expressed its
view that certain terms and conditions common to SPAC warrants may require the warrants to be classified as liabilities and measured at
fair value on the SPAC’s balance sheet as opposed to equity, with subsequent changes in fair value reported in the Company’s
statement of operations each reporting period.
In December 2020, in connection with the
Company’s merger (the “Business Combination”) with Flying Eagle Acquisition Corp. (“FEAC”), a SPAC, we acquired
Public and Private Common Stock Warrants, which were accounted for as equity as opposed to liabilities, on our balance sheets and our
statements of operations did not include the subsequent non-cash changes in estimated fair value of the Public and Private Common Stock
Warrants, based on our application of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity (“ASC 815-40”). The views expressed
in the SEC Staff Statement were not consistent with our historical interpretation of the specific provisions within our warrant agreements
and our application of ASC 815-40 to the warrant agreements. We reassessed our accounting for Public and Private Common Stock Warrants,
in light of the SEC Staff’s Statement. Based on this reassessment, we determined that the Public and Private Common Stock Warrants
should be classified as liabilities measured at fair value upon issuance, with subsequent changes in fair value reported in our Statement
of Operations each reporting period.
On April 29, 2021, the Audit Committee of
our Board of Directors (the “Audit Committee), in consultation with management and our independent auditors, concluded that, because
of a misapplication of the accounting guidance applicable to the warrants acquired in connection with the Company’s Business Combination,
our previously issued consolidated financial statements as of and for the year ended December 31, 2020 should no longer be relied
upon. As such, we determined that we would restate our consolidated financial statements as of and for the year ended December 31,
2020.
Effect of Restatement and Revisions
As described above, as a result of the misapplication
of the accounting guidance applicable to the Public and Private Common Stock Warrants, we are including in this Annual Report restated
consolidated financial statements as of and for the year ended December 31, 2020. The cumulative effect of the change in the accounting
treatment of the warrants and the resulting restatement and revision of our consolidated financial statements resulted in $178 million
of common stock warrant liabilities, an 11% increase in our accumulated deficit of approximately $23 million and a 34% decrease in additional
paid-in capital of approximately $155 million as of December 31, 2020. The change in the accounting treatment for the warrants and
the resulting restatement and revision of our consolidated financial statements include (i) the reclassification of the initial fair
value of the warrants in the Business Combination from additional paid-in capital to common stock warrant liabilities within our balance
sheet and (ii) the adjustment of previously reported other expense for the change in fair value of the common stock warrant liabilities
and related transaction costs and advisor fees in our statements of operations and corresponding
adjustments to accumulated deficit for the year ended December 31, 2020. There was no impact on revenues, operating expenses or operating
loss as the change in fair value of the common stock warrant liabilities is presented within other income (expense) and not as a component
of operating loss in our statements of operations for the year ended December 31, 2020. The restatement of the financial statements
for the year ended December 31, 2020 had no impact on our liquidity or cash position. An explanation of the impact on our consolidated
financial statements is contained in “Note 3—Restatement of Consolidated Financial Statements” to the accompanying consolidated
financial statements included in this Annual Report.
As all material restatement information will be
included in this Annual Report, investors and others should rely only on the financial information and other disclosures regarding the
periods described above in this Annual Report and in future filings with the SEC (as applicable) and should not rely on any previously
issued or filed reports, press releases, corporate presentations or similar communications relating to the year ended December 31,
2020.
Internal Control Considerations
In connection with the restatement, management
has re-evaluated the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting
as of December 31, 2020. Management has concluded that the Company’s disclosure controls and procedures and internal control
over financial reporting were not effective as of December 31, 2020, due to a material weakness in internal control over financial
reporting related to the accounting for warrants issued by a SPAC. For a discussion of management’s consideration of our disclosure
controls and procedures, internal controls over financial reporting, and the material weaknesses identified, see Part II, Item
9A, “Controls and Procedures” of this Annual Report.
Items Amended in this Annual Report
The following items of this Annual Report include
restated or revised financial data: (i) Part II, Item 7: Management’s Discussion and Analysis of Financial Condition
and Results of Operations and (ii) Part II, Item 8: Financial Statements. The following items of this Annual Report also
include amendments due to the restatement: (i) Part I, Item 1A: Risk Factors and (ii) Part II, Item 9A:
Controls and Procedures. Additionally, Part III has been updated to incorporate by reference portions of our Proxy Statement filed
with the SEC on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 26,
2021. Ernst and Young LLP is providing a currently dated consent in connection with this Annual Report, which is filed as Exhibit 23.1.
Our principal executive officer and principal financial officer are providing currently dated certifications in connection with this Annual
Report. These certifications are filed as Exhibits 31.1, 31.2, 32.1 and 32.2. Except for the foregoing amended and restated information
required to reflect the effects of the restatement of the consolidated financial statements for the year ended December 31, 2020,
and applicable cross-references within this Annual Report, no other changes have been made to the Original Filing. This Annual Report
continues to describe conditions as of the date of the Original Filing, and the disclosures herein have not been updated to reflect events,
results or developments that have occurred after the date of the Original Filing, or to modify or update those disclosures affected by
subsequent events, except for the exercise of Public Warrants, as described in “Note 3—Restatement of Consolidated Financial
Statements”. Accordingly, forward looking statements included in this Annual Report represent management’s views as of the
date of the Original Filing and should not be assumed to be accurate as of any date thereafter. This Annual Report should be read in conjunction
with our filings made with the SEC subsequent to the Original Filing date.
SKILLZ INC.
TABLE OF CONTENTS
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Annual Report on Form 10-K contains forward-looking
statements regarding, among other things, the plans, strategies and prospects, both business and financial, of Skillz. These statements
are based on the beliefs and assumptions of the management of Skillz. We also may provide forward-looking statements in oral statements
or other written materials released to the public. Although Skillz believes that its plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, Skillz cannot assure you that it will achieve or realize these plans, intentions
or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that
are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of
operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes”,
“estimates”, “expects”, “projects”, “forecasts”, “may”, “will”,
“should”, “seeks”, “plans”, “scheduled”, “anticipates” or “intends”
or similar expressions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to,
statements about the ability of Skillz to:
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•
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effectively compete in the global entertainment and gaming industries;
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attract and retain successful relationships with third-party mobile game developers (“developers” and each a “developer”)
that develop and update all of the games hosted on Skillz’s platform; and
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comply with laws and regulations applicable to its business.
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These forward-looking statements are based on
information available as of the date of this Form 10-K, and current expectations, forecasts and assumptions, and involve a number
of judgments, risks and uncertainties. Important factors could cause actual results to differ materially from those indicated or implied
by forward-looking statements such as those contained in documents we have filed with the United States Securities and Exchange Commission
(the “SEC”). Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent
date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they
were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks
and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking
statements. For a discussion of the risks involved in our business and investing in our Class A common stock, par value $0.001 per
share (the “Class A common stock”), see the section entitled “Risk Factors.”
Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed
or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.
ITEM 1. BUSINESS
Overview
We were founded on one simple belief: everyone
loves to compete. We are building the competition layer of the internet by re-inventing competitive mobile gaming.
We believe in the potential for all people to
unleash their inner champions through competition and for developers to bring their art to the world and achieve their dreams of financial
success.
Our proprietary platform revolutionizes and democratizes
the mobile gaming industry and allows us to deliver gaming experiences that our player community trusts and loves and “levels the
playing field” for every developer.
The trust and fairness we foster with our player
community is part of the foundation upon which our business is built.
Our Platform
Overview
Our proprietary platform revolutionizes and democratizes
the mobile gaming industry and allows us to deliver gaming experiences that our player community trusts and loves and “levels the
playing field” for every developer. We believe we are re-inventing competitive mobile gaming and thereby expanding the mobile gaming
market. Our technology platform aligns the interests of developers and gamers with respect to user monetization, instead of putting them
at odds. Traditional mobile games utilize in-game advertisements or purchases, which create friction in the user experience, hurting engagement
and retention. By monetizing user engagement primarily through prizes, we create a compelling alternative for both developers and users
for any competitive game. With our system, the more users enjoy playing in contests for prizes and the longer they play, the more revenue
we generate for developers. This dynamic generates significantly stronger monetization for developers.
Live Operations
Delivering high-quality live operations in games
is critical to user retention and engagement. Our live operations, or LiveOps, system is used to manage and optimize the user experience
across the thousands of games on our platform. We have built a highly automated system to power LiveOps for the games on our platform.
LiveOps in mobile games on our platform encompasses everything from generation of new events to creating new and exciting tournament formats
in which users can compete and brand and influencer-sponsored events. With our highly automated system, we are able to run LiveOps for
the games on our system and we believe we are supporting those games with a fraction of the number of people required by a typical game
developer.
We use these marketing and system optimization
technologies to run multivariate testing on our system settings in order to optimize user engagement and retention for games on our platform.
This system manages the presentation of tournament formats, frequency of events and merchandising of the Ticketz store, which is our in-game
store that allows users to redeem prizes using in-game tickets earned in gameplay on our platform (“Ticketz”). Ticketz can
be redeemed within our loyalty program for prizes or credits to be used towards future paid entry tournaments.
With our segment manager tool, we can administer
important system settings for users on the platform, including, among other things, the types of tournaments a user sees and is eligible
to enter, deposit offers and promotions available to a user, and the incentives and achievements presented to a user at various moments
of their gaming journey.
Gamer Competition Engine
Our end-to-end technology platform enables mobile
game developers to improve gameplay experiences and drive improved engagement, retention and revenue from their content. Our easy-to-integrate
software development kit, or “SDK” contains over 200 features in a 15-megabyte package, which allows for seamless over-the-air
updates.
User rating and matching is a challenging technical
problem, as the fastest match is the next user in line to play, while the fairest match (i.e., a theoretically perfectly matched skill
rating) could take a much longer time to find. User retention is sensitive to both fair matching and time to match and, therefore, we
have invested significantly in the technology necessary to optimize these competing objectives.
Our SDK includes many social features such as
in-game chat, friends tournaments and leagues which allow players to interact and build relationships, strengthening the Skillz player
community. Our players enjoy social experiences around our games, by communicating during and after competitions, on topics ranging from
sharing gameplay strategies to building healthy rivalries and making personal connections. Our Friends feature allows players to challenge
a friend to a match and broadcasts that player’s affinity for Skillz to their social network.
Developer Console
Our intuitive developer dashboard enables our
developer partners to rapidly integrate and monitor the performance of their games on our platform. The first step for a game developer
integrating our tournament management system is to sign up for a free account on our developer portal. Developer onboarding has been optimized
through multiple iterations to enable developers to quickly and easily set up an account, access technical documentation, download the
SDK and access customer support. The developer portal has been built such that an average game developer can implement our SDK in about
a day with little or no technical support. Once a game goes live on our platform, the developer portal provides the game developers with
a single system through which they can access analytics on user behavior and monetization for the games.
Payment Infrastructure
We have developed a robust payment infrastructure
that we use to process close to 70 transactions per second with 99.95% system uptime. We believe our technology capabilities are critical
to building and maintaining trusted relationships with our developers and users.
Data Science
Our algorithms and machine learning technologies
augment all sides of our platform. Key features of our proprietary data science technologies include anti-cheat, anti-fraud, player rating
and matching and segmentation engine. We believe our technology capabilities are industry-leading and have helped to differentiate our
product offerings and fueled our growth.
Strong anti-cheat and anti-fraud protections are
among the most critical elements required to foster a healthy competitive ecosystem. Our systems need to continuously evolve to stay ahead
of sophisticated attempts to defraud or stack the odds against users. As a component of our proprietary security systems, we use the robust
data we analyze to build statistical maps to predict users’ probable next outcome. This enables us to statistically detect anomalies,
which are escalated for further review and, if appropriate, remediation.
High personalization is an integral element to
enhancing the gamer experience on our platform. For example, we invented a technology for creating user segments based on dynamically
linking behaviors. Our technology allows us to overlap, concatenate and exclude different behaviors to create new user journeys through
game environments. We have identified 65 different behavior sets, which enables us to increase the number of potential unique user journeys
exponentially and dynamically adjust for a significantly more personalized experience.
We give gamers the confidence to transact on our
platform by delivering on our values of trust and fairness. We enable game developers to focus on what they do best: build great content.
We provide developers with a comprehensive technology platform necessary to compete with the largest and most sophisticated mobile game
developers in the world.
Our Developer Community
We have a growing community of developers using
our platform to bring their art to the world. Content creation has been democratized in recent years with the introduction of standardized
game development and distribution platforms and, as of December 31, 2020, we had over 9,000 registered game developers that have
launched game integration on our system. Our self-serve platform enables our developer customers to integrate and monitor their game performance
through sophisticated dashboards. This allows the developers to do what they do best — build great games, while we help them on
all other fronts by delivering services such as payments, analytics, LiveOps, prize fulfillment and customer service. Historically, a
small number of games have accounted for a substantial portion of our revenue.
Games on our platform go live with free-to-play
capabilities first before applying for prized competitions. We carefully curate which games are enabled for prizes based on a number of
criteria to ensure we are providing a great competitive mobile gaming experience. We actively monitor metrics such as the player liquidity
inside each game based on number of daily active users, the stability of each game based on crash rates, the user satisfaction based on
app store ratings, and user issues based on support tickets. Games that do not meet our quality thresholds are not eligible for prized
competitions. Games that are not determined by our proprietary algorithm to be skill-based are not prize enabled. We maintain player data
and handle all communications with the players on behalf of our developers. This data model allows us to deliver effective monetization
for the benefit of developers on our platform.
Our Gamer Community
We built a virtual world where our community shares
in the thrill of victory or the agony of defeat, enjoying healthy rivalry, great achievements and valued recognition. Our social features
such as chat, friend tournaments and leagues allow players to interact and build relationships, strengthening our player community. While
we have highly effective means of acquiring users through paid channels, we also benefit from significant organic traffic. As we build
awareness for the Skillz brand, we expect to attract continued and valuable organic user traffic to our platform.
As illustrated in the table below, the end-user
demographic is the mass market and, we believe, resembles the population at large.
Gaming for Good
We pioneered the next iteration of the charity
walk-a-thon. The next generation’s mass-participatory charity event is the video game tournament. Through our initiative, Gaming
for Good, or G4G, our platform enables mass-participatory video game tournaments that harness the power of community through competition.
Through our platform, non-profits can reach a dramatically broadened universe of younger, first-time donors. A diverse range of charitable
initiatives have benefited from the power of our platform and gamer community. For non-profit organizations, their brand and reputations
are among their most valuable assets. We have been honored to be trusted by some of the world’s leading non-profits, such as the
World Wildlife Fund, the NAACP, and the American Cancer Society, to engage their audience of supporters and grow their reach. For the
year ended December 31, 2020, we generated donations from over 500,000 unique donors for non-profits.
Games on Our Platform
We offer a wide range of contests for users. We
enable game genres that can be played: (i) asynchronously; (ii) turn-based synchronously; or (iii) synchronously. An example
of an asynchronous game would be a match-3 puzzle game or bingo game where users play the exact same game at different times and then
the scores are compared when both contestants have played to determine the winner. An example of a turn-based synchronous game would be
a dominoes game in which users take turns in real-time and the winner is determined when the game ends. An example of a synchronous game
would be a real-time strategy game where users are making multiple moves simultaneously and then the winner is determined when the game
ends.
Our Distribution
Our developers distribute their games through
direct app downloads from our websites, as well as third-party platforms, such as the Apple App Store, which traditionally has been the
main distribution channel for our developers’ games. In accordance with the Apple App Store policy, Apple does not take any share
of the end-user deposits on our system; however, Apple does receive a fee for end-user deposits made through Apple Pay.
Our Marketing
Our
ability to effectively market to potential users is important to our operational success. With a blend of our analytics and data science,
we leverage software tools to efficiently acquire, retain and engage users while reinforcing our trusted consumer-facing brand for both
the end users and our developer partners. We acquire and engage users primarily through digital ad networks, our game developers and affiliate
partners. We use paid marketing channels, in combination with compelling offers and exciting games, to achieve our objectives. We optimize
our marketing investment across all our channels in order to generate strong returns on our marketing spending. We currently expect that
the average Three-Year Lifetime Value of our 2018, 2019 and 2020 cohorts will be 3.8x our total user acquisition costs (and after taking
into account the end-user incentives recorded and expected to be recorded in sales and marketing expense is expected to be 2.5x). Three-Year
Lifetime Value means cumulative gross profit from a paying user over the thirty-six (36) months following user acquisition,
which is based on a combination of historic data and extrapolation of historic data for future periods. User acquisition costs include
expenses incurred in the period to acquire that cohort of users, including digital advertising costs, affiliate marketing costs, third-party
vendors and software tools used by the user acquisition marketing team.
In addition to traditional paid advertising channels,
we cross-promote our product offerings to our existing user base across our gaming ecosystem. The average paying user has downloaded 10
Skillz-hosted games. Through our cross-promotion channels, we use a combination of content, contests and special offers to engage existing
users.
We have significant opportunities to extend our
marketing channels to offline media and deploy omni-channel marketing strategies to further expand our business. For example, partnerships
with celebrities and influencers have the potential to cost-effectively reach new users. Moreover, we intend to opportunistically engage
in brand marketing to drive broader consumer and developer awareness of our platform.
We have engagement marketing programs that provide
rewards and awards for players engaging on the platform. Players earn loyalty currency, called Ticketz, every time they play a paid entry
contest. The frequency and amount of entry fees determine the amount of Ticketz that are earned. Players can earn trophies as awards for
performing certain actions or achieving milestones in games for which they receive Ticketz or credits to be used towards future paid entry
tournaments. Tickets earned through the loyalty rewards and awards programs can be exchanged in our in-app Ticketz Store for various prizes
ranging from Skillz-branded apparel to luxury goods and vehicles.
Our Customer Advocacy
We provide 24/7 customer support and trust and
safety services to our developers’ end-users. The customer support team responds to all user inquiries including support for game
crashes, payment issues, and loyalty program inquiries. During 2020, our customer support team achieved a 88% Player CSAT and 44 Player
NPS rating. The Trust & Safety team reviews any suspicious payments and chargebacks, and investigates anomalous scoring patterns
and user reports of cheating, among other things. We leverage our data science technologies to reduce the population of bad actors by
a factor of 500, which we believe leaves just a handful of potential cheaters and fraudsters per million active users requiring manual
intervention. These suspected bad actors are reviewed on a case-by-case basis with several escalating levels of review, which ultimately
may require an in-person play test on a Skillz-provided mobile device administered by a third-party security vendor to confirm the user’s
ability.
Our People
We were founded in 2012 by Andrew Paradise and
Casey Chafkin. Our founders have imprinted a set of values that has set the culture for the company and its employees. Our seven values
are: Honor; Mission; Collaboration; Productivity; Willingness; Frugality; and Balance.
Our founders and our business have been recognized
for leadership. In 2018, we were recognized as one of Forbes’ “Next Billion Dollar Startups” and our CEO was named to
the Entrepreneur 360 list. In 2019, we were recognized as one of Fast Company’s most innovative companies and were named #31 on
CNBC’s Disruptor 50. During 2020, we were named by Inc. Magazine to their Private Titans list.
We believe that our people are the reason for
our success and we have organized ourselves to maximize productivity and performance. We maintain a high bar for talent and actively work
to build diversity within our workforce.
Our human capital resources objectives include,
as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal
purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting
of stock-based compensation awards and cash-based performance bonus awards.
As of December 31, 2020, we had 277 employees.
None of our employees are represented by a labor organization or are a party to any collective bargaining agreement with respect to their
employment by us.
Our Competition
We primarily compete with alternative monetization
services for mobile game content. This includes platforms that facilitate in-app advertisements and purchases. We principally compete
on a number of factors, including a robust technology toolset designed with the ability to convert, engage and retain users. Our developers
compete for end users with other forms of consumer discretionary entertainment that vie for the users’ time and disposable income.
This includes companies that provide video entertainment, music entertainment, social networking and other forms of leisure entertainment.
The large companies in our ecosystem may play multiple different roles given the breadth of their businesses. Examples of these larger
companies are Sony, Amazon, Facebook, Apple, Google, and Unity. Most of these companies are also our partners and customers.
Our Intellectual Property
Our business relies substantially on the creation,
use and protection of intellectual property. We protect our intellectual property by relying on international, federal, state and common
law rights. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with
our employees and contractors. We actively seek patent protection covering our inventions and as of December 31, 2020, we have 58
patents granted or pending worldwide.
Government Regulation and Compliance
Regulation
We
are subject to a variety of laws in the U.S. and abroad that affect our business, including state and federal laws regarding skill-based
gaming, consumer protection, electronic marketing, data protection and privacy, competition, taxation, intellectual property,
export and national security, which are continuously evolving. The scope and interpretation of the laws that are or may be applicable
to us are often uncertain and may be conflicting, particularly laws outside the U.S. It is also likely that as our business grows and
evolves, particularly if we expand to other countries, we will become subject to laws and regulations in additional jurisdictions or other
jurisdictions may claim that we are required to comply with their laws and regulations.
State and federal laws in the
U.S. distinguish between games of skill and games of chance. We only enable games for paid entry-fee contests in states in which skill-based
gaming is permitted and not required to be licensed as gambling under applicable state law. As of December 31, 2020, we enabled cash
prizes in 41 states and the District of Columbia, covering approximately 90% of the U.S. population. Skillz enables cash prizes in all
states except for Arizona, Arkansas, Connecticut, Delaware, Louisiana, Montana, South Carolina, South Dakota, and Tennessee. We use proprietary
algorithms and data science tools designed to ensure that the degree of skill involved in affecting the outcome of a contest is sufficient
to comply with applicable state laws. The scope and interpretation of the laws that are or may be applicable to the determination as to
whether a contest is skill-based, and therefore beyond the scope of a state’s gambling laws and licensing requirements, are subject
to interpretation and evolving. We have not received any licenses, authorizations or approvals confirming that the paid entry-fee contests
hosted on our platform comply with applicable laws. Our compliance is based on our interpretation of existing state and federal laws regarding
skill-based gaming. There is a risk that existing or future laws in the states in which we operate may be interpreted in a manner that
is not consistent with our current practices, and could have an adverse impact on our business and prospects. Additionally, existing and
future laws that permit skill-based gaming may be accompanied in the future by restrictions or taxes that make it impractical or less
feasible to operate in these jurisdictions.
It is possible that a number of
laws and regulations may be adopted or construed to apply to us that could restrict the online and mobile industries, including with respect
to player privacy, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic
commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting
business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will
be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing
of in-app purchases, or regulation of currency, banking institutions, unclaimed property or money transmission, may be interpreted to
cover the games featured on our platform and the entry fees paid in respect of such contests. If that were to occur we may be required
to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital
and other requirements, and we may be subject to additional regulation and oversight, all of which could significantly increase our operating
costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere regarding these activities
may impede the growth of social game services and impair our business, financial condition or results of operations.
Compliance
Because we handle, collect, store,
receive, transmit and otherwise process certain personal information of users and employees, we are also subject to federal, state and
foreign laws related to the privacy and protection of such data, including the General Data Protection Regulation of the European Union
(“GDPR”) and the California Consumer Privacy Act (“CCPA”). The scope of data privacy laws and regulations worldwide
continues to evolve, and we anticipate that the number of data privacy laws and the scope of individual data privacy and protection rights
will increase.
We have developed internal compliance
programs in an effort to comply with legal and regulatory requirements for skill-based gaming and with respect to data privacy and security.
We use geofencing technology designed to restrict user access to paid entry fee contests to only those jurisdictions where video game
contests of skill are permitted. While we are firmly committed to full compliance with all applicable laws and have developed appropriate
policies and procedures in order to comply with the requirements of the evolving regulatory regimes, we cannot ensure that our compliance
program will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the
imposition of a monetary fine.
Corporate Information
We were originally incorporated
in the State of Delaware on January 15, 2020 as a special purpose acquisition company, formed for the purpose of effecting a merger,
capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or
more businesses. In December 2020, we completed the transactions (the “Business Combination”) contemplated by that certain
Agreement and Plan of Merger, dated as of September 1, 2020, by and among Flying Eagle Acquisition Corporation, a Delaware corporation
(“FEAC”), FEAC Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of FEAC (“Merger Sub”), Old
Skillz (which we define as Skillz Inc. prior to the Business Combination and Skillz Platform Inc. after the Business Combination), and
solely in his capacity as the representative of the Old Skillz stockholders, Andrew Paradise as stockholder representative (the “Merger
Agreement”), including the merger of Merger Sub with and into Old Skillz, pursuant to which (i) Old Skillz survived the merger
as a wholly owned subsidiary of Skillz Inc. (“New Skillz”) and (ii) the Old Skillz stockholders and the holders of Old
Skillz options and warrants exchanged their Old Skillz capital stock and Old Skillz options for equity interests in New Skillz.
Our mailing address is P.O. Box
445, San Francisco, California 94104, and our telephone number is (415) 762-0511. Our Class A common stock is listed on the New York
Stock Exchange under the symbol “SKLZ.” Unless the context requires otherwise, the words “Skillz,” “we,”
“Company,” “us” and “our” refer to Skillz Inc. and our wholly-owned subsidiaries.
Available Information
Our website is located at www.skillz.com,
and our investor relations website is located at http://investors.skillz.com/. Copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act are available, free of charge, on our investor relations website as soon as reasonably practicable after
we file such material electronically with or furnish it to the SEC. The SEC also maintains a website that contains our SEC filings. The
address of the site is www.sec.gov. We use our http://investors.skillz.com/ and www.skillz.com websites as a means of disclosing material
nonpublic information and for complying with our disclosure obligations under Regulation FD.
The contents of, or information
accessible through, our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or
document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
We have identified the following risks and
uncertainties that may have a material adverse effect on our business, financial condition, results of operations or reputation. The risks
described below are not the only risks we face. Additional risks not presently known to us or that we currently believe are not material
may also significantly affect our business, financial condition, results of operations or reputation. Our business could be harmed by
any of these risks. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K,
including our consolidated financial statements and related notes.
SUMMARY RISK FACTORS
Our business is subject to numerous
risks and uncertainties, all of which are more fully described in the Risk Factors below. These risks include, but are not limited to:
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Our rapid growth may not be sustainable and depends on our ability to attract and retain end-users.
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Our business could be harmed if we fail to manage our growth effectively.
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We have a history of losses and we may be unable to achieve profitability.
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We rely on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform.
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A limited number of games account for a substantial portion of our revenue.
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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.
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Failure to maintain our brand and reputation could harm our business, financial condition and results of operations.
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The broader entertainment industry is highly competitive and our existing and potential users may be attracted to competing forms
of entertainment.
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Our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business.
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Failure to obtain, maintain, protect or enforce our intellectual property rights could harm our business, results of operations and
financial condition.
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Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition
and results of operations.
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The occurrence of a data breach or other failure of our cybersecurity.
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Failure to properly contain Covid-19 or another global pandemic in a timely manner could materially affect how we and our business
partners are operating.
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Failure to timely and effectively remediate the material weakness in our internal controls over financial reporting.
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Exercise of our outstanding warrants would result in dilution to our stockholders.
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The valuation of our warrants could increase the volatility in our net loss.
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Risks Related to Our Business and Industry
The COVID-19 pandemic could materially adversely affect our business,
financial condition and results of operations.
The COVID-19 pandemic, the measures
attempted to contain and mitigate the effects of the virus, including travel bans and restrictions, shelter-in-place, quarantine and other
similar governmental orders and restrictions on trade put in place around the world have caused widespread disruption in global economies,
productivity and financial markets and have materially altered the way in which we conduct our day-to-day business.
The full extent to which the COVID-19
pandemic and the various responses to it impact our business, operations and financial results will depend on numerous evolving factors
that we may not be able to accurately predict, including: the duration and scope of the pandemic, including any potential future waves
of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;
the effect on players and their willingness and ability to pay entry fees for the games on our platform; the effect on our third party
developers and their willingness and ability to engage with our services and our platform; disruptions or restrictions on our employees’
ability to work and travel; and interruptions related to our cloud networking and platform infrastructure and partners, and developer
and user service and support providers. As the COVID-19 pandemic continues, we may not be able to provide the same level of services and
support that our developers and players expect from us, which could negatively impact our business and operations. While substantially
all of our business operations can be performed remotely, many of our employees are juggling additional work-related and personal challenges,
including adjusting communication and work practices to collaborate remotely with work colleagues and business partners, managing technical
and communication challenges of working from home on a daily basis, looking after children as a result of remote-learning and school closures,
making plans for childcare and caring for themselves, family members or other dependents who are or may become ill. We will continue to
actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, including
as may be required by federal, state, local or foreign authorities or that we determine are in the best interests of our employees, players,
partners, game developers and stockholders.
The COVID-19 pandemic and resulting
shelter-in-place, quarantine and other similar governmental orders and restrictions have also led to increased player engagement with
the games on our platform relative to historic trends. These increases in player activity may not be indicative of our financial and operating
results in future periods. The long-term effects of the COVID-19 pandemic on society and player behavior are highly uncertain, and there
is no assurance that player engagement will not decrease, as the full impacts of the pandemic on society and the global economy become
more clear.
In addition to the potential direct
impacts to our business, the U.S. economy has been, and is likely to continue to be, significantly weakened as a result of the actions
taken in response to COVID-19. A weakened U.S. economy may impact our third-party developers and players and their engagement with our
platform, and the ability of our business partners to navigate this complex social health and economic environment, any of which could
result in disruption to our business and results of our operations.
The duration and extent of the
impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity
and transmission rate of the virus, the existence of any additional waves of the pandemic, the extent and effectiveness of containment
actions, treatment and prevention measures, including vaccines, and the impact of these and other factors on our employees, third-party
developers, players and other business partners. If we are not able to respond to and manage the impact of such events effectively, our
business may be harmed.
Competition within the broader entertainment industry is intense
and our existing and potential users may be attracted to competing forms of entertainment such as television, movies and sporting events,
as well as other entertainment and gaming options on the Internet. If our platform and games available through our platform do not maintain
or increase their popularity, our business, financial condition, results of operations and prospects would be materially adversely affected.
We operate in the global entertainment
and gaming industries within the broader entertainment industry. Our end-users face a vast array of entertainment choices. Other forms
of entertainment, such as television, movies, sporting events and casinos, are more well established and may be perceived by users to
offer greater variety, affordability, interactivity and enjoyment. We compete with these other forms of entertainment for the discretionary
time and income of our users. If we are unable to sustain sufficient interest in our gaming platform in comparison to other forms of entertainment,
including new forms of entertainment, our business model may not continue to be viable.
The specific industries in which
we operate are characterized by dynamic customer demand and technological advances, and there is intense competition among online gaming
and entertainment providers. A number of established, well-financed companies producing online gaming, and/or interactive entertainment
products and services compete with our platform, and other well-capitalized companies may introduce competitive services. Such competitors
may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more
aggressive pricing or promotional policies, including with third-party developers, or otherwise develop more commercially successful products
or services than ours, which could negatively impact our business. Our competitors may also develop products, features or services that
are similar to ours or that achieve greater market acceptance. Such competitors may also undertake more far-reaching and successful product
development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Furthermore, new competitors may enter the
gaming industry. There has also been considerable consolidation among competitors in the entertainment and gaming industries and such
consolidation and future consolidation could result in the formation of larger competitors with increased financial resources and altered
cost structures, which may enable them to offer more competitive products, gain a larger market share, expand offerings and broaden their
geographic scope of operations. If we are not able to maintain or improve our market share, or if the offerings on our platform do not
maintain or increase their popularity, our business could suffer.
We rely on our third-party developer partners to develop and
update all of the games featured on our platform. The decision of developers to remove the Skillz Software Development Kit, or “SDKs”
from their games or changes in the terms of our commercial relationships with third-party developers could adversely impact our financial
condition and results of operations and prospects. In addition, the failure of developers to provide timely and reliable updates to their
games could adversely impact our financial condition and results of operations and prospects.
We rely on third-party game developers to develop
the games that we host on our platform. Accordingly, our business depends on our ability to promote, enter into and maintain successful
commercial relationships with such developers. In general, we rely on our standard terms of service for third-party developers which govern
the distribution, operations and fee sharing arrangements for hosting a game on our platform. In some
cases, we rely on negotiated agreements with third-party developers that modify our standard terms of service. Quality third-party game
developers are continually in high demand and there can be no assurance that the developers that have developed games for our platform
historically will continue to maintain games on our platform or be willing to provide new games for our platform in the future. If we
are unable to attract and maintain these third-party developer relationships, if the terms and conditions of such commercial relationships
become less favorable to Skillz or if a developer decides to remove their games from our platform, our results of operations and prospects
would suffer.
In addition, we rely on our developer partners
to manage and maintain their games, including updating their games to include the latest version of the Skillz SDK. The failure of our
developer partners to provide timely and reliable updates could adversely impact our financial condition and results of operations and
prospects.
Our focus on our third-party developers and willingness
to focus on the long term benefits of our relationships with such developers may conflict with the short-term interests of our business.
We believe our third-party developer partners are essential to our success and establishing mutually successful relationships with such
developers serves the best long-term interests of Skillz and our stockholders. Therefore, we have made in the past, and we may make in
the future, significant investments or changes to the terms of our relationships with our developer partners that we believe will benefit
us in the long term, even if our decision has the potential to negatively impact our operating results in the short term. In addition,
our decisions may not result in the long-term benefits that we expect, in which case the success of our platform, business, financial
condition or results of operations could be harmed.
A limited number of games historically have accounted for a substantial
portion of our revenue. If these games were to become less popular or be removed from our platform and we are unable to identify and market
suitable replacements, our business and prospects could suffer.
Historically, a small number of games and related
developers have accounted for a substantial portion of our revenue. For the year ended December 31, 2020, Solitaire Cube and 21 Blitz
(each developed by Tether) together with Blackout Bingo (developed by Big Run) accounted for 79% of our revenue. Games developed by Tether
and Big Run accounted for 87% of our revenue for the year ended December 31, 2020. These games, and the related developers, are subject
to our standard terms of service, which include, among other things, developer exclusivity, as modified by negotiated agreements. The
negotiated agreements provide Skillz with the discretion, but not the obligation, to provide marketing support for specified games and
for revenue sharing with the developers that is more favorable to Skillz than our standard terms. These negotiated agreements restrict
the removal of the applicable games from our platform for at least 12 months following termination. During the post-termination period,
Skillz has the option, but not the obligation, to host paid competitions for such games on the platform. Consistent with our standard
terms of service, our agreement with Tether may be terminated by either party on 30 days’ notice. Our agreement with Big Run is
subject to termination by either party on an annual basis and by Skillz at any time at its discretion. If these games were to become less
popular or be removed from our platform and we are unable to identify and market suitable replacements, our business and prospects could
suffer.
Maintaining and enhancing our brand and reputation is critical
to our business prospects. Failure to grow our brand and reputation could harm our business, financial condition and results of operations.
We believe that our brand, identity and reputation
has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “Skillz”
brand and reputation is critical to retaining and growing our third-party developer and user base. We strive to establish and maintain
our brand by obtaining trademark rights. However, if our trademarks and trade names are not adequately protected, we may not be able to
build name recognition in our markets of interest and our competitive position, business, financial condition or results of operations
may be harmed. Maintaining and enhancing our brand and reputation also depends largely on our continued ability to provide, through our
platform, high-quality, relevant, reliable and trustworthy games developed by our third-party partners, which may require substantial
investment, may not be successful, and may contain errors, bugs, flaws, corrupted data, effects and other vulnerabilities that could adversely
affect our users’ gaming experience, violate applicable security standards and cause users to stop using our platform, any of which
could harm our reputation. We may also need to introduce new products or services that require developers or users to agree to new terms
of service that they do not like, which may cause them to stop using our platform, which may negatively affect our brand and reputation.
Our brand and reputation may also be negatively
affected by the actions of users acting under false or unauthentic identities and by the use of our platform for illicit, illegal or objectionable
ends. We may also fail to respond expeditiously to the illicit efforts of third parties to gain unfair advantage in games through cheating
or other fraudulent activity or to otherwise address developer or user concerns, which could erode confidence in our brand and platform
and damage our reputation. We expect that our ability to identify and respond to these concerns in a timely manner may decrease as the
number of developers and users that engage with our platform grows, as the amount of content on the platform increases or as we expand
our product and service offerings. Any governmental or regulatory inquiry, investigation or action, including based on the appearance
of illegal, illicit or objectionable activity or content on our platform, our business practices, or our failure to comply with laws and
regulations, could damage our brand and reputation, regardless of the outcome.
We have experienced, and expect to continue to
experience, media, legislative, governmental, regulatory, investor and other third-party scrutiny of our business decisions. Any scrutiny,
inquiry investigation or action, including regarding the quality and trustworthiness of the games featured on our platform, data privacy,
copyright, employment or other practices, workplace culture, product changes, service quality, litigation or regulatory action or regarding
the actions of our employees, may harm our brand and reputation.
Our growth will depend on our ability to attract
and retain end-users who participate in paid entry-fee contests, and the loss of such end-users, failure to attract new end-users in a
cost-effective manner, or failure to effectively manage our growth could adversely affect our business, financial condition, results of
operations and prospects.
Our business depends on maintaining a successful
platform for third-party developed games that end-users will download and pay entry fees to compete in for cash or other prizes of real
world value with other end-users. As a result, our business relies on our ability to engage with players by consistently and timely making
available through our platform games that are engaging, trustworthy and competitive and encouraging our developer partners to create and
enhance games with compelling content, features and events.
The success of the games featured on our platform
depends, in part, on unpredictable and volatile factors beyond our control, including consumer preferences, competing games, new mobile
platforms and the availability of other entertainment experiences. Our end-users have accounts in which they make deposits and hold prior
cash winnings that have not been withdrawn. Prior cash winnings that have not been withdrawn represented more than 80% of total paid entry
fees for the year ended December 31, 2020. If the games offered on our platform do not meet consumer expectations, if they are not
marketed in a timely and effective manner, or if end-users decide to withdraw prior cash winnings rather than apply such winnings as entry
fees to enter subsequent paid contests on our platform our revenue and financial performance will be negatively affected. End-user deposits
and prior cash winnings that have not been withdrawn as of December 31, 2020 amounted to $2.8 million and are reflected on our balance
sheet within other current liabilities. We may be required to return these funds to end-users if they choose to withdraw them from their
account.
In addition to the market factors noted above,
our ability to successfully attract games to our platform and the ability of such games to achieve commercial success will depend on our
ability to:
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effectively market such games to existing and new players;
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achieve benefits from our player acquisition costs;
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achieve viral organic growth and gain user interest in our featured games through free or paid channels;
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adapt to changing player preferences;
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adapt to new technologies and feature sets for mobile and other devices;
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attract, retain and motivate talented and experienced third-party game developers to our platform;
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partner with mobile platforms and obtain featuring opportunities;
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continue to adapt to an increasingly diverse set of mobile devices, including various operating systems and specifications, limited
bandwidth, and varying processing power and screen sizes;
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achieve and maintain successful end-user engagement;
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maintain a quality, trustworthy and entertaining game experience for players;
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host games that can build upon or become franchise games;
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compete successfully against a large and growing number of existing market participants;
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accurately forecast the timing and expense of our operations, including costs to secure and retain game developers and end-user adoption;
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minimize and quickly resolve bugs or outages negatively impacting our platform or games on our platform; and
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acquire and successfully integrate high quality mobile game assets, personnel or companies.
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These and other uncertainties make it difficult
to know whether our platform will succeed in continuing to host successful games and new games and features in accordance with our operating
plan. If we do not succeed in doing so, our business, financial condition, results of operations and reputation will suffer.
If users engage in criminal, inappropriate or fraudulent activities
that seek to exploit our platform and users, our ability to attract and retain developers and users may be harmed, which could have an
adverse impact on our reputation, business, financial condition and operating results.
Unrelated third parties have developed, and may
continue to develop, “cheating” programs that enable players to exploit vulnerabilities in the games featured on our platform,
play them in an automated way, collude to alter the outcome of such games or obtain unfair advantages. These programs and practices undermine
the integrity of our platform and harm the experiences of players who play fairly, and may lead players or third-party developers to stop
engaging with our platform. We devote significant resources to discover and disable these cheating programs and activities. However, if
we are unable to do so in a timely and effective manner, our operations may be disrupted and our reputation may be damaged. These cheating
programs could result in lost revenue from paid competitions, disrupt our in-game economies, divert time from our personnel, increase
costs of developing technological measures to combat these programs and activities, increase our customer service costs needed to respond
to dissatisfied players, and lead to legal claims. This type of activity may subject us to liability and negative publicity, which would
increase our operating costs and adversely affect our business, financial condition, operating results, reputation and future prospects.
We primarily rely, and expect to continue to rely, on Amazon
Web Services (“AWS”) to deliver our offerings to users on our platform and any failure, disruption of or interference with
our use of AWS could adversely affect our business, financial condition, results of operations and prospects.
Our technology infrastructure is critical to the
performance of our platform and to the satisfaction of our developer partners and players, as well as our corporate functions. Our platform
and company systems run on a complex distributed system, or what is commonly known as cloud computing. We own, operate and maintain elements
of this system, but significant elements of this system are operated by third parties that we do not control and which would require significant
time and expense to replace. We expect this dependence on third parties to continue. We have suffered interruptions in service in the
past, including when releasing new software versions or bug fixes, and if any such interruption were significant and/or prolonged it could
adversely affect our business, financial condition, future prospects, results of operations or reputation.
We have experienced, and may in the future experience,
disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors
and capacity constraints. If a particular game is unavailable when players attempt to access it or navigation through a game is slower
than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all.
In particular, a significant portion of our game
traffic, data storage, data processing and other computing services and systems is hosted by AWS. AWS provides us with computing and storage
capacity pursuant to an agreement that continues until terminated by either party. The agreement requires AWS to provide us their standard
computing and storage capacity and related support in exchange for timely payment by us.
Any failure, disruption or interference with our
use of hosted cloud computing services and systems provided by third-parties, like AWS, could adversely impact our business, financial
condition or results of operations. In response to the ongoing COVID-19 pandemic, we have engaged with our partners at AWS to understand
their operations and have evaluated our business disruption plans. In addition, since many of the technical specialists responsible for
managing disruptions to our technology infrastructure are working from home in accordance with shelter-in-place orders issued due to the
COVID-19 pandemic, the time required to remedy any interruption may increase. To the extent we or our third-party service providers do
not effectively respond to any such interruptions, upgrade systems as needed and continually develop technology and network architecture
to accommodate traffic, our business, reputation, financial condition or results of operations could be adversely affected. In addition,
we do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. Furthermore,
our disaster recovery systems and those of third parties with which we do business may not function as intended or may fail to adequately
protect our critical business information in the event of a significant business interruption, which may cause interruption in service
of our games, security breaches or the loss of data or functionality, leading to a negative effect on our business, financial condition
or results of operations.
In addition, in the event that any of our agreements
with these third party service providers are terminated, we may experience significant costs or downtime in connection with the transfer
to, or the addition of, new hosting or cloud computing providers. Although alternative providers could host our platform on a substantially
similar basis, such transition could potentially be disruptive and we could incur significant costs in connection with such transition.
Our use of third-party open source software could negatively
affect our ability to offer our products and services through our platform and subject us to possible litigation.
We have incorporated, and may in the future incorporate,
third-party open source software in our technologies. Open source software is generally licensed by its authors or other third parties
under open source licenses. From time to time, companies that use third-party open source software have faced claims challenging the use
of such open source software and requesting compliance with the open source software license terms. Accordingly, we may be subject to
suits by parties claiming ownership of what we believe to be open source software or claiming non-compliance with the applicable open
source licensing terms. Some open source software licenses require end-users who use, distribute or make available across a network software
and services that include open source software to offer to the public aspects of the technology that incorporates the open source software
for no cost, make publicly available source code (which in some circumstances could include valuable proprietary code) for modifications
or derivative works created based upon incorporating or using the open source software and/or to license such modifications or derivative
works under the terms of the particular open source license. If we combine our proprietary software with open source software in a certain
manner, we could, under certain open source licenses, be required to release or license the source code of our proprietary software to
the public. Additionally, if a third-party software provider has incorporated open source software into software that we license from
such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software.
While we use tools designed to help us monitor and comply with the licenses of third-party open source software and protect our valuable
proprietary source code, we may inadvertently use third-party open source software in a manner that exposes us to claims of non-compliance
with the terms of their licenses, including claims of intellectual property rights infringement or for breach of contract. Furthermore,
there exists today an increasing number of types of open source software licenses, almost none of which have been tested in courts of
law to provide guidance of their proper legal interpretations, and there is a risk that such licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our use of the open source software. If we were to receive a claim of non-compliance
with the terms of any of these open source licenses, we may be required to publicly release certain portions of our proprietary source
code, expend substantial time and resources to re-engineer some of our software, or pay damages, settlement fees or a royalty to use certain
open source software. Any of the foregoing could disrupt and harm our business.
In addition, the use of third-party open source
software typically exposes us to greater risks than the use of third-party commercial software because open source licensors generally
do not provide support, warranties, controls, indemnification or other contractual protections regarding the functionality or origin of
the software. Use of open source software may also present additional security risks because the public availability of such software
may make it easier for hackers and other third parties to determine how to compromise our platform. Any of the foregoing could harm our
business, financial condition, results of operations and prospects and could help our competitors develop products and services that are
similar to or better than ours.
Economic downturns and political and market conditions beyond
our control could adversely affect our business, financial condition, results of operations and prospects.
Our financial performance is subject to U.S.
economic conditions and their impact on levels of spending by users and advertisers. Economic recessions have had, and may continue to
have, far-reaching adverse consequences across many industries, including the global entertainment and gaming industries, which may adversely
affect our financial condition, results of operations and prospects. In the past decade, the U.S. economy experienced tepid growth following
the financial crisis in 2008 – 2009 and a recession began in 2020 due to the impact of the COVID-19 pandemic as well as international
trade and monetary policy and other changes. If the U.S. economy experiences a continued recession or any of the relevant regional or
local economies suffers a prolonged downturn, we may experience a material adverse effect on our business, financial condition, results
of operations or prospects.
In addition, changes in general market, economic
and political conditions in domestic and foreign economies or financial markets, including fluctuation in stock markets resulting from,
among other things, trends in the economy as a whole may reduce users’ disposable income. Any one of these changes could have a
material adverse effect on our business, financial condition, results of operations or prospects.
Our business model depends upon the continued compatibility
between the games featured on our platform and major mobile gaming operating systems and upon third-party platforms for the distribution
of such games. If such third parties interfere with the distribution of our products or offerings, our business, financial condition,
results of operations and prospects would be adversely affected.
The substantial majority of users access the
games featured on our platform through the direct download on their mobile devices of apps developed by our developer partners. Our business
model depends upon the continued compatibility between these apps and the major mobile operating systems. Third parties with whom we
do not have any formal relationships control the design of mobile devices and operating systems. These parties frequently introduce new
devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also impact the
ability of users to download apps or access specified content on mobile devices.
In addition, we rely upon third-party platforms,
such as the Apple App Store, for distribution of the games featured on our platform. The promotion, distribution and operation of apps
are subject to the respective distribution platforms’ standard terms and policies for application developers, which are very broad
and subject to frequent changes and differing interpretations. Furthermore, the distribution platforms may not enforce their standard
terms and policies for application developers consistently and uniformly across all applications and with all publishers. A platform
provider may also change its fee structure, add fees associated with access to and use of its platform and alter how developers and publishers
are able to advertise on the platform. Such terms and policy changes may decrease the visibility or availability of the games featured
on our platform, which could adversely affect our business, financial condition or results of operations.
There is no guarantee that popular mobile devices
will start or continue to support or feature the games featured on our platform or that mobile device users will continue to engage with
such games rather than competing products. We are dependent on the interoperability of our platforms with popular mobile operating systems,
technologies, networks and standards that we do not control, such as the Android and iOS operating systems, and any changes, bugs, security,
technical or regulatory issues in such systems, changes to our relationships with mobile manufacturers and carriers, or in their terms
of service or policies that degrade our offerings’ functionality, reduce or eliminate our ability to distribute our offerings,
give preferential treatment to competitive products, limit our ability to deliver high quality offerings, or impose fees or other charges
related to delivering our offerings, could adversely affect our product usage and monetization on mobile devices.
If the growth of high-bandwidth capabilities,
particularly for mobile devices, is slower than we expect, end-user growth, retention, and engagement may be seriously harmed. Additionally,
to deliver high-quality content over mobile cellular networks, the games offered through our platform must work well with a range of
mobile technologies, systems, networks, regulations, and standards that we do not control. In particular, any future changes to the Android
or iOS operating systems may impact the accessibility, speed, functionality, and other performance aspects of our platform, which issues
are likely to occur in the future from time to time. In addition, the adoption of any laws or regulations that adversely affect the growth,
popularity, or use of the Internet, including laws governing Internet neutrality, could decrease the demand for our platform and increase
our cost of doing business. Specifically, any laws that would allow mobile providers in the United States to impede access to content,
or otherwise discriminate against our content, such as providing for faster or better access to our competitors, over their data networks,
could have a material adverse effect on our business, financial condition, results of operations and prospects.
Furthermore, we may not successfully cultivate
relationships with key industry participants or develop product offerings that operate effectively with these technologies, systems,
networks, regulations, or standards. If it becomes more difficult for end-users to access and use our platform on their mobile devices,
if end-users choose not to access or use the games featured on our platform through their mobile devices, or if end-users choose to use
mobile products that do not offer access to the games featured on our platform, end-user growth, retention and engagement could be seriously
harmed.
We rely on information technology and other systems and platforms,
and any failures, errors, defects or disruptions in our or our vendors’ or other partners’ systems or platforms could diminish
our brand and reputation, subject us to liability, disrupt our business, affect our ability to scale our technical infrastructure and
adversely affect our business, financial condition, operating results and growth prospects.
Our technology infrastructure will be critical
to the performance of our platform and offerings and to the satisfaction of our developer partners and users. We devote significant resources
to network and data security to protect our systems and data. However, our systems may not be adequately designed with the necessary
reliability and redundancy to avoid performance delays or outages that could be harmful to our business. We cannot assure you that the
measures we take to prevent or hinder cyber-attacks, protect our systems, data and user information and to prevent outages, data or information
loss, fraud and to prevent or detect security breaches, including a disaster recovery strategy for server and equipment failure and back-office
systems and the use of third parties for certain cybersecurity services, will provide sufficient security. Our vendors and other third
parties with whom we do business, such as our developer partners, are also subject to the foregoing risks, and we do not have any control
over them. We have experienced, and we may in the future experience, system disruptions, outages and other performance problems due to
a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Such disruptions have not
had a material impact, individually or in the aggregate to date; however, future disruptions from unauthorized access to, fraudulent
manipulation of, or tampering with our computer systems and technological infrastructure, or those of third parties, could result in
a wide range of negative outcomes, including violations of applicable privacy laws which can result in significant fines, governmental
investigations and enforcement actions, legal and financial exposure, contractual liability and damage to our reputation, each of which
could materially adversely affect our business, financial condition, results of operations, reputation and prospects.
Additionally, the games offered through our platform
may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch. If a particular game
is unavailable when users attempt to play it or navigation through our platform is slower than they expect, users may be unable to properly
engage in the games we host. Furthermore, programming errors, defects and data corruption could disrupt our operations, adversely affect
the experience of end-users, harm our reputation, cause end-users to stop utilizing our platforms, divert our resources and delay market
acceptance of our offerings, any of which could result in legal liability to us or harm our business, financial condition, results of
operations and prospects.
If our developer and the end-user base and engagement
continue to grow, and the amount and types of games offered through our platform continue to grow and evolve, we will need an increasing
amount of technical infrastructure, including network capacity and computing power, to continue to satisfy end-users’ needs. Such
infrastructure expansion may be complex, and unanticipated delays in completing these projects or availability of components may lead
to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of our platform.
In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation,
which may only become evident after we have started to fully use the underlying equipment or software, that could further degrade the
user experience or increase our costs. As such, we could fail to continue to effectively scale and grow our technical infrastructure
to accommodate increased demands. In addition, our business may be subject to interruptions, delays or failures resulting from adverse
weather conditions, other natural disasters, power loss, terrorism, cyber-attacks, public health emergencies (such as COVID-19) or other
catastrophic events.
We believe that if our third-party developers
or users have a negative experience with our platform or services, or if our brand or reputation is negatively affected, developers and
users may be less inclined to continue or to engage with our platform. As such, a failure or significant interruption in our service
would harm our reputation, business and operating results.
Our business is subject to a variety of U.S. and foreign laws,
many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business, financial condition,
results of operations and growth prospects. Any change in existing regulations or their interpretation, or the regulatory climate applicable
to our platform and services, or changes in tax rules and regulations or interpretation thereof related to our platform and services,
could adversely impact our ability to operate our business as currently conducted or as we seek to operate in the future, which could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are subject to a variety of laws in the U.S.
and abroad that affect our business, including state and federal laws regarding skill-based gaming, consumer protection, electronic marketing,
data protection and privacy, competition, taxation, intellectual property, export and national security, which are continuously evolving
and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting,
particularly laws outside the U.S. There is a risk that existing or future laws may be interpreted in a manner that is not consistent
with our current practices, and could have an adverse effect on our business, financial condition, results of operations and growth prospects.
It is also likely that as our business grows and evolves, particularly if we expand to other countries, we will become subject to laws
and regulations in additional jurisdictions or other jurisdictions may claim that we are required to comply with their laws and regulations.
State and federal laws in the U.S. distinguish
between games of skill and games of chance. We only enable games for paid entry-fee contests in states in which skill-based gaming is
permitted and not required to be licensed as gambling under applicable state law. As of December 31, 2020, we operated in 41 states
and the District of Columbia, covering approximately 90% of the U.S. population. We use proprietary algorithms and data science tools
designed to ensure that the degree of skill involved in affecting the outcome of a contest is sufficient to comply with applicable state
laws. The scope and interpretation of the laws that are or may be applicable to the determination as to whether a contest is skill-based,
and therefore beyond the scope of a state’s gambling laws and licensing requirements, are subject to interpretation and evolving.
There is a risk that existing or future laws in the states in which we operate may be interpreted in a manner that is not consistent
with our current practices, and could have an adverse impact on our business and prospects. Additionally, existing and future laws that
permit skill-based gaming may be accompanied in the future by restrictions or taxes that make it impractical or less feasible to operate
in these jurisdictions.
It is possible that a number of laws and regulations
may be adopted or construed to apply to us that could restrict the online and mobile gaming industries, including player privacy, taxation,
content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce may prompt
calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through
the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to
devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing of in-app
purchases, or regulation of currency, banking institutions, unclaimed property or money transmission may be interpreted to cover the
games and contests featured on our platform and the entry fees paid in respect of such contests. If that were to occur we may be required
to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain
capital and other requirements and we may become subject to additional regulation and oversight, all of which could significantly increase
our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere regarding
these activities may lessen the growth of social game services and impair our business, financial condition, results of operations and
prospects.
Governmental authorities could view us as having
violated local laws, despite our efforts to comply. There is also a risk that civil and criminal proceedings, including class actions
brought by or on behalf of prosecutors or public entities or incumbent providers of entertainment and gaming services, or private individuals,
could be initiated against us, Internet service providers, credit card and other payment processors, advertisers and others involved
in the skill-based gaming industries. Such potential proceedings could involve substantial litigation expense, penalties, fines, seizure
of assets, injunctions or other restrictions being imposed upon us or our business partners, while diverting the attention of key executives.
Such proceedings could have a material adverse effect on our business, financial condition, results of operations and prospects, as well
as impact our reputation.
There can be no assurance that legally enforceable
legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to our business to prohibit, legislate
or regulate various aspects of the skill-based gaming industry (or that existing laws in those jurisdictions will not be interpreted
negatively). Compliance with any such legislation may have a material adverse effect on our business, financial condition results of
operations and prospects, either as a result of our determination that a jurisdiction should be blocked, or because a local license or
approval may be costly for us or our business partners to obtain and/or such licenses or approvals may contain other commercially undesirable
conditions.
Existing and future laws that permit skill-based gaming may
be accompanied in the future by regulatory and/or licensing requirements, which could have a material adverse effect on our business,
financial condition, results of operations, growth prospects and reputation.
Existing and future laws that permit skill-based
gaming may be accompanied in the future by regulatory and/or licensing requirements, which require us to obtain regulatory approvals
of our product offerings. This may be a time-consuming process that may be extremely costly. Any delays in obtaining or difficulty in
maintaining regulatory approvals needed for expansion within existing jurisdictions or into new jurisdictions may negatively affect our
opportunities for growth, including the growth of our customer base, or delay our ability to recognize revenue from our offerings in
any such jurisdictions.
Regulatory authorities may have broad powers
with respect to the regulation and licensing of skill- based gaming operations and may revoke, suspend, condition or limit such licenses,
impose substantial fines on us or take other actions, any one of which could have a material adverse effect on our business. We will
strive to comply with all applicable laws and regulations relating to our business. It is possible, however, that these requirements
may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules. Non-compliance
with any such law or regulations could expose us to claims, proceedings, litigation and investigations by private parties and regulatory
authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business, financial
condition, results of operations, growth prospects and reputation.
We may be unable to obtain or maintain all necessary
registrations, licenses, permits or approvals, and could incur fines or experience delays related to the licensing process, which could
adversely affect our business, financial condition, results of operations, growth prospects and reputation. Our delay or failure to obtain
or maintain licenses in any jurisdiction may prevent us from distributing our offerings, increasing our customer base and/or generating
revenues.
The success of gaming products depends on a variety of factors
and is not completely controlled by us.
Our success also depends in part on our ability
to anticipate and satisfy user preferences in a timely manner. As we operate in a dynamic environment characterized by rapidly changing
industry and legal standards, our products are subject to changing consumer preferences that cannot be predicted with certainty. We need
to continually introduce new offerings and identify future product offerings that complement our existing platform, respond to end-users’
needs and improve and enhance our existing platform to maintain or increase end-user engagement and growth of our business. We may not
be able to compete effectively unless our product selection keeps up with trends in the gaming industry in which we compete, or trends
in new gaming products.
We rely on other third-party service providers and if such third
parties do not perform adequately or terminate their relationships with us, our costs may increase and our business, financial condition
and results of operations could be adversely affected.
Our success depends in part on our relationships
with our third-party service providers. If those providers do not perform adequately, end-users may experience issues or interruptions
with their experiences on our platform. Furthermore, if any of our partners terminates its relationship with us or refuses to renew its
agreement with us on commercially reasonable terms, we would need to find an alternate provider, and we may not be able to secure similar
terms or replace such providers in an acceptable time frame. We also rely on software and services supplied by third parties, such as
game content, and our business may be adversely affected to the extent such game content does not meet our expectations, contain errors
or vulnerabilities, is compromised or experiences outages. Any of these risks could increase our costs and adversely affect our business,
financial condition, results of operations and prospects. Further, any negative publicity related to any of our third-party partners,
including any publicity related to regulatory concerns, could adversely affect our reputation and brand, and could potentially lead to
increased regulatory or litigation exposure.
We incorporate technology from third parties
into our platform. We cannot be certain that our licensors are not infringing, misappropriating or otherwise violating the intellectual
property rights of others or that our suppliers and licensors have sufficient rights to such technology in all jurisdictions in which
we may operate. In addition, some of our license agreements may be terminated by our licensors for convenience. If we are unable to obtain
or maintain rights to any of this technology because of intellectual property infringement claims brought by third parties against our
suppliers and licensors or against us, or if we are unable to continue to obtain such technology or enter into new agreements on commercially
reasonable terms, our ability to develop our platform could be severely limited and our business could be harmed. Additionally, if we
are unable to obtain necessary technology from third parties, we may be forced to acquire or develop alternate technology, which may
require significant time and effort and may be of lower quality or performance standards. This would limit and delay our ability to provide
new or competitive offerings and increase our costs. If alternate technology cannot be obtained or developed, we may not be able to offer
certain functionality as part of our offerings, which could adversely affect our business, financial condition and results of operations
and prospects.
We rely on third-party providers to validate the identity and
identify the location of end-users, and if such providers fail to perform adequately or fail to provide accurate information, or if we
do not maintain business relationships with them, our business, financial condition, results of operations and prospects could be adversely
affected.
There is no guarantee that the third-party geolocation
and identity verification systems that we rely on will perform adequately, or be effective. We rely on our geolocation and identity verification
systems to ensure we are in compliance with certain laws and regulations, and any service disruption to those systems would prohibit
us from operating our platform, and would adversely affect our business, financial condition, results of operations and prospects. Additionally,
incorrect or misleading geolocation and identity verification data with respect to current or potential users received from third-party
service providers may result in us inadvertently allowing access to our offerings to individuals who should not be permitted to access
them, or otherwise inadvertently deny access to individuals who should be able to access our offerings, in each case based on inaccurate
identity or geographic location determination. Our third-party geolocation services provider relies on its ability to obtain information
necessary to determine geolocation from mobile devices, operating systems, and other sources. Changes, disruptions or temporary or permanent
failure to access such sources by our third-party services providers may result in their inability to accurately determine the location
of end-users. Moreover, our inability to maintain our existing contracts with third-party services providers, or to replace them with
equivalent third parties, may result in our inability to access geolocation and identity verification data necessary for our day-to-day
operations. If any of these risks materializes, we may be subject to disciplinary action, fines, lawsuits, and our business, financial
condition, results of operations prospects and reputation could be adversely affected.
We
rely on third-party payment processors to process deposits and withdrawals made by end-users into the platform, and if we cannot manage
our relationships with such third parties and other payment-related risks, our business, financial condition and results of operations
could be adversely affected.
We rely on a limited number of third-party payment
processors to process deposits and withdrawals made by end-users into our platform. If any of our third-party payment processors terminates
its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate
payment processor, and may not be able to secure similar terms or replace such payment processor in an acceptable time frame. Further,
the software and services provided by our third-party payment processors may not meet our expectations, and may contain errors or vulnerabilities,
be compromised or experience outages. Any of these risks could cause us to lose our ability to accept online payments or other payment
transactions or make timely payments to users on our platform, any of which could make our platform less trustworthy and convenient and
adversely affect our ability to attract and retain end-users.
Nearly all of our payments are made by credit
card, debit card or through other third-party payment services, which subjects us to certain regulations and to the risk of fraud. We
may in the future offer new payment options to users that may be subject to additional regulations and risks. We are also subject to
a number of other laws and regulations relating to the payments we accept from end-users, including with respect to money laundering,
money transfers, privacy and information security. If we fail to comply with applicable rules and regulations, we may be subject
to civil or criminal penalties, fines and/or higher transaction fees and may lose our ability to accept online payments or other payment
card transactions, which could make our offerings less convenient and attractive to end-users. If any of these events were to occur,
our business, financial condition results of operations and prospects could be materially adversely affected.
Additionally, our payment processors require
us to comply with payment card network operating rules, which are set and interpreted by the payment card networks. The payment card
networks could adopt new operating rules or interpret or reinterpret existing rules in ways that might prohibit us from providing
certain offerings to some users, be costly to implement or difficult to follow. We have agreed to reimburse our payment processors for
fines they are assessed by payment card networks if we or the users on our platform violate these rules. Any of the foregoing risks could
materially adversely affect our business, financial condition, results of operations and prospects.
Our growth prospects and market potential will depend on our
ability to operate in a number of jurisdictions and if we fail to do so our business, financial condition, results of operations and
prospects could be impaired.
Our ability to grow our business will depend
on our ability to offer our product offerings in a large number of jurisdictions or in heavily populated jurisdictions. If we fail to
remain in large jurisdictions or in a greater number of mid-market jurisdictions, this may prevent us from expanding the footprint of
our product offerings, increasing the end-user base and/or generating revenues. We cannot be certain that we will be able to conduct
our skill-based gaming operations in any particular jurisdiction. Any failure could have a material adverse effect on our business, financial
condition, results of operations and prospects.
Negative events or negative media coverage relating to, or a
declining popularity of, gaming in particular, or other negative coverage may adversely impact our ability to retain or attract users,
which could have an adverse impact on our business, financial condition, results of operations and prospects.
Public opinion can significantly influence our
business. Unfavorable publicity regarding us, for example, our product changes, product quality, litigation, or regulatory activity,
or regarding the actions of third parties with whom we have relationships could seriously harm our reputation. In addition, a negative
shift in the perception of skill-based gaming by the public or by politicians, lobbyists or others could affect future legislation, which
could cause jurisdictions to restrict or prohibit gaming, thereby limiting the number of jurisdictions in which we can operate. Such
negative publicity could also adversely affect the size, demographics, engagement, and loyalty of the end-user base and result in decreased
revenue or slower user growth rates, which could seriously harm our business, financial condition, results of operations and prospects.
We may have difficulty accessing the services of banks, credit
card issuers and payment processing services providers, which may make it difficult to sell our products and services.
Although financial institutions and payment processors
are permitted to provide services to us and others in our industry, banks, credit card issuers and payment processing service providers
may be hesitant to offer banking and payment processing services to gaming businesses. Consequently, we may encounter difficulties in
establishing and maintaining banking and payment processing relationships with a full scope of services and generating market interest
rates. If we were unable to maintain Skillz’s bank accounts or end-users were unable to use their credit cards, bank accounts or
e-wallets to make deposits and withdrawals from our platforms it would make it difficult for us to operate our business, increase our
operating costs, and pose additional operational, logistical and security challenges which could result in an inability to implement
our business plan. A disruption in our ability to process payments could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Our results of operations may fluctuate due to seasonality and
other factors and, therefore, our periodic operating results will not be guarantees of future performance.
Our financial results and operating metrics have
fluctuated in the past and we expect such results to fluctuate in the future. These fluctuations may be due to a variety of factors,
some of which are outside of our control and may not fully reflect the underlying performance of our business.
Our financial results and operations in any given
period may be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including the impact
of seasonality, and the other risks and uncertainties set forth herein. Consumer engagement with our gaming platform may decline or fluctuate
as a result of a number of factors, including the popularity of the underlying games, the user’s level of satisfaction with our
platform, the ability of our developer partners to improve and innovate games, our ability to adapt our platform, outages and disruptions
of online services, the availability of alternative live events or entertainment, the services offered by our competitors, our marketing
and advertising efforts or declines in consumer activity generally as a result of economic downturns, among others. Any decline or fluctuation
in the recurring portion of our business may have a negative impact on our business, financial condition, results of operations or prospects.
We may invest in or acquire other businesses, and our business
may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated
with multiple acquisitions.
We intend to evaluate and pursue acquisitions
and strategic investments. Each of these acquisitions will require unique approaches to integration due to, among other reasons, the
structure of the acquisitions, their locations and cultural differences among their teams and ours, and has required, and will continue
to require, attention from our management team. If we are unable to obtain the anticipated benefits from these acquisitions and strategic
investments, or we encounter difficulties in integrating their operations with ours, our business, financial condition, results of operations
and prospects could be materially harmed.
Challenges and risks from such investments and
acquisitions include:
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negative
effects on business initiatives and strategies from the changes and potential disruption
that may follow the acquisition;
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diversion
of our management’s attention;
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declining
employee morale and retention issues resulting from changes in compensation, or changes in
management, reporting relationships, or future prospects;
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the
need to integrate the operations, systems, technologies, products and personnel of each acquired
company, the inefficiencies and lack of control that may result if such integration is delayed
or not implemented, and unforeseen difficulties and expenditures that may arise in connection
with integration;
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the
difficulty in determining the appropriate purchase price of acquired companies may lead to
the overpayment of certain acquisitions and the potential impairment of intangible assets
and goodwill acquired in the acquisitions;
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the
difficulty in successfully evaluating and utilizing the acquired products, technology or
personnel;
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the
potential incurrence of debt, contingent liabilities, amortization expenses or restructuring
charges in connection with any acquisition;
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the
need to implement controls, procedures and policies appropriate for a larger, U.S.-based
public company at companies that prior to acquisition may not have as robust controls, procedures
and policies, in particular, with respect to the effectiveness of cyber and information security
practices and incident response plans, compliance with privacy and other regulations protecting
the rights of developers and users, and compliance with U.S.-based economic policies and
sanctions which may not have previously been applicable to the acquired company’s operations;
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the
difficulty in accurately forecasting and accounting for the financial impact of an acquisition
transaction, including accounting charges and integrating and reporting results for acquired
companies that have not historically followed U.S. GAAP;
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the
fact that we may be required to pay contingent consideration in excess of the initial fair
value, and contingent consideration may become payable at a time when we do not have sufficient
cash available to pay such consideration;
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under
purchase accounting, we may be required to write off deferred revenue which may impair our
ability to recognize revenue that would have otherwise been recognizable which may impact
our financial performance or that of the acquired company;
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risks
associated with our expansion into new international markets and doing business internationally,
including those described under the risk factor caption “Our strategy to expand internationally
will be subject to increased challenges and risks”;
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in
the case of foreign acquisitions, the need to integrate operations across different cultures
and languages and to address the particular economic, currency, political and regulatory
risks associated with specific countries;
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the
need to transition operations, third-party developers and players onto our existing or new
platforms and the potential loss of, or harm to, our relationships with employees, third-party
developers, players and other suppliers as a result of integration of new businesses;
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the
implications of our management team balancing levels of oversight over acquired businesses
which continue their operations under contingent consideration provisions in acquisition
agreements;
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our
dependence on the accuracy and completeness of statements and disclosures made or actions
taken by the companies we acquire or their representatives, when conducting due diligence
and evaluating the results of such due diligence; and
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liability
for activities of the acquired company before the acquisition, including intellectual property
and other litigation claims or disputes, cyber and information security vulnerabilities,
violations of laws, rules and regulations, commercial disputes, tax liabilities and
other known and unknown liabilities.
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The benefits of an acquisition or investment
may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended
benefits, which could adversely affect our business, financial condition, results of operations, prospects or reputation. Our ability
to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable
cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions.
In addition, depending upon the duration and extent of shelter-in-place, travel and other business restrictions adopted by us and imposed
by various governments in response to the COVID-19 pandemic, we have and will continue to encounter new challenges in evaluating future
acquisitions and integrating personnel, business practices and company cultures. Acquisitions could result in potential dilutive issuances
of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities
or amortization expenses related to intangible assets or write-offs of goodwill and/or intangible assets, which could adversely affect
our financial condition and results of operations and dilute the economic and voting rights of our stockholders.
If we fail to detect fraud or theft, including by end-users
and employees, our reputation may suffer, which could harm our brand and reputation and negatively impact our business, financial condition
and results of operations and can subject us to investigations and litigation.
We have in the past incurred, and may in the
future incur, losses from various types of financial fraud, including use of stolen or fraudulent credit card data, claims of unauthorized
payments by a user and attempted payments by users with insufficient funds. Bad actors use increasingly sophisticated methods to engage
in illegal activities involving personal information, such as unauthorized use of another person’s identity, account information
or payment information and unauthorized acquisition or use of credit or debit card details, bank account information and mobile phone
numbers and accounts. Under current credit card practices, we may be liable for use of funds on our platform with fraudulent credit card
data, even if the associated financial institution approved the credit card transaction.
Acts of fraud may involve various tactics, including
collusion. Successful exploitation of our systems could have negative effects on our product offerings, services and user experience
and could harm our reputation. Failure to discover such acts or schemes in a timely manner could result in harm to our operations. In
addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse
effect on our business, financial condition, results of operations and prospects. In the event of the occurrence of any such issues with
our existing platform or product offerings, substantial engineering and marketing resources and management attention, may be diverted
from other projects to correct these issues, which may delay other projects and the achievement of our strategic objectives. Our failure
to adequately detect or prevent fraudulent transactions could harm our reputation or brand, result in litigation or regulatory action
and lead to expenses that could adversely affect our business, financial condition, results of operations and prospects.
Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such
breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such
access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy
of personal information, and regulatory penalties, disruption of our operations and the services we provide to users, damage to our reputation,
and a loss of confidence in our products and services, which could adversely affect our business, financial condition, results of operations,
prospects or reputation.
Cybersecurity attacks, including breaches, computer
malware, computer hacking and insider threats have become more prevalent in our industry, and experts have warned that the global disruption
related to the COVID-19 pandemic and remote working conditions may result in increased threats and malicious activity. Any cybersecurity
breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions,
loss or corruption of data, software, hardware or other computer equipment, or the inadvertent transmission of computer viruses or other
unauthorized access to our systems caused by employee error, malfeasance or other disruptions could adversely affect our business, financial
condition, results of operations or reputation. We have experienced and will continue to experience hacking attacks of varying degrees
from time to time. Because of our prominence in the gaming industry, we believe we are a particularly attractive target for hackers.
Additionally, rapidly evolving technology and capabilities, evolving changes in the sources, capabilities and targets for cybersecurity
attacks, as well as the increasing sophistication of cyber criminals increase the risk of material data compromise or business disruption.
In addition, we store sensitive information,
including personal information about our employees, and the games hosted on our platform involve the storage and transmission of players’
personal information on equipment, networks and corporate systems run by us or managed by third-parties including Amazon, Apple, Facebook,
Google and Microsoft. We are subject to a number of laws, rules and regulations requiring us to provide notification to players,
investors, regulators and other affected parties in the event of a security breach of certain personal data, or requiring the adoption
of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance
with these laws, including the GDPR and the CCPA, have increased and may increase in the future. Our corporate systems, third-party systems
and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or
otherwise, and, as a result, an unauthorized party may obtain access to, or compromise the integrity of, our data, our employees’
data, our players’ data or any third-party data we may possess. Any such security breach could require us to comply with various
breach notification laws, may affect our ability to operate and may expose us to litigation, remediation and investigation costs, increased
costs for security measures, loss of revenue, damage to our reputation and potential liability, each of which could be material.
We are subject to laws and regulations concerning privacy, information
security, data protection, consumer protection and protection of minors, and these laws and regulations are continually evolving. Our
actual or perceived failure to comply with these laws and regulations could harm our business, financial condition, results of operations,
reputation or prospects.
We receive, store and process personal information
and other data relating to our employees and business contacts, as well as player data, and we enable our players to share their personal
information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state
and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information
and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and
may be inconsistent between countries or conflict with other rules.
Various government and consumer agencies have
called for new regulation and changes in industry practices and are continuing to review the need for greater regulation for the collection
of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices.
In the United States, there are numerous federal and state data privacy laws, data breach notification laws and consumer protection laws.
For example, the State of California’s passage of the CCPA, which went into effect on January 1, 2020 and created new privacy
rights for consumers residing in the state. The CCPA gives California residents expanded rights to access and delete their personal information,
opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA
allows for the California Attorney General to impose civil penalties and also provides a privacy right of action for certain data breaches.
California voters also recently passed the California Privacy Rights Act (“CPRA”), which will take effect on January 1,
2023. The CPRA significantly modifies the CCPA, including by imposing additional obligations on covered companies and expanding California
consumers’ rights with respect to certain sensitive personal information, potentially resulting in further uncertainty and requiring
us to incur additional costs and expenses in an effort to comply. Other states, such as Virginia, have also adopted, or are considering
adopting similar data privacy laws. In addition, laws in all 50 states require businesses to provide notice to consumers whose personal
information has been disclosed as a result of a data breach. There is also increased attention being given to the collection of data
from minors. For instance, the Children’s Online Privacy Protection Act (“COPPA”) requires companies to obtain parental
consent before collecting personal information from children under the age of 13.
We are also subject to international laws, regulations
and standards in many jurisdictions, which apply broadly to the collection, use, retention, security, disclosure, transfer and other
processing of personal information. For example, the GDPR, which became effective in May 2018, greatly increased the European Commission’s
jurisdictional reach of its laws and adds a broad array of requirements for handling personal data. EU member states are tasked under
the GDPR to enact, and have enacted, certain implementing legislation that adds to and/or further interprets the GDPR requirements and
potentially extends our obligations and potential liability for failing to meet such obligations. The GDPR, together with national legislation,
regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations
and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise process personal data. In particular,
the GDPR includes obligations and restrictions concerning data transparency and consent, the overall rights of individuals to whom the
personal data relates, the transfer of personal data out of the European Economic Area ("EEA") or the United Kingdom, security
breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to
4% of global annual revenue or €20 million, whichever is greater. Recent legal developments in Europe have created further complexity
and uncertainty regarding transfers of personal data from the EEA and the United Kingdom to the United States. Most recently, in July 2020,
the Court of Justice the European Union (“CJEU”) invalidated the EU-U.S. Privacy Shield Framework (“Privacy Shield”)
under which personal data could be transferred from the EEA to the United States. While the CJEU upheld the adequacy of standard contractual
clauses, a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential
alternative to the Privacy Shield, it made clear that reliance on them alone may not necessarily be sufficient in all circumstances.
Further, the United Kingdom’s decision to leave the EU has created uncertainty with regard to data protection regulation in the
United Kingdom. As of January 1, 2021, we are also subject to the UK GDPR and UK Data Protection Act of 2018, which retains the
GDPR in the United Kingdom’s national law. These recent developments will require us to review and amend the legal mechanisms by
which we make and/or receive personal data transfers. As supervisory authorities issue further guidance on personal data export mechanisms,
including circumstances where the standard contractual clauses and other mechanisms cannot be used, and/or start taking enforcement action,
we could suffer additional costs, complaints and/or regulatory investigations or fines, or if we are otherwise unable to transfer personal
data between and among countries and regions in which we operate, it could affect the manner in which we do business, the geographical
location or segregation of our relevant operations, and could adversely affect our financial results.
Compliance with GDPR, CCPA, COPPA and similar
legal requirements has required us to devote significant operational resources and incur significant expenses. We expect the number of
jurisdictions adopting their own data privacy laws to increase, which will require us to devote additional significant operational resources
and incur additional significant expenses and will also increase our exposure to risks of claims by our players that we have not complied
with all applicable data privacy laws.
We strive to comply with all applicable laws,
policies, legal and contractual obligations and certain industry codes of conduct relating to privacy and data protection, to the extent
reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent
from one jurisdiction to another and may conflict with other rules or our practices. It is also possible that new laws, policies,
legal obligations or industry codes of conduct may be passed, or existing laws, policies, legal obligations or industry codes of conduct
may be interpreted in such a way that could require us to take further compliance steps and/or could prevent us from being able to offer
services to citizens of a certain jurisdiction or may make it costlier or more difficult for us to do so. Any failure or perceived failure
by us to comply with our privacy policy and terms of service, our privacy-related obligations to players or other third parties, or our
privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable
information or other player data, may result in governmental enforcement actions, investigations, litigation or public statements against
us by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business,
financial condition, results of operations, reputation or prospects. Additionally, if third parties we work with, such as players, vendors
or developers violate applicable laws or our policies, such violations may also put our players’ information at risk and could
in turn have an adverse effect on our business, financial condition, results of operations, reputation or prospects.
Failure to obtain, maintain, protect or enforce our intellectual
property rights could harm our business, results of operations, financial condition and prospects.
Our success is dependent in part on protecting
our intellectual property rights and proprietary technology (such as source code, information, data, processes and other forms of information,
and know-how). We rely on a combination of copyrights, patents, trademarks, service marks, trade secret laws and contractual restrictions
to establish and protect our intellectual property rights. However, there are steps that we have not yet taken to protect our intellectual
property on a global basis. Additionally, the steps that we have already taken to protect our intellectual property may not be sufficient
or effective to prevent third parties from infringing, misappropriating or otherwise violating our intellectual property or to prevent
unauthorized disclosure or unauthorized use of our trade secrets or other confidential information. We may also not detect unauthorized
use, infringement, misappropriation or other violation of our intellectual property rights, and even if we do detect such violations,
we may need to engage in expensive and time-consuming litigation to enforce our rights.
While we take precautions designed to protect
our intellectual property, it may still be possible for competitors and other unauthorized third parties to copy our technology and use
our proprietary brand, content and information to create or enhance competing solutions and services, which could adversely affect our
competitive position in our rapidly evolving and highly competitive industry. Effective protection of intellectual property rights is
expensive and difficult to maintain, both in terms of applications and registration costs as well as the costs of defending and enforcing
these rights. We may fail to maintain or be unable to obtain adequate protections for certain of our intellectual property rights in
certain foreign countries because effective intellectual property protection may not be available to us in every country in which our
services are available, and our intellectual property rights may not receive the same degree of protection in foreign countries as they
would in the United States because of the differences in foreign patent, trademark, copyright, and other laws concerning intellectual
property and proprietary rights.
We enter into confidentiality and invention assignment
agreements with our employees and consultants and enter into confidentiality agreements with our third-party providers and strategic
partners. However, we cannot guarantee that we have entered into such agreements with each party who has developed intellectual property
on our behalf or each party that has or may have had access to our confidential information, know-how and trade secrets and cannot assure
you that these agreements will be effective in controlling access to, and use and distribution of, our platform and proprietary information.
Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent
or superior to our offerings. Moreover, these agreements may not provide an adequate remedy for breaches or in the event of unauthorized
use or disclosure of our confidential information or technology or infringement of our intellectual property. Enforcing a claim that
a party illegally disclosed or misappropriated a trade secret or know-how is difficult, expensive, and time-consuming, and the outcome
is unpredictable. In addition, trade secrets and know-how can be difficult to protect and some courts inside and outside the United States
are less willing or unwilling to protect trade secrets and know how. If any of our trade secrets were to be lawfully obtained or independently
developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete
with us, which could harm our competitive position, business, financial condition, results of operations, and prospects.
We have filed, and may continue in the future
to file, trademark and patent applications to protect certain of our innovations and intellectual property. This process can be expensive
and time-consuming, and we do not know whether any of our applications will result in the issuance of a patent, trademark or copyright,
as applicable, or whether the examination process will require us to narrow the claims in our patent applications. In addition, we may
not receive competitive advantages from the rights granted under our intellectual property. Our existing intellectual property, and any
intellectual property granted to us or that we otherwise acquire in the future, may be contested, circumvented, invalidated, or declared
unenforceable through administrative processes or litigation, and we may not be able to prevent third parties from infringing, misappropriating
or otherwise violating our rights to our intellectual property. Therefore, the exact effect of our efforts to protect our intellectual
property cannot be predicted with certainty. In addition, given the costs, effort, risks and downside of obtaining patent protection,
including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain
innovations. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to
adversely impact our business, results of operations, financial condition or prospects.
We currently hold various domain names relating
to our brand, including Skillz.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more
difficult for users to find our website and our online app. We may be unable, without significant cost or at all, to prevent third parties
from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary
rights.
We may be required to spend significant resources
in order to monitor and protect our intellectual property rights, and some violations may be difficult or impossible to detect. Litigation
to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result
in the impairment or loss of portions of our intellectual property. Our efforts to enforce our intellectual property rights may be met
with defenses, counterclaims and counter suits attacking the validity and enforceability of our intellectual property rights. Our inability
to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s
attention and resources, could impair the functionality of our platform, delay introductions of enhancements to our platform, result
in our substituting inferior or costlier technologies into our platform or harm our reputation or brand and business, financial condition
and results of operations. In addition, we may be required to license additional technology from third parties to develop and market
new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect our ability
to compete.
Although we take measures to protect our intellectual
property, if we are unable to prevent the unauthorized use or exploitation of our intellectual property, the value of our brand, content,
and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations,
the perception of our business and service to our third party developer partners, potential developer partners and end game users may
become confused, and our ability to attract new developers and users may be adversely affected. Any inability or failure to protect our
intellectual property could adversely impact our business, results of operations, financial condition, reputation and prospects.
Our commercial success also depends in part on
our ability to operate without infringing, misappropriating or otherwise violating the intellectual property rights of others. We may
face allegations that we have infringed, misappropriated or otherwise violated the trademarks, copyrights, patents and other intellectual
property rights of third parties, including from our competitors and non-practicing entities. We may also be subject to claims that our
employees, consultants or other advisors have wrongfully used or disclosed alleged trade secrets of their former employers or claims
asserting ownership of what we regard as our intellectual property. Intellectual property litigation may be protracted and expensive,
and the results are difficult to predict. As the result of any court judgment or settlement, we may be obligated to stop offering certain
features of our platform in a particular geographic region or worldwide, pay significant royalties, settlement costs or damages (including
treble damages and attorneys’ fees if we are found to have willfully infringed intellectual property rights), obtain licenses (which
may not be available on acceptable terms or at all), modify our platform and features, or develop substitutes. Even if we were able to
obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed
to us. Furthermore, even if intellectual property disputes do not result in litigation, the time and resources necessary to resolve them
could harm our business, results of operations, financial condition and reputation.
We have incurred losses since inception. We may not achieve
profitability in the near future, depending on company strategic priorities.
We have experienced net losses in each period
since inception. As of December 31, 2020, we had an accumulated deficit of $238.3 million. While we have experienced significant
revenue and user metrics growth in recent periods, the industry in which we operate is highly competitive and rapidly changing, and relies
heavily on continually introducing compelling content, products and services. As such, if we, in combination with our third-party developers,
fail to deliver such content, products and services, do not execute our strategy successfully or if our new content launches are delayed,
our revenue and user metrics may decline, and our operating results will suffer.
In addition, our operating margin may experience
downward pressure as a result of increasing competition, increased user acquisition costs and the other risks discussed in this Annual
Report on Form 10-K. We expect to continue to expend substantial financial and other resources on expanding our developer and consumer
base, our technology, the expansion of our platform, and marketing. Our operating costs will increase and our operating margins may decline
if we do not effectively manage costs, launch new products on schedule that monetize successfully and enhance the games featured on our
platform. We rely primarily on digital advertising networks to acquire new users to the platform. Increases in digital advertising costs,
including on a per user basis, could have a material adverse effect on our business, financial condition and results of operations, including
on our ability to achieve profitability. Historically, our Three-Year Lifetime Value to User Acquisition Cost has fluctuated over time.
Rising digital advertising costs in 2020 reduced our expected average Three-Year Lifetime Value to User Acquisition Costs relative to
prior periods. Neither our user acquisition costs nor our lifetime customer value are assured, and thus we cannot assure you that this
ratio will not further decline over time. In addition, we cannot assure you that digital advertising costs will not continue to increase
in 2021 or any other future period. In addition, weak economic conditions or other factors could cause our business to further contract,
requiring us to implement significant additional cost cutting measures, including a decrease in research and development and sales and
marketing, which could harm our long-term prospects.
If our revenue does not increase to offset any
additional expenses, if we fail to manage or experience unexpected increases in operating expenses or if we are required to take additional
charges related to impairments or restructurings, our business, financial condition, results of operations and prospects may be materially
adversely affected.
We rely on assumptions and estimates to calculate certain of
our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Certain of our key metrics, including Monthly
Active Users or “MAUs”, Paying Monthly Active Users or “Paying MAUs”, Average Revenue Per Monthly Active User
or “ARPU”, and Average Revenue Per Paying Monthly Active User or “ARPPU”, are calculated using data tracked by
our internal analytics systems based on tracking activity of user accounts. MAUs means the number of 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. Paying MAUs 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. ARPU means the average monthly revenue in a given period divided by average monthly MAUs in that period. ARPPU means
the average monthly revenue in a given period divided by average monthly Paying MAUs in that period. The analytics systems for these
metrics and the resulting data have not been independently verified. While these numbers are based on what we believe to be reasonable
calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across the
end-user base, and factors relating to user activity and systems may impact these numbers. The calculation of our key metrics and examples
of how user activity and our systems may impact the calculation of these metrics is described in detail under the heading titled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” In addition, our Three-Year Lifetime Value to User Acquisition
Cost and payback period calculations are based in substantial part on our extrapolations of historical performance of previous cohorts.
If these assumptions and extrapolations prove to be wrong, the Three-Year Lifetime Value to User Acquisition Cost and payback period
for the cohorts presented herein may differ significantly from our estimates. For example, our calculations assume that users that we
acquired in 2020 will exhibit retention and revenue characteristics that are similar to those of users that we acquired in 2019 or 2018.
There can be no assurance this will be the case.
Our third-party developers and investors rely
on our key metrics as a representation of our performance. We regularly review and may adjust our processes for calculating our internal
metrics to improve their accuracy. If we determine that we can no longer calculate any of our key metrics with a sufficient degree of
accuracy, and we cannot find an adequate replacement for the metric, our business, financial condition or results of operations may be
harmed. In addition, if advertisers, platform partners or investors do not perceive end-user metrics to be accurate representations of
the end-user base or end-user engagement, or if we discover material inaccuracies in end-user metrics, our reputation may be harmed and
advertisers and platform partners may be less willing to allocate their budgets or resources to our products and services, which could
negatively affect our business, financial condition, results of operations, reputation and prospects.
Our workforce and operations have grown substantially since
our inception and we expect that they will continue to do so. If we are unable to effectively manage that growth, our financial performance
and future prospects will be adversely affected.
Since our inception, we have experienced rapid
growth in the United States and internationally. This expansion increases the complexity of our business and has placed, and will continue
to place, significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal
financial control and reporting functions. We may not be able to manage our growth effectively, which could damage our reputation and
negatively affect our operating results.
Properly managing our growth will require us
to continue to hire, train, and manage qualified employees and staff, including engineers, operations personnel, financial and accounting
staff, and sales and marketing staff, and to improve and maintain our technology. If our new hires perform poorly, if we are unsuccessful
in hiring, training, managing, and integrating these new employees and staff, or if we are not successful in retaining our existing employees
and staff, our business may be harmed. Moreover, in order to optimize our organizational structure, we have implemented reductions in
force, including in response to the COVID-19 pandemic and its impact on our business, and may in the future implement other reductions
in force. Any reduction in force may yield unintended consequences and costs, such as attrition beyond the intended reduction in force,
the distraction of employees, reduced employee morale and could adversely affect our reputation as an employer, which could make it more
difficult for us to hire new employees in the future and increase the risk that we may not achieve the anticipated benefits from the
reduction in force. Properly managing our growth will require us to establish consistent policies across regions and functions, and a
failure to do so could likewise harm our business.
Our failure to upgrade our technology or network
infrastructure effectively to support our growth could result in unanticipated disruptions. To manage the growth of our operations and
personnel and improve the technology that supports our business operations, as well as our financial and management systems, disclosure
controls and procedures, and internal controls over financial reporting, we will be required to commit substantial financial, operational,
and technical resources.
Our current and planned personnel, systems, procedures,
and controls may not be adequate to support our future operations. If we are unable to expand our operations and hire additional qualified
personnel in an efficient manner, or if our operational technology is insufficient to reliably service our platform, we could potentially
face difficulties in retaining users, which would adversely affect our business, financial condition, operating results and prospects.
Our organizational structure is complex and will
continue to grow as we add additional employees. We will need to improve our operational, financial, and management controls as well
as our reporting systems and procedures to support the growth of our organizational structure. We will require capital and management
resources to grow and mature in these areas. If we are unable to effectively manage the growth of our business, the quality of our platform
may suffer, and we may be unable to address competitive challenges, which would adversely affect our overall business, operations, financial
condition and prospects.
Continued growth and success will depend on the performance
of the current and future employees of Skillz, including certain key employees. Recruitment and retention of these individuals is vital
to growing our business and meeting our business plans. The loss of any of our key executives or other key employees could harm our business.
Our ability to compete and grow depends in large
part on the efforts and talents of our employees and executives. Our success depends in a large part upon the continued service of our
senior management team, including Andrew Paradise, our Founder and Chief Executive Officer. Paradise is critical to our vision, strategic
direction, culture, products and technology, and the continued retention of our entire senior management team is important to the success
of our operating plan. We do not have employment agreements, other than offer letters, with our senior management team, and we do not
maintain key-man insurance for members of our senior management team. The loss of any member of our senior management team could cause
disruption and harm our business, financial condition, results of operations, reputation and prospects.
In addition, our ability to execute our strategy
depends on our continued ability to identify, hire, develop, motivate and retain highly skilled employees, particularly in the competitive
fields of game design, product management, engineering and data science. These employees are in high demand, and we devote significant
resources to identifying, recruiting, hiring, training, successfully integrating and retaining them. Interviewing, hiring and integrating
new employees has and will continue to be particularly challenging during the COVID-19 pandemic. We have continued to experience significant
turnover in our headcount, which has placed and will continue to place significant demands on our management and our operational, financial
and technological infrastructure. As part of our global remote working plans, throughout the duration of the COVID-19 pandemic, we will
devote increased efforts to maintaining the collaborative culture of Skillz, including through the use of videoconferencing and other
online communication and sharing tools, and to monitoring the health, safety, morale and productivity of our employees, including new
employees, as we evaluate the impacts of this changing situation on our business and employees.
We believe that two critical components of our
success and our ability to retain our best people are our culture and our competitive compensation practices. Any volatility in our operating
results and the trading price of our Class A common stock may cause our employee base to be more vulnerable to be targeted for recruitment
by competitors. While we believe we compete favorably, competition for highly skilled employees is intense, particularly in the San Francisco
Bay Area, where our operations are based. If we are unable to identify, hire and retain our senior management team and our key employees,
our business, financial condition or results of operations could be harmed. Moreover, if our team fails to work together effectively
to execute our plans and strategies on a timely basis, our business, financial condition, results of operations and prospects could be
materially adversely affected.
If the use of mobile devices as game platforms and the proliferation
of mobile devices generally do not increase, our business could be adversely affected.
The number of people using mobile Internet-enabled
devices has increased dramatically over time and we expect that this trend will continue. However, the mobile market, particularly the
market for mobile games, may not grow in the way we anticipate. Our future success is substantially dependent upon the continued growth
of the market for mobile games. In addition, we do not currently offer our games on all mobile devices. If the mobile devices on which
our games are available decline in popularity or become obsolete faster than anticipated, we could experience a decline in revenue and
GMV and may not achieve the anticipated return on our development efforts. Any such declines in the growth of the mobile market or in
the use of mobile devices for games could harm our business, financial condition, results of operations and prospects.
We are a party to pending litigation with various plaintiffs
and we may be subject to future litigation in the operation of our business. An adverse outcome in one or more proceedings could adversely
affect our business.
We are involved, and in the future, may become
involved, in claims, suits, government investigations, and proceedings arising in the ordinary course of our business, including actions
with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment
claims, commercial and acquisition-related claims and other matters. Such claims, suits, government investigations, and proceedings are
inherently uncertain and their results cannot be predicted with certainty. Regardless of their outcomes, such legal proceedings can have
an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. It is possible that a
resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees,
or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business
practices, products or technologies, which could in the future materially and adversely affect our business, financial condition, results
of operations, reputation and prospects.
Our insurance may not provide adequate levels of coverage against
claims.
We believe that we maintain insurance customary
for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe
are not economically reasonable to insure. We do not maintain “Key man” insurance policies on any of our officers or employees.
Moreover, any loss incurred could exceed policy
limits and policy payments made to us may not be made on a timely basis. Such losses could adversely affect our business prospects, results
of operations and financial condition.
Our strategy to expand internationally will be subject to increased
challenges and risks.
One of our growth strategies is to expand our
business outside the United States. An important part of targeting international markets is developing offerings that are localized and
customized for the players in those markets. Our ability to expand our business and to attract talented employees and players in international
markets will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly
growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems
and commercial infrastructures. Expanding our international focus may subject us to risks that we have not faced before or increase risks
that we currently face, including risks associated with:
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inability
to host certain games in certain foreign countries;
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recruiting
and retaining talented and capable management and employees in foreign countries;
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challenges
caused by distance, language and cultural differences;
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developing
and customizing games and other offerings that appeal to the tastes and preferences of players
in international markets;
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competition
from local game makers with significant market share in those markets and with a better understanding
of player preferences;
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utilizing,
protecting, defending and enforcing our intellectual property rights;
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negotiating
agreements with local distribution platforms that are sufficiently economically beneficial
to us and protective of our rights;
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the
inability to extend proprietary rights in our brand, content or technology into new jurisdictions;
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implementing
alternative payment methods for virtual items in a manner that complies with local laws and
practices and protects us from fraud;
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compliance
with applicable foreign laws and regulations, including privacy laws and laws relating to
content and consumer protection (for example, the United Kingdom’s Office of Fair Trading’s
2014 principles relating to in-app purchases in free-to-play games that are directed toward
children 16 and under);
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compliance
with anti-bribery laws, including the Foreign Corrupt Practices Act;
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credit
risk and higher levels of payment fraud;
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currency
exchange rate fluctuations;
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protectionist
laws and business practices that favor local businesses in some countries;
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double
taxation of our international earnings and potentially adverse tax consequences due to changes
in the tax laws of the U.S. or the foreign jurisdictions in which we operate;
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political,
economic and social instability;
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public
health crises, such as the COVID-19 pandemic, which can result in varying impacts to our
employees, players, vendors and commercial partners internationally;
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higher
costs associated with doing business internationally;
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export
or import regulations; and
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trade
and tariff restrictions.
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If we are unable to manage the complexity
of our global operations successfully, our business, financial condition and operating results could be adversely affected. Additionally,
our ability to successfully gain market acceptance in any particular market is uncertain, and the distraction of our senior management
team could harm our business, financial condition, results of operations and prospects.
Companies and governmental agencies may restrict access to platforms,
our website, mobile applications or the Internet generally, which could lead to the loss or slower growth of players on the Skillz platform.
Our players generally need to access the Internet
and in particular platforms or our website to play the games available on the Skillz platform. Companies and governmental agencies could
block access to any platform, our website, mobile applications or the Internet generally for a number of reasons such as security or
confidentiality concerns or regulatory reasons, or they may adopt policies that prohibit employees from accessing Apple or Google and
our website or any social platform. If companies or governmental entities block or limit such or otherwise adopt policies restricting
players from playing the games available on the Skillz platform, our business could be negatively impacted and could lead to the loss
or slower growth of players on the Skillz platform.
The requirements of being a public company may strain our resources
and divert management’s attention, and the increases in legal, accounting and compliance expenses may be greater than we anticipate.
Following
the closing of the Business Combination, we became a public company, and as such, have incurred, and will continue to incur (and
particularly after we are no longer an “emerging growth company”), significant legal, accounting and other expenses that
Skillz did not incur as a private company. We are subject to the reporting requirements of the Exchange Act and are required to comply
with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well
as the rules and regulations subsequently implemented by the SEC and the listing standards of The New York Stock Exchange, including
changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial controls. Compliance
with these rules and regulations can be burdensome. Our management and other personnel need to devote a substantial amount of time
to these compliance initiatives. Moreover, these rules and regulations will increase our historical legal and financial compliance
costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may
make it more difficult and more expensive for us to attract and retain qualified members of our Board of Directors (the “Board”)
as compared to Skillz as a private company. In particular, we expect to incur significant expenses and devote substantial management
effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are
no longer an “emerging growth company.” We will need to hire additional accounting and financial staff, and engage outside
consultants, all with appropriate public company experience and technical accounting knowledge and maintain an internal audit function,
which will increase our operating expenses. Moreover, we could incur additional compensation costs in the event that we decide to pay
cash compensation closer to that of other publicly-listed companies, which would increase our general and administrative expenses and
could materially and adversely affect our business, financial condition, results of operations and prospects. We are evaluating these
rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
As a private company, Skillz was not required to document and
test its internal controls over financial reporting nor was its management required to certify the effectiveness of its internal controls
and its auditors were not required to opine on the effectiveness of Skillz’s internal control over financial reporting. Failure
to maintain adequate financial, information technology and management processes and controls could result in material weaknesses which
could lead to errors in our financial reporting, which could adversely affect our business, financial condition, results of operations
and prospects.
Skillz was not required to document and test
its internal controls over financial reporting nor was its management required to certify the effectiveness of their internal controls
and its auditors were not required to opine on the effectiveness of their internal control over financial reporting. Similarly, as an
“emerging growth company,” FEAC was exempt from the SEC’s internal control reporting requirements. We may lose our
emerging growth company status and become subject to the SEC’s internal control over financial reporting management and auditor
attestation requirements in the year in which we are deemed to be a large accelerated filer, which will occur at the end of 2021 if the
market value of our common equity held by non-affiliates exceeds $700 million as of the end of our second fiscal quarter in 2021. We
anticipate that we will be subject to the SEC’s internal control reporting and attestation requirements with respect to our annual
report on Form 10-K for the year ending December 31, 2021. We may not be able to complete our evaluation, testing and any required
remediation in a timely fashion. In addition, our current controls and any new controls that we develop may become inadequate because
of poor design and changes in our business, including increased complexity resulting from any international expansion. Any failure to
implement and maintain effective internal controls over financial reporting could adversely affect the results of assessments by our
independent registered public accounting firm and their attestation reports.
If we are unable to certify the effectiveness
of our internal controls, or if our internal controls have a material weakness, we may not detect errors timely, our consolidated financial
statements could be misstated, we could be subject to regulatory scrutiny and a loss of confidence by stakeholders, which could harm
our business, financial condition and results of operations and adversely affect the market price of our Class A common stock.
We have identified a material weakness in our internal control
over financial reporting as of December 31, 2020. If we are unable to develop and maintain an effective system of internal control
over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect
investor confidence in us and materially and adversely affect our business and operating results.
Following this issuance of the SEC Staff Statement,
on April 29, 2021, the audit committee of our board of directors, in consultation with management and our independent auditors,
concluded that, because of a misapplication of the accounting guidance applicable to the warrants acquired in connection with the Business
Combination, our previously issued consolidated financial statements as of and for the year ended December 31, 2020 should no longer
be relied upon. As such, we determined that we would restate our consolidated financial statements as of and for the year ended December 31,
2020. As part of such process, we identified a material weakness in our internal control over financial reporting.
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Effective internal controls are necessary for
us to provide reliable financial reports and prevent fraud. To remediate the material weakness, the Company studied and clarified its
understanding of the accounting of contracts that may be settled in the Company’s own stock, such as warrants, as equity of the
entity or as an asset or liability as highlighted in the SEC Staff Statement, and is in the process of implementing additional review
procedures and enhanced its accounting policy related to the accounting for such contracts to determine proper accounting in accordance
with GAAP as clarified by the SEC Staff Statement. Finally, the Company restated its consolidated financial statements as of and for
the year ended December 31, 2020 upon completing its evaluation of the SEC Staff Statement. If we identify any new material weaknesses
in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts
or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable
to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange
listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot
assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential
future material weaknesses.
Changes in tax laws or tax rulings could materially affect our
effective tax rates, financial position and results of operations.
The tax regimes we are subject to or operate
under are unsettled and may be subject to significant change. Changes in tax laws (including in response to the COVID-19 pandemic) or
tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income-based taxes and non- income
taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which in turn could
materially affect our financial position and results of operations. For example, in December 2017, the U.S. federal government enacted
the Tax Cuts and Jobs Act (“2017 Tax Act”). The 2017 Tax Act significantly changed the existing U.S. corporate income tax
laws by, among other things, lowering the corporate tax rate, implementing a partially territorial tax system, and imposing a one-time
deemed repatriation toll tax on cumulative undistributed foreign earnings.
On June 7, 2019, the U.S. Court of Appeals
for the Ninth Circuit ("Ninth Circuit") issued its opinion in Altera Corp v. Commissioner, which requires parties to a qualified
cost-sharing arrangement to include stock-based compensation in the cost pool. As a result, our ability to offset 2019 taxable income
with net operating losses may be reduced. In addition, many countries in the European Union, as well as a number of other countries and
organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing
tax laws or have enacted new laws that could impact our tax obligations. Any significant changes to our future effective tax rate may
result in a material adverse effect on our business, financial condition and results of operations.
Our reported financial results may be affected by changes in
accounting principles generally accepted in the United States.
Generally accepted accounting principles (“GAAP”)
in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various
bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have
a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement
of a change. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations,
which could result in regulatory discipline and harm investors’ confidence in us.
We may require additional capital to support our growth plans,
and such capital may not be available on terms acceptable to us, if at all. This could hamper our growth and adversely affect our business,
financial condition, results of operations and prospects.
We intend to continue to make significant investments
to support our business growth and may require additional funds to respond to business challenges, including the need to develop new
games and features or enhance our existing games, improve our operating infrastructure or acquire complementary businesses, personnel
and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional
funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A
common stock. Any debt financing that we secure in the future could involve offering additional security interests and undertaking restrictive
covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for
us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, the COVID-19 pandemic
has disrupted capital markets, and if we seek to access additional capital or increase our borrowing, there can be no assurance that
financing and credit may be available on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms
satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could
be significantly impaired, and our business, financial condition or results of operations may be harmed.
Our investment portfolio may become impaired by deterioration
of the financial markets.
Our cash equivalent and investment portfolio
is invested with a goal of preserving our access to capital, and generally consists of money market funds, corporate debt securities,
U.S. government and government agency debt securities, mutual funds, certificates of deposit and time deposits. We follow an established
investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth
credit quality standards, permissible allocations of certain sectors and limits our exposure to specific investment types. Volatility
in the global financial markets can negatively impact the value of our investments, and recent depressed performance in U.S. and global
financial markets due to the COVID-19 pandemic has negatively impacted the carrying value of our investment portfolio. If financial markets
experience further volatility, including due to depressed economic production and performance across the U.S. and global economies due
to impacts of the COVID-19 pandemic, investments in some financial instruments may pose risks arising from market liquidity and credit
concerns. In addition, any disruption of the capital markets could cause our other income and expenses to vary from expectations. Although
we believe our current investment portfolio has a low risk of material impairment, we cannot predict future market conditions, market
liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
The occurrence of an earthquake, other natural disaster or other
significant business interruption at or near any of our facilities could cause damage to our facilities and equipment and interfere with
our operations.
Our principal business operations are located
in the San Francisco Bay Area, an area known for earthquakes, and are thus vulnerable to damage. All of our facilities are also vulnerable
to damage from natural or manmade disasters, including power loss, fire, explosions, floods, communications failures, terrorist attacks,
contagious disease outbreak (such as the COVID-19 pandemic) and similar events. If any disaster were to occur, our ability to operate
our business at our facilities could be impaired and we could incur significant losses, recovery from which may require substantial time
and expense.
Risks Related to Ownership of Our Warrants and Class A Common
Stock
The trading price of our Class A common stock has been,
and may continue to be, volatile, and the value of our Class A common stock may decline.
The market price of our Class A common stock
has been and may continue to be subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including:
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actual
or anticipated fluctuations in our financial condition and operating results;
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changes
in projected operational and financial results;
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changes
in laws or regulations applicable to our offerings;
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the
commencement or conclusion of legal proceedings that involve us;
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actual
or anticipated changes in our growth rate relative to our competitors;
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announcements
of new offerings by us or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures
or capital-raising activities or commitments;
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additions
or departures of key personnel;
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issuance
of new or updated research or reports by securities analysts;
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the
use by investors or analysts of third-party data regarding our business that may not reflect
our financial performance;
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fluctuations
in the valuation of companies perceived by investors to be comparable to us;
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sales
of our Class A common stock;
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share
price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
and
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general
economic and market conditions.
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Furthermore, the stock markets frequently experience
extreme price and volume fluctuations that affect the market prices of equity securities of many companies. These fluctuations often
have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations,
as well as general economic, political and market conditions such as recessions, elections, interest rate changes or international currency
fluctuations, may negatively impact the market price of our Class A common stock. As a result of such fluctuations, you may not
realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced
volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type
of litigation in the future, which could result in substantial costs and divert our management’s attention from other business
concerns.
Recently, the stock markets in general, and the
markets for technology stocks in particular, have experienced extreme volatility, including as a result of the COVID-19 pandemic. Furthermore,
the trading price of our Class A common stock may be adversely affected by third-parties trying to drive down the market price.
Short sellers and others, some of whom post anonymously on social media, may be positioned to profit if our stock declines and their
activities can negatively affect our stock price. These broad market and industry factors may seriously harm the market price of our
Class A common stock, regardless of our operating performance.
Outstanding warrants are exercisable for shares of our Class A
common stock and, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution
to our stockholders.
As of March 5, 2021, there were 17,249,977
outstanding public warrants to purchase 17,249,977 shares of our Class A common stock at an exercise price of $11.50 per
share, which warrants became exercisable beginning on March 18, 2021. Under the terms of the Warrant Agreement, dated as of March 3,
2020, between the Company (formerly known as Flying Eagle Acquisition Corp.) and Continental Stock Transfer & Trust Company
(the “Warrant Agreement”) the Company is entitled to redeem all outstanding public warrants if the reported closing price
of the Company’s Class A common stock is at least $18.00 per share on each of twenty trading days within a thirty trading
day period. As of the date of the filing of this Annual Report on Form 10-K/A, this condition has not been satisfied. In addition,
there are 5,016,666 private placement warrants outstanding exercisable for 5,016,666 shares of our Class A common stock at an exercise
price of $11.50 per share, which warrants became exercisable beginning on March 18, 2021. Warrants that were issued under
the Warrant Agreement in a private placement and held by the founders of FEAC and their permitted transferees will not be subject to
redemption.
To the extent such warrants are exercised, additional
shares of our Class A common stock will be issued, which will result in dilution to the holders of our Class A common stock
and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public
market could adversely affect the market price of our Class A common stock, the impact of which is increased as the value of our
stock price increases.
The valuation of our warrants could increase the volatility
in our net loss in our consolidated statements of operations.
The change in fair value of our warrants is primarily
the result of changes in stock price and warrants outstanding at each reporting period. The change in fair value of warrant liabilities
represents the fair value adjustments to the outstanding warrants issued in connection with FEAC’s initial public offering. Significant
changes in our stock price or other valuation inputs (such as expected volatility, expected life and risk-free interest rate) or the
number of warrants outstanding may adversely affect our net loss in our consolidated statements of operations.
We are a “controlled company” within the meaning
of the rules of the New York Stock Exchange (“NYSE”) and our stockholders may not have certain corporate governance
protections that are available to stockholders of companies that are not controlled companies.
So long as more than 50% of the voting power
for the election of our directors is held by an individual, a group or another company, we will qualify as a “controlled company”
within the meaning of the NYSE corporate governance standards. As December 31, 2020, Paradise controls eighty-four (84)% of the
voting power of our outstanding capital stock. As a result, we will be a “controlled company” within the meaning of the NYSE
corporate governance standards and will not be subject to the requirements that would otherwise require us to have: (i) a majority
of independent directors; (ii) a nominating committee comprised solely of independent directors; (iii) compensation of our
executive officers determined by a majority of the independent directors or a compensation committee comprised solely of independent
directors; and (iv) director nominees selected, or recommended for the Board’s selection, either by a majority of the independent
directors or a nominating committee comprised solely of independent directors.
Paradise may have his interest diluted due to
future equity issuances or his own actions in selling shares of Class B common stock, par value $0.0001 per share (the “Class B
common stock” and together with the Class A common stock, the “common stock”) in each case, which could result
in a loss of the “controlled company” exemption under the NYSE listing rules. We would then be required to comply with those
provisions of the NYSE listing requirements.
The dual class structure of our common stock has the effect
of concentrating voting power with our Chief Executive Officer and Co-Founder, which will limit an investor’s ability to influence
the outcome of important transactions, including a change in control.
Shares of our Class B common stock have
20 votes per share, while shares of our Class A common stock have one vote per share. Paradise holds all of the issued and outstanding
shares of our Class B common stock and, as of December 31, 2020, eighty-four (84)% of the voting power of our capital stock
on a fully-diluted basis. Accordingly, Paradise will be able to control matters submitted to our stockholders for approval, including
the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all
of our assets or other major corporate transactions. Paradise may have interests that differ from yours and may vote in a way with which
you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing or deterring
a change in control of us, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a
sale of us and might ultimately affect the market price of shares of our Class A common stock.
We cannot predict the impact our dual class structure may have
on the stock price of our Class A common stock.
We cannot predict whether our dual class structure
will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences.
For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain
of their indexes. Under these policies, our dual class capital structure would make us ineligible for inclusion in certain indices, and
as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track those indices will not
be investing in our stock. It is unclear what effect, if any, these policies will have on the valuations of publicly traded companies
excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included.
As a result, the market price of shares of our Class A common stock could be adversely affected.
Delaware law and provisions in our certificate of incorporation
and bylaws could make a takeover proposal more difficult.
Our organizational documents are governed by
Delaware law. Certain provisions of Delaware law and of our certificate of incorporation and bylaws could discourage, delay, defer or
prevent a merger, tender offer, proxy contest or other change of control transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price for the shares of Class A common stock held by our
stockholders. These provisions provide for, among other things:
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the
ability of our board of directors to issue one or more series of preferred stock;
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stockholder
action by written consent only until the first time when Paradise ceases to beneficially
own a majority of the voting power of our capital stock;
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certain
limitations on convening special stockholder meetings;
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advance
notice for nominations of directors by stockholders and for stockholders to include matters
to be considered at our annual meetings;
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amendment
of certain provisions of the organizational documents only by the affirmative vote of (i) a
majority of the voting power of our capital stock so long as Paradise beneficially owns shares
representing a majority of the voting power of our capital stock and (ii) at least two-thirds
of the voting power of the capital stock from and after the time that Paradise ceases to
beneficially own shares representing a majority of the voting power of our voting stock;
and
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a
dual-class common stock structure with 20 votes per share of our Class B common stock,
the result of which is that Paradise has the ability to control the outcome of matters requiring
stockholder approval, even though Paradise owns less than a majority of the outstanding shares
of our capital stock.
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These anti-takeover provisions as well as certain
provisions of Delaware law could make it more difficult for a third party to acquire us, even if the third party’s offer may be
considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium
for their shares. If prospective takeovers are not consummated for any reason, we may experience negative reactions from the financial
markets, including negative impacts on the price of our common stock. These provisions could also discourage proxy contests and make
it more difficult for our stockholders to elect directors of their choosing and to cause us to take other corporate actions that our
stockholders desire.
Our certificate of incorporation designates the Court of Chancery
of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings and the federal district courts
as the sole and exclusive forum for other types of actions and proceedings, in each case, that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain what such stockholders believe to be a favorable judicial forum for disputes
with us or our directors, officers or other employees.
Our certificate of incorporation provides that,
unless we consent to the selection of an alternative forum, any (i) derivative action or proceeding brought on behalf of us; (ii) action
asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of ours to us or our stockholders; (iii) action
asserting a claim against us or any director or officer arising pursuant to any provision of the General Corporation Law of the State
of Delaware or our certificate of incorporation or bylaws; (iv) any action to interpret, apply, enforce or determine the validity
of any provisions in our certificate of incorporation or bylaws; or (v) action asserting a claim against us or any director or officer
of ours governed by the internal affairs doctrine, shall, to the fullest extent permitted by law, be exclusively brought in the Court
of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court
of the State of Delaware. Subject to the foregoing, the federal district courts of the United States are the exclusive forum for the
resolution of any action, suit or proceeding asserting a cause of action under the Securities Act. The exclusive forum provision does
not apply to suits brought to enforce any liability or duty created by the Exchange Act. Any person or entity purchasing or otherwise
acquiring an interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions
in our certificate of incorporation. These choice-of-forum provisions may limit a stockholder’s ability to bring a claim in a judicial
forum that he, she or it believes to be favorable for disputes with us or our or directors, officers or other employees, which may discourage
such lawsuits. We note that there is uncertainty as to whether a court would enforce these provisions and that investors cannot waive
compliance with the federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates
concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities
Act or the rules and regulations thereunder.
Alternatively, if a court were to find these
provisions of our certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions
or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely
affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management
and board of directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our
principal business operations are located in San Francisco, California. We lease space in Portland, Oregon and Las Vegas, Nevada for
our customer support and engineering operations. We intend to acquire additional space as we add employees
and expand geographically.
ITEM 3. LEGAL PROCEEDINGS
We are engaged in the defense of certain claims
and lawsuits arising out of the ordinary course and conduct of our business and have certain unresolved claims pending, the outcomes
of which are not determinable at this time. We have insurance policies covering certain potential losses where such coverage is available
and cost effective. In our opinion, any liability that might be incurred by us upon the resolution of any claims or lawsuits will not,
in the aggregate, have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our Class A common stock has been listed
on the New York Stock Exchange (“NYSE”) under the symbol “SKLZ” since December 17, 2020. There is no public
market for our Class B common stock.
Holders of our Common Stock
As of March 5, 2021, there were 303 holders
of record of our Class A common stock and two holders of record of our Class B common stock. The number of record holders does
not include Depository Trust Company participants or beneficial owners holding shares through nominee names.
Dividend Policy
We have not paid any cash dividends on our common
stock to date and we do not intend to pay any cash dividends on our common stock for the foreseeable future. The payment of cash dividends
in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment
of any cash dividends will be within the discretion of the Board at such time.
Stock Performance Graph
This performance graph shall not be deemed
“soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated
by reference into any filing of Skillz Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph compares the cumulative total
stockholder return on our Class A common stock with the cumulative total return on the Standard & Poor’s (“S&P”)
500 Index and the Nasdaq Composite Index. The graph assumes an initial investment of $100 in our common stock at the market close on April 27,
2020, which was the initial trading day of the Class A common stock of FEAC (our predecessor) on a stand-alone basis. Our Business
Combination with FEAC was announced on September 2, 2020 and closed on December 16, 2020. Data for the S&P 500 Index and
the Nasdaq Composite Index assume reinvestment of dividends. Total return equals stock price appreciation plus reinvestment of dividends.
Unregistered Sales of Equity Securities
In
connection with FEAC’s initial formation in January 2020, Eagle Equity Partners II LLC (“Eagle Equity”) was issued
all of FEAC’s outstanding founder shares. On February 10, 2020, FEAC conducted a 1:1.25 stock split of its founder shares such
that Eagle Equity directly continued to own all 14,375,000 outstanding founder shares. On March 2, 2020, 20,000 founder shares were
transferred to each of Scott M. Delman and Joshua A. Kazam, FEAC’s director nominees. On March 6, 2020, FEAC conducted a 1:1.2
stock split of its founder shares, resulting in Eagle Equity holding an aggregate of 17,210,000 founder shares and there being an aggregate
of 17,250,000 founder shares outstanding. The number of founder shares outstanding was determined based on
the expectation that the founder shares would represent 20% of the outstanding shares after the FEAC’s initial public offering (“IPO”)
excluding the private placement shares underlying the private placement units. In connection with the Business Combination, Eagle
Equity agreed to forfeit 899,797 founder shares.
Simultaneously with the closing
of FEAC’s IPO, Eagle Equity purchased an aggregate of 10,033,333 private placement warrants at $1.50 per private placement warrant
($15,050,000 in the aggregate). Each private placement warrant was exercisable to purchase one share of Class A common stock at an
exercise price of $11.50 per share. The proceeds from the private placement warrants were added to the proceeds from the FEAC IPO held
in the trust account. In connection with the Business Combination, Eagle Equity agreed to forfeit 5,016,666 private placement warrants.
Prior to the consummation of the
Business Combination, FEAC entered into subscription agreements (the “Subscription Agreements”), each dated as of September 1,
2020, with certain institutional investors (the “Investors”), pursuant to which, among other things, FEAC agreed to issue
and sell, in private placements, an aggregate of 15,853,052 shares of Class A common stock, par value $0.0001 per share, of FEAC
(“FEAC Class A common stock”) for $10.00 per share (the “Private Placement”). The Private Placement closed
immediately prior to the Business Combination. The shares of FEAC Class A common stock issued to the Investors became shares of Class A
common stock upon consummation of the Business Combination.
In connection with consummation
of the Business Combination, Eagle Equity delivered 5,000,000 of its shares of Class B common stock, par value $0.0001 per share,
of FEAC (the “FEAC Class B common stock” and together with the FEAC Class A common stock, the “FEAC Shares”)
into escrow that are subject to release if certain earn-out conditions are satisfied. Such earn-out conditions were satisfied and on March 5,
2021, these shares were released to the Old Skillz stockholders who received shares of common stock as a result of the Business Combination
in the form of shares of Class A common stock (other than the Founder and a trust for the benefit of his family members who will
receive shares of Class B common stock and other than 270 shares of Class A common stock that were released to the Company).
ITEM 6. SELECTED FINANCIAL DATA
None.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis of the financial condition and results of operations of Skillz Inc. (for purposes of this section, “Skillz,” “we,”
“us” and “our”) should be read in conjunction with the consolidated financial statements and related notes included
in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K/A. This
discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described
in Part I, 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.
Restatement of Previously Issued Consolidated Financial
Statements
This Management’s Discussion
and Analysis of Financial Condition and Results of Operations has been amended and restated to give effect to the restatement and revision
of our consolidated financial statements as more fully described in the Explanatory Note and in “Note 3—Restatement of Consolidated
Financial Statements” to our accompanying consolidated financial statements. For further detail regarding the restatement adjustments,
see Explanatory Note and Item 9A: Controls and Procedures, both contained herein.
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. Today, the platform
has 2.4 million MAUs and hosts an average of over 5 million daily tournaments, including 1.4 million paid entry daily tournaments,
offering over $100 million in prizes each month. As of December 31, 2020, we had over 9,000 registered game developers on our
platform that have launched a game integration. For the year ended December 31, 2020, Solitaire Cube, 21 Blitz and Blackout
Bingo accounted for 79% of our revenue. For the year ended December 31, 2019, Solitaire Cube and 21 Blitz (each developed by
Tether) together with Blackout Bingo (developed by Big Run) accounted for 72% of revenue. For the year ended December 31, 2020, Tether
and Big Run accounted for 59% and 28%, respectively, of our revenue. For the year ended December 31, 2019, Tether and Big Run accounted
for 83% and 0.1%, respectively, of our revenue. Our top titles rotate over time as more games have generated success on the Skillz
platform. In 2020, the number of games that generated over $1 million of annualized GMV has grown 57% from 23 to 36.
Our culture is built upon a set
of values established by our founders, aligning the company and its employees in a common vision. Our seven values are: Honor; Mission;
Collaboration; Productivity; Willingness; Frugality; and Balance. Our approach has focused on trust and fairness for users enabling game
developers to focus on what they do best: build great content.
Our technology capabilities are
industry-leading and provide the tools necessary for developers to compete with the largest and most sophisticated mobile game developers
in the world. Our easy-to-integrate software development kit (“SDK”) and developer console allow our developers to monitor,
integrate and update their games seamlessly over the air. We ingest and analyze over 300 data points from each game play session, enhancing
our data-driven algorithms and LiveOps systems. Moreover, we have developed a robust platform enabling fun, fair and meaningful competitive
gameplay.
For
the years ended December 31, 2020 and 2019, we served 2.6 million and 1.6 million monthly active users (“MAUs”), respectively,
and had monthly average revenue per user (“ARPU”) of $7.49 and $6.30, respectively. We monitor the conversion of users to
paying users based on the ratio of Paying MAU to MAU. For each of fiscal years 2020 and 2019, our Paying MAU to MAU ratio was 13% and
10%, respectively and our Paying MAU was 0.3 million and 0.2 million, respectively and our monthly average revenue per paying user (“ARPPU”)
was $58 and $62, respectively. We see a substantial opportunity for our developers to expand beyond casual content into other genres
of interactive entertainment, from first-person shooters to racing games. In 2020 and 2019, we generated less than 10% of our revenues
from users outside of North America, leaving us with several large untapped international markets. We see a significant opportunity to
build partnerships with brands to sponsor tournaments on our platform to both increase our brand awareness and achieve improvements
in profitability through advertiser sponsored prizes.
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 more than five times higher what our developers would generate through advertisements or
in-game purchases.
Our platform allows users to participate
in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage
of player entry fees in paid contests, after deducting end-user prize money (i.e. winnings from the Competitions), end-user incentives
accounted for as reduction of revenue and the profit share paid to developers (the “Take Rate”). GMV represents entry fees
that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives. Cash deposits represented
approximately 11% of total entry fees for the years ended December 31, 2020 and 2019. Prior cash winnings that have not been withdrawn
represented approximately 82% of total entry fees for the years ended December 31, 2020 and 2019. End-user incentives represented
approximately 7% of total entry fees for the years ended December 31, 2020 and 2019. Our model has allowed us to grow users, developers
and revenue steadily while driving meaningful operating leverage.
The following are key elements
of our financial model:
|
•
|
The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable
players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement
and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously
improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading
to ever-improving gaming experiences. In the years ended December 31, 2020 and 2019, we estimate that paying users spent an average
of 60 and 62 minutes per day in game play on our platform[1].
|
|
•
|
The scale, growth and partnership of our developers — We have created a platform that drives economic success for
our developers. Our end-to-end platform allows developers to focus on creating games by automating and optimizing integral parts of their
businesses — from user acquisition and monetization to game optimization. Our built-in payments, analytics, customer
support, and live operations platform enables our developers to consistently learn, grow, earn and share in our success.
|
|
•
|
Product-first philosophy and data science capabilities — We have built a culture that puts product first, driving
our impact with users and developers and then scaling marketing investment. In 2020, 46% of our salary costs were spent on product development.
Our easy-to-integrate SDK contains over 200 features in a 15-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,
contributing to our gross margins. Once acquired, each user cohort contributes predictably to revenue over its life. A cohort is all the
users acquired in the period presented. A user is considered part of a cohort based on the first time they make a deposit and enter a
paid tournament. Once a user is considered part of a cohort, they are always counted in that cohort.
|
For example, our 2016 cohort contributed $6.0 million
in revenue in the first year, $5.5 million in the second year, $5.5 million in the third year, $6.6 million in the fourth
year, and $7.2 million in the fifth year. Our 2017 cohort contributed $9.9 million in revenue in the first year, $10.3 million
in the second year. $9.6 million in the third year and $9.5 million in the fourth year. Our 2018 cohort contributed $33.2 million
in revenue in the first year, $36.1 million in the second year, and $31.5 million in the third year. Our 2019 cohort contributed
$65.2 million in revenue in the first year and $64.3 million in the second year. Our 2020 cohort contributed $115.8 million in revenue
in the first year.
We also complement these stable cohort dynamics with disciplined
user acquisition spending. We currently expect that the average Three-Year Lifetime Value of our 2018, 2019 and 2020 cohorts will be 3.8x
our total user acquisition costs (and after taking into account the end-user incentives recorded and expected to be recorded in sales
and marketing expense is expected to be 2.5x).
1
Based on the average number of tournament entries per day multiplied by 4 minutes per tournament. Skillz tracks the number of games that
end users play but does not monitor end user playing time on its platform, and this estimate is based on the time allowed to complete
a tournament in the top three games for paying users featured on our platform. Accordingly, the actual time paying users spend per day
on the platform may be less than such estimate.
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 rewarding them with prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and
can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). 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 prizes and tickets (“Ticketz”) which can be redeemed
in the Skillz virtual store. Ticketz are earned in every match and can be redeemed for prizes or credits to be used towards future paid
entry fee tournaments;
|
|
•
|
Marketing campaigns through main-stream online advertising networks and social media platforms to drive end-user traffic to developers’
games within the Skillz ecosystem;
|
|
•
|
Systematic calls to end-user action via push notifications to users with game results, promotional offers, and time-sensitive actions;
and
|
|
•
|
Process end-user payments, billings and settlements on behalf of the developer to enable players to connect their preferred payment
method to deposit and enter into the game developers’ multi-player competitions for cash prizes.
|
Generally, end-users are required to deposit funds
into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services, Skillz is
responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer
does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users
pay an entry fee using cash deposits, prior cash winnings in the end-users’ accounts that have not been withdrawn, and end-user
incentives (specifically Bonus Cash). Skillz recognizes revenue related to each game regardless of how entry fees are paid. Skillz is
responsible for distributing the prize money to the winner on behalf of the game developer. Skillz typically withholds 16% – 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.
Research and Development
Research and development expenses consist of software
development costs, comprised mainly of product and platform development, server and software costs that support research and development
activities, and to a lesser extent, allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses
consist of salaries, benefits, and stock-based compensation. We expect research and development expenses will fluctuate both in terms
of absolute dollars and as a percentage of revenue in the future.
Sales and Marketing
Sales and marketing expenses consist primarily
of direct advertising costs and end-user incentives that are not recorded as a reduction of revenue. Sales and marketing also includes
allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits,
and stock-based compensation. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage
of revenue in the future.
General and Administrative
General and administrative expenses consist of
personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional
services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries,
benefits, and stock-based compensation.
We expect our general and administrative expenses
to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public
company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations
activities, and other administrative and professional services.
Change in Fair Value of Common Stock Warrant
Liabilities
The Company’s Public and Private Common
Stock Warrants assumed in connection with the Business Combination are classified as liabilities pursuant to ASC 815-40, Derivatives
and Hedging – Contracts in Entity’s Owned Equity. The change in fair value of warrant liabilities consists of the change
in fair value of the Public and Private Common Stock Warrants.
Results of Operations
The following table sets forth a summary of our
results of operations for the periods indicated.
​
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
Revenue
|
|
$
|
230,115
|
|
|
$
|
119,872
|
|
|
$
|
50,778
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
12,281
|
|
|
|
5,713
|
|
|
|
2,112
|
|
Research and development
|
|
|
23,225
|
|
|
|
11,241
|
|
|
|
7,547
|
|
Sales and marketing
|
|
|
251,941
|
|
|
|
111,370
|
|
|
|
51,689
|
|
General and administrative
|
|
|
42,289
|
|
|
|
16,376
|
|
|
|
14,975
|
|
Total costs and expenses
|
|
|
329,736
|
|
|
|
144,700
|
|
|
|
76,323
|
|
Loss from operations
|
|
|
(99,621
|
)
|
|
|
(24,828
|
)
|
|
|
(25,545
|
)
|
Interest expense, net
|
|
|
(1,325
|
)
|
|
|
(2,497
|
)
|
|
|
(2,190
|
)
|
Change in fair value of common stock warrant liabilities
|
|
|
(23,049
|
)
|
|
|
—
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
(21,400
|
)
|
|
|
3,720
|
|
|
|
(45
|
)
|
Loss before income taxes
|
|
|
(145,395
|
)
|
|
|
(23,605
|
)
|
|
|
(27,780
|
)
|
Provision for income taxes
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(145,510
|
)
|
|
$
|
(23,605
|
)
|
|
$
|
(27,780
|
)
|
Net loss per share attributable to common stockholders –
basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
Weighted average common shares outstanding – basic and
diluted
|
|
|
294,549,146
|
|
|
|
261,228,108
|
|
|
|
236,040,717
|
|
Revenue
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
230,115
|
|
|
$
|
119,872
|
|
|
$
|
50,778
|
|
|
|
92
|
%
|
|
|
136
|
%
|
2020 Compared to 2019
Revenue increased by $110.2 million, or 92%, to
$230.1 million in 2020 from $119.9 million in 2019. The increase was attributable primarily to an increase in paying MAUs, driven by sales
and marketing investment to acquire new paying users. ARPU increased 19% over the same period.
2019 Compared to 2018
Revenue increased by $69.1 million, or 136%, to
$119.9 million in 2019 from $50.8 million in 2018. The increase was attributable primarily to an increase in paying MAUs, driven
by sales and marketing investment to acquire new paying users. ARPU increased 7% over the same period.
Cost of Revenue
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Cost of revenue
|
|
$
|
12,281
|
|
|
$
|
5,713
|
|
|
$
|
2,112
|
|
|
|
115
|
%
|
|
|
171
|
%
|
2020 Compared to 2019
Cost of revenue increased by $6.6 million, or
115%, to $12.3 million in 2020 from $5.7 million in 2019, growing in line with revenue. The increase in cost of revenue was primarily
driven by payment processing and software costs. Cost of revenue as a percentage of revenue remained flat at 5% in 2020 and 2019.
2019 Compared to 2018
Cost of revenue increased by $3.6 million, or
171%, to $5.7 million in 2019 from $2.1 million in 2018, growing in line with revenue. The increase in cost of revenue was primarily driven
by payment processing and software costs. Cost of revenue as a percentage of revenue increased one percentage point to 5% in
2019 from 4% in 2018.
Research and Development
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Research and development
|
|
$
|
23,225
|
|
|
$
|
11,241
|
|
|
$
|
7,547
|
|
|
|
107
|
%
|
|
|
49
|
%
|
2020 Compared to 2019
Research and development costs increased by $12.0
million, or 107%, to $23.2 million in 2020 from $11.2 million in 2019. The increase was primarily driven by a $11.3 million increase
in research and development headcount cost, of which $5.9 million was related to stock based compensation, a $1.7 million increase in
server and software costs, and a $0.5 million increase in allocation of related overhead costs, partially offset by a $1.4 million
increase in capitalized internal-use software development costs, as certain projects entered the application development stage. Research
and development expenses accounted for 10% of revenues in 2020 compared to 9% in 2019.
2019 Compared to 2018
Research and development expenses increased by
$3.7 million, or 49%, to $11.2 million in 2019 from $7.5 million in 2018. The increase was driven by a $3.4 million increase in research
and development headcount costs and a $1.6 million increase in the allocation of related overhead costs, partially offset by a $1.3 million
increase in capitalized internal-use software development costs, as certain projects entered the application development stage. Research
and development expenses accounted for 9% of revenues in 2019 compared to 15% in 2018.
Sales and Marketing
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Sales and marketing
|
|
$
|
251,941
|
|
|
$
|
111,370
|
|
|
$
|
51,689
|
|
|
|
126
|
%
|
|
|
115
|
%
|
2020 Compared to 2019
Sales and marketing costs increased by $140.6
million, or 126%, to $251.9 million in 2020 from $111.4 million in 2019. The increase was attributable primarily to a 160% increase in
spend to acquire new paying users and a 97% increase in engagement marketing spend. User acquisition marketing costs were $136.6 million
and $52.5 million in 2020 and 2019, respectively. This increase reflects higher digital advertising costs that resulted in an increase
in our acquisition cost per user in 2020 compared to 2019. Engagement marketing costs were $99.8 million and $50.7 million in 2020 and
2019, respectively. Engagement marketing as a percentage of revenue increased to 43% in 2020 from 42% in 2019. This increase reflects
investment in marketing programs that resulted in an increase in our engagement marketing cost per user in 2020 compared to 2019.
2019 Compared to 2018
Sales and marketing expenses increased by $59.7
million, or 115%, to $111.4 million in 2019 from $51.7 million in 2018. The increase was attributable primarily to a 113% increase in
spend to acquire new paying users and 145% increase in engagement marketing spend. User acquisition marketing costs were $52.5 million
and $24.2 million in 2019 and 2018, respectively. Engagement marketing costs were $50.7 million and $20.7 million in 2019 and 2018, respectively.
Engagement marketing as a percentage of revenue increased to 42% in 2019 from 41% in 2018.
General and Administrative
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
General and administrative
|
|
$
|
42,289
|
|
|
$
|
16,376
|
|
|
$
|
14,975
|
|
|
|
158
|
%
|
|
|
9
|
%
|
2020 Compared to 2019
General and administrative costs increased by
$25.9 million, or 158%, to $42.3 million in 2020 from $16.4 million in 2019. The increase was primarily driven by a $12.2 million
increase in stock-based compensation expense, a $3.4 million impairment charge related to a lease deposit and prepayment and one-time
transaction related expenses. General and administrative expenses accounted for 18% of revenues in 2020 compared to 14% in 2019.
2019 Compared to 2018
General and administrative expenses increased
by $1.4 million, or 9%, to $16.4 million in 2019 from $15.0 million in 2018. The increase is attributed to higher personnel expenses driven
by growth in headcount and higher general corporate expenses. General and administrative expenses accounted for 14% of revenues in 2019
compared to 29% in 2018.
Interest expense, net
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Interest expense, net
|
|
$
|
(1,325
|
)
|
|
$
|
(2,497
|
)
|
|
$
|
(2,190
|
)
|
|
|
(47
|
)%
|
|
|
14
|
%
|
2020 Compared to 2019
Interest expense, net decreased by $1.2 million,
or 47%, to $1.3 million in 2020 from $2.5 million in 2019. The decrease was primarily driven by the repayment of our long-term debt in
2020.
2019 Compared to 2018
Interest expense, net increased by $0.3 million,
or 14%, to $2.5 million in 2019 from $2.2 million in 2018. The increase was primarily driven by the increase in our long-term debt in
2019.
Change in fair value of common stock warrant
liabilities
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of common stock warrant liabilities
|
|
|
(23,049
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
NM
|
|
|
|
NM
|
|
The change in fair value of warrant liabilities
in 2020 was due to the increase in the estimated fair value of the Public and Private Common Stock Warrants.
Other income (expense), net
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Other income (expense), net
|
|
$
|
(21,400
|
)
|
|
$
|
3,720
|
|
|
$
|
(45
|
)
|
|
|
NM
|
|
|
|
NM
|
|
2020 Compared to 2019
Other income (expense), net decreased by $25.1
million to $21.4 million in other expenses in 2020 from $3.7 million in other income in 2019. The decrease was primarily driven by fair
value adjustments of financial instruments.
2019 Compared to 2018
Other income (expense), net increased by $3.8
million to $3.7 million of other income in 2019 from $45.0 thousand of other expense in 2018. The increase was primarily driven by fair
value adjustments of financial instruments.
Provision for income taxes
​
|
|
Year Ended December 31,
|
|
|
2019 to 2020
|
|
|
2018 to 2019
|
|
(In thousands, except percentages)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
% Change
|
|
Provision for income taxes
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
NM
|
|
|
|
NM
|
|
2020 Compared to 2019
Provision for income taxes increased by $0.1 million
in 2020. The increase was primarily driven by accrued state tax liabilities.
2019 Compared to 2018
There was no provision for income taxes in either
2019 or 2018.
Non-GAAP Financial Measures
In addition to our results determined in accordance
with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP
financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP
financial information, when taken collectively with GAAP financial information, may be helpful to investors in assessing our operating
performance. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.
Adjusted EBITDA
“Adjusted EBITDA” is defined as net
income (loss), excluding interest income (expense); change in fair value of common stock warrant liabilities; other income (expense),
net; income tax provision; depreciation and amortization; stock-based compensation expense and related payroll tax expense; and certain
other non-cash or non-recurring items impacting net income (loss) from time to time, including, but not limited to fair value adjustments
for certain financial liabilities (including derivatives) associated with debt and equity transactions, and impairment charges as they
are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required
by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use
in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies,
which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating Adjusted EBITDA
we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should
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):
​
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(145,510
|
)
|
|
$
|
(23,605
|
)
|
|
$
|
(27,780
|
)
|
Interest expense, net
|
|
|
1,325
|
|
|
|
2,497
|
|
|
|
2,190
|
|
Stock-based compensation
|
|
|
23,757
|
|
|
|
1,237
|
|
|
|
6,680
|
|
Change in fair value of common stock warrant liabilities(5)
|
|
|
23,049
|
|
|
|
—
|
|
|
|
—
|
|
Provision for income taxes
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
1,609
|
|
|
|
711
|
|
|
|
404
|
|
Other non-operating costs (income)(1)(2)
|
|
|
21,400
|
|
|
|
(3,648
|
)
|
|
|
46
|
|
Impairment charge(3)
|
|
|
3,395
|
|
|
|
—
|
|
|
|
—
|
|
One-time transaction related expenses(4)
|
|
|
4,747
|
|
|
|
—
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(66,113
|
)
|
|
$
|
(22,808
|
)
|
|
$
|
(18,460
|
)
|
|
(1)
|
For the year ended December 31, 2020, other non-operating costs (income) is primarily attributed to a $21.7 million adjustment
to the fair value of the redeemable convertible Series E preferred stock forward contract liability.
|
|
(2)
|
For the year ended 2019, other non-operating costs (income) include a $3.6 million remeasurement gain for the bifurcated derivative
liability related to the Company’s convertible promissory notes issued in 2018.
|
|
(3)
|
This represents an impairment charge of a lease deposit and prepayment in connection with a lease agreement related to our new corporate
facilities in San Francisco.
|
|
(4)
|
For the year ended December 31, 2020, amounts represent one-time transaction expenses related to the Business Combination.
|
|
(5)
|
For the year ended December 31, 2020, amounts represent the fair value adjustments related to the revaluation of liability classified
warrants and transaction costs and advisor fees incurred by Skillz attributable to the liability
classified warrants..
|
Liquidity and Capital Resources
Since inception, we have financed our operations
primarily from the sales of capital stock. As of December 31, 2020, our principal sources of liquidity were our cash and cash equivalents
in the amount of $262.7 million, which are primarily invested in money market funds.
In December 2019, we entered into a mezzanine
term loan for up to $40.0 million; $30.0 million of which is immediately available and an additional $10.0 million available
upon the achievement of certain performance milestones (“2019 Mezzanine Term Loan”). In 2019, we drew $10.0 million of
the $30 million immediately available from the 2019 Mezzanine Term Loan. In 2020, we paid the $10.0 million outstanding principal
amount related to the 2019 Mezzanine Loan, plus all accrued and unpaid interest. No additional amounts have been drawn since 2019. As
of December 31, 2020, we had $30.0 million of availability under the 2019 Mezzanine Term Loan.
As of the date of this statement, our existing
cash resources are sufficient to continue operating activities for at least one year past the issuance date of the consolidated financial
statements.
The following table provides a summary of cash flow data (in thousands):
​
|
|
Year Ended December 31,
|
|
​
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(56,232
|
)
|
|
$
|
(21,937
|
)
|
|
$
|
(16,948
|
)
|
Net cash used in investing activities
|
|
$
|
(3,246
|
)
|
|
$
|
(3,223
|
)
|
|
$
|
(867
|
)
|
Net cash provided by financing activities
|
|
$
|
296,578
|
|
|
$
|
31,168
|
|
|
$
|
33,330
|
|
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 $56.2
million for the year ended December 31, 2020. The most significant component of our cash used during this period was a net loss of
$145.5 million, which included non-cash expenses of $21.5 million on related to the fair value adjustment to the redeemable convertible
Series E preferred stock forward contract liability, $23.0 million for the change in fair value of Public and Private Common Stock
Warrants, $23.8 million related to stock-based compensation, $3.6 million related to impairment charges, and $1.6 million related
to depreciation and amortization, accretion of unamortized discounts and amortization of issuance costs, as well as net cash inflows of
$15.3 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities
were primarily the result of an increase in other liabilities of $12.0 million.
Net cash used in operating activities was $21.9
million for the year ended December 31, 2019. The most significant component of our cash used during this period was a net loss of
$23.6 million, which included non-cash expenses of $4.1 million related to stock-based compensation, depreciation, amortization,
and net cash inflows of $1.2 million from changes in operating assets and liabilities, partially offset by $3.6 million in fair
value adjustments of derivatives.
Net cash used in operating activities was $16.9
million for the year ended December 31, 2018. The most significant component of our cash used during this period was a net loss of
$27.8 million, which included non-cash expenses of $6.7 million related to stock-based compensation, $1.7 million related to
depreciation and accretion of unamortized discount and amortization of issuance costs, and net cash inflows of $2.4 million from
changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the
result of an increase in accounts payable and other liabilities due of $3.4 million, primarily related to an increase in accrued
sales and marketing costs.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.2
million, $3.2 million, and $0.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. In all periods, the
net cash used in investing activities related to purchases of property and equipment, including internal-use software.
Cash Flows from Financing Activities
Net cash provided by financing activities was
$296.6 million for the year ended December 31, 2020, which was primarily due to $246.5 million in net proceeds from the issuance
of common stock in connection with the Business Combination, net proceeds from the issuance of redeemable convertible Series E preferred
stock of $76.6 million, partially offset by $13.4 million due to taxes paid related to the net share settlement of equity awards,
$10.0 million of debt repayments under our debt facilities, and $2.0 million in payments made towards offering costs.
Net cash provided by financing activities was
$31.2 million for the year ended December 31, 2019, which was primarily due to $24.9 million in net proceeds from the issuance
of redeemable convertible Series D-1 preferred stock and net proceeds from borrowings of $6.1 million under our debt facilities.
Net cash provided by financing activities was
$33.3 million for the year ended December 31, 2018, which was primarily due to net proceeds from the issuance of redeemable convertible
Series D preferred stock of $18.2 million and net proceeds from borrowings of $14.9 million related to the convertible
promissory notes.
Contractual Obligations and Commitments
The following table summarizes our contractual
obligations and other commitments as of December 31, 2020, and the years in which these obligations are due:
Contractual Obligations and Commitments
​
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
More
than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
5 Years
|
|
Operating lease obligations
|
|
$
|
26,141
|
|
|
$
|
4,528
|
|
|
$
|
4,866
|
|
|
$
|
4,952
|
|
|
$
|
11,795
|
|
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.
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 December 31, 2020,
we had cash and cash equivalents of $262.7 million, which consisted of money market fund accounts for which the fair market value would
be affected by changes in the general level of U.S. interest rates. However, due to the low-risk profile of our investments, an immediate
10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.
Foreign Currency Risk
There was no material foreign currency risk for
the years ended December 31, 2020 and 2019.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been
prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on
our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates
under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical
and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are
described in the notes to our consolidated financial statements, we believe that the following accounting policies are most critical to
understanding our financial condition and historical and future results of operations:
|
•
|
stock-based compensation and common stock valuation
|
|
•
|
Public and Private Common Stock Warrant liabilities
|
Revenue Recognition
Skillz provides monetization services to game
developers enabling them to offer competitive games to our end-users. These activities are not distinct from each other as we provide
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. We are entitled to a revenue share based on total entry fees for paid Competitions, regardless
of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide the monetization services.
The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash deposits received from
end-users. In addition, we reduce revenue for certain end-user incentives which are determined to be a payment to a customer.
Skillz collects the entry fees and related charges
from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds its
fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is not
subject to significant judgment.
Revenue is recognized at the time the performance
obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that we expect to
receive in exchange for the Monetization Services. We recognize revenue upon completion of a game, which is when our performance obligation
to the game developer is satisfied. We do not have contract assets or contract liabilities as the payment of the transaction price is
concurrent with the fulfillment of the services. At the time of game completion, we have the right to receive payment for the services
rendered. Our agreements with game developers can generally be terminated for convenience by either party upon thirty days prior written
notice, and in certain of our larger developer agreements, the developer, if required by us, must continue to make its games available
on our platform for a period of up to twelve months. As we are able to terminate our developer agreements at our convenience, we have
concluded the contract term for revenue recognition does not extend beyond the contractual notification period. We do not have any transaction
price allocated to performance obligations that are unsatisfied (or partially satisfied).
End-User Incentive Programs
To drive traffic to the platform, we provide 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 we pay or promise to pay the incentive. Promotions and incentives recorded as sales and marketing
expense are recognized when we incur the related cost. In either case, the promotions and incentives are recognized when they are used
by end-users to enter into a paid competition.
Marketing
promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions in the
form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based on
our agreement with the game developers, we consider 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 our 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 currency earned for every competition played based on the amount of the entry fee. Ticketz
can be redeemed for Bonus Cash. Another example is initial deposit Bonus Cash which is a promotional incentive program that can be earned
in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can be used by end-users to enter into future
paid entry fee competitions and cannot be withdrawn by end-users.
Marketing
promotions accounted for as sales and marketing expense. When we conclude that the game developers do not have a valid
expectation that the incentive will be offered, we record 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 our 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 our 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. We target groups of end-users differently, offering specific promotions we think 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.
Stock-Based Compensation
We recognize the cost of share-based awards granted
to employees and directors based on the estimated grant-date fair value of the awards. For awards that vest solely based on a service
condition, the cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award.
For awards that vest based on service, performance and market conditions, we recognize stock-based compensation expense when the performance
conditions are probable of being achieved. The compensation cost related to awards with market conditions is recognized on an accelerated
attribution basis over the requisite service period and regardless of whether the market condition is satisfied, if the requisite service
is provided. We recognize stock-based compensation costs and reverse previously recognized costs for unvested options in the period forfeitures
occur. We determine the fair value of stock options that vest solely based on a service condition using the Black-Scholes option pricing
model, which is impacted by the following assumptions:
|
•
|
Expected term — The Company determines the expected term based on the average period the stock options are expected
to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period,
as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior.
|
|
•
|
Expected volatility — The expected volatility rate is based on an average historical stock price volatility of
comparable publicly-traded companies in the industry group as there has been no public market for the Company’s shares to date.
|
|
•
|
Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected term of the option.
|
|
•
|
Expected dividend yield — The Company has not paid and does not expect to pay dividends. Consequently, the Company
uses an expected dividend yield of zero.
|
For awards with market conditions, we determine
the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions such as expected stock price
volatility, expected term, risk-free interest rates, expected date of a qualifying event, and expected capital raise percentage.
We estimate the volatility of common stock on the date of grant based on the weighted average historical stock price volatility of comparable
publicly-traded companies in our industry group. We estimate the expected term based on various exercise scenarios, as these awards are
not considered “plain vanilla.” The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant. We estimate the expected date of a qualifying event and the expected capital raise percentage based on management’s expectations
at the time of measurement of the award’s value.
Common Stock Valuation
Prior to the Business Combination, the grant date
fair value of Skillz common stock was determined by our board of directors with the assistance of management and a third-party valuation
specialist. The grant date fair value of Skillz common stock was determined based on valuation methodologies which utilize certain assumptions,
including probability weighting of events, recent sales of stock to external investors, volatility, time to liquidity, a risk-free interest
rate, and an assumption for a discount for lack of marketability where applicable. We historically used a combination of the Option Pricing
Model (“OPM”) and Common-Stock Equivalent (“CSE”) methods, which primarily derived the implied equity value for
our common stock from a contemporaneous transaction involving our convertible preferred stock. Application of these methods involves the
use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue,
expenses, and cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of future events.
Following the Business Combination, our stock
became publicly traded, following which our board of directors determined the fair value of Skillz common stock based on the closing price
of Skillz common stock on the date of grant.
Public and Private Common Stock Warrant Liabilities
As part of FEAC’s initial public offering,
FEAC issued to third party investors 69.0 million units, consisting of one share of Class A common stock of FEAC and one-fourth
of one warrant, at a price of $10.00 per unit. Each whole warrant entitles the holder to purchase one share of Class A common stock
at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously with the closing of FEAC’s initial
public offering, FEAC completed the private sale of 10,033,333 warrants to FEAC’s sponsor at a purchase price of $1.50 per warrant
(the “Private Warrants”). In connection with the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 private
placement warrants. Each Private Warrant allows the sponsor to purchase one share of Class A common stock at $11.50 per share. Subsequent
to the Business Combination, 17,249,977 Public Warrants and 5,016,666 Private Warrants remained outstanding as of December 31, 2020.
The Private Warrants and the shares of common
stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable until after the completion of a Business
Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis,
at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees.
If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will
be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
We evaluated the Public and Private Common Stock
Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity (“ASC 815-40”), and
concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public
and Private Common Stock Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of
our Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender
offer or exchange to trigger the potential cash settlement and we do not control the occurrence of such an event, we concluded that the
Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private Common Stock
Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance sheet at
fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of operations at each reporting
date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they were valued based
on their trading price as of each reporting date.
The Private Warrants were valued using the Black-Scholes-Merton
Option pricing model that is based on the individual characteristics of the warrants on the valuation date, which include the Company’s
stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum
cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact
on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability are the Company’s
stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such
as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility
of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in
the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease
in the fair value of the warrant liability.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements
for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made
one, of their potential impact on our financial condition and our results of operations.
ITEM 7A. 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 December 31, 2020,
we had cash and cash equivalents of $262.7 million, which consisted of money market fund accounts for which the fair market value would
be affected by changes in the general level of U.S. interest rates. However, due to the low-risk profile of our investments, an immediate
10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.
Foreign Currency Risk
There was no material foreign currency risk for
the years ended December 31, 2020 and 2019.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The supplementary financial information required by this Item 8 is
included in Item 7.
Report of Independent Registered Public Accounting
Firm
To the Stockholders and the Board of Directors of Skillz Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Skillz Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted
accounting principles.
Restatement of 2020 Financial Statements
As discussed in Note 3 to the financial statements,
the financial statements as of and for the year ended December 31, 2020 have been restated to correct a misstatement.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
|
|
We have served as the Company’s auditor since 2018.
|
|
Redwood City, California
|
|
March 12, 2021
|
|
except for Note 3, as to which the date is
|
|
May 13, 2021
|
SKILLZ INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares and
par value per share amounts)
​
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Restated)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
262,728
|
|
|
$
|
25,628
|
|
Prepaid expenses and other current assets
|
|
|
10,491
|
|
|
|
9,464
|
|
Total current assets
|
|
|
273,219
|
|
|
|
35,092
|
|
Property and equipment, net
|
|
|
5,292
|
|
|
|
3,648
|
|
Other long-term assets
|
|
|
3,910
|
|
|
|
116
|
|
Total assets
|
|
$
|
282,421
|
|
|
$
|
38,856
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,039
|
|
|
$
|
2,944
|
|
Accrued professional fees
|
|
|
5,699
|
|
|
|
—
|
|
Other current liabilities
|
|
|
19,618
|
|
|
|
7,537
|
|
Total current liabilities
|
|
|
47,356
|
|
|
|
10,481
|
|
Common stock warrant liabilities
|
|
|
178,232
|
|
|
|
—
|
|
Long-term debt, non-current
|
|
|
—
|
|
|
|
9,628
|
|
Other long-term liabilities
|
|
|
46
|
|
|
|
82
|
|
Total liabilities
|
|
|
225,634
|
|
|
|
20,191
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders’ equity:(1)
|
|
|
|
|
|
|
|
|
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of December 31, 2020 and 2019
|
|
|
—
|
|
|
|
—
|
|
Common stock
$0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares
authorized; 292 million and 212 million shares issued and outstanding as of December 31, 2020 and 2019,
respectively; Class B common stock – 125 million shares authorized; 78 million and 74 million
shares issued and outstanding as of December 31, 2020 and 2019, respectively
|
|
|
37
|
|
|
|
29
|
|
Additional paid-in capital
|
|
|
295,065
|
|
|
|
108,892
|
|
Accumulated deficit
|
|
|
(238,315
|
)
|
|
|
(90,256
|
)
|
Total stockholders’ equity
|
|
|
56,787
|
|
|
|
18,665
|
|
Total liabilities and stockholders’ equity
|
|
$
|
282,421
|
|
|
$
|
38,856
|
|
(1) Retroactively restated for the reverse recapitalization as
described in Notes 1 and 4.
See accompanying Notes to the Consolidated Financial
Statements.
SKILLZ INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for number of shares and
per share amounts)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
230,115
|
|
|
$
|
119,872
|
|
|
$
|
50,778
|
|
Costs and expenses:
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Cost of revenue
|
|
|
12,281
|
|
|
|
5,713
|
|
|
|
2,112
|
|
Research and development
|
|
|
23,225
|
|
|
|
11,241
|
|
|
|
7,547
|
|
Sales and marketing
|
|
|
251,941
|
|
|
|
111,370
|
|
|
|
51,689
|
|
General and administrative
|
|
|
42,289
|
|
|
|
16,376
|
|
|
|
14,975
|
|
Total costs and expenses
|
|
|
329,736
|
|
|
|
144,700
|
|
|
|
76,323
|
|
Loss from operations
|
|
|
(99,621
|
)
|
|
|
(24,828
|
)
|
|
|
(25,545
|
)
|
Interest expense, net
|
|
|
(1,325
|
)
|
|
|
(2,497
|
)
|
|
|
(2,190
|
)
|
Change in fair value of common stock warrant liabilities
|
|
|
(23,049
|
)
|
|
|
—
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
(21,400
|
)
|
|
|
3,720
|
|
|
|
(45
|
)
|
Loss before income taxes
|
|
|
(145,395
|
)
|
|
|
(23,605
|
)
|
|
|
(27,780
|
)
|
Provision for income taxes
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(145,510
|
)
|
|
$
|
(23,605
|
)
|
|
$
|
(27,780
|
)
|
Net loss per share attributable to common stockholders – basic and
diluted(1)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
Weighted average common shares outstanding – basic and diluted(1)
|
|
|
294,549,146
|
|
|
|
261,228,108
|
|
|
|
236,040,717
|
|
(1) Retroactively restated for the reverse recapitalization as
described in Notes 1 and 4.
See accompanying Notes to the Consolidated Financial
Statements.
SKILLZ INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)(1)
(In thousands, except for number of shares)
|
|
Redeemable
convertible preferred stock
|
|
|
Preferred
stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Total
stockholders’
equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
(deficit)
|
|
Balance
at December 31, 2017
|
|
|
4,404,840
|
|
|
$
|
17,040
|
|
|
|
13,621,802
|
|
|
$
|
25,560
|
|
|
|
126,464,480
|
|
|
$
|
1
|
|
|
$
|
36
|
|
|
$
|
(38,871
|
)
|
|
$
|
(13,274
|
)
|
Retroactive
application of recapitalization
|
|
|
(4,404,840
|
)
|
|
|
(17,040
|
)
|
|
|
(13,621,802
|
)
|
|
|
(25,560
|
)
|
|
|
102,694,176
|
|
|
|
22
|
|
|
|
42,578
|
|
|
|
—
|
|
|
|
17,040
|
|
Balance
at December 31, 2017, after effect of reverse recapitalization (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
229,158,656
|
|
|
|
23
|
|
|
|
42,614
|
|
|
|
(38,871
|
)
|
|
|
3,766
|
|
Issuance
of Old Skillz redeemable convertible Series D preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,705,320
|
|
|
|
2
|
|
|
|
18,216
|
|
|
|
—
|
|
|
|
18,218
|
|
Issuance
of Old Skillz common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,036,200
|
|
|
|
—
|
|
|
|
192
|
|
|
|
—
|
|
|
|
192
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,680
|
|
|
|
—
|
|
|
|
6,680
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,780
|
)
|
|
|
(27,780
|
)
|
Balance
at December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
249,900,176
|
|
|
|
25
|
|
|
|
67,702
|
|
|
|
(66,651
|
)
|
|
|
1,076
|
|
Issuance
of Old Skillz redeemable convertible Series D and Series D-1 preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,718,385
|
|
|
|
3
|
|
|
|
39,757
|
|
|
|
—
|
|
|
|
39,760
|
|
Issuance
of Old Skillz common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,485,844
|
|
|
|
—
|
|
|
|
197
|
|
|
|
—
|
|
|
|
197
|
|
Issuance
of Old Skillz common stock upon early exercise of stock options with promissory note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,970,518
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,237
|
|
|
|
—
|
|
|
|
1,237
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,605
|
)
|
|
|
(23,605
|
)
|
Balance
at December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286,074,923
|
|
|
|
29
|
|
|
|
108,892
|
|
|
|
(90,256
|
)
|
|
|
18,665
|
|
Issuance
of Old Skillz redeemable convertible Series E preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,834,808
|
|
|
|
2
|
|
|
|
98,303
|
|
|
|
—
|
|
|
|
98,305
|
|
Issuance
of Old Skillz common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,642,110
|
|
|
|
1
|
|
|
|
1,242
|
|
|
|
—
|
|
|
|
1,243
|
|
Conversion
of Old Skillz preferred stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
654
|
|
|
|
—
|
|
|
|
654
|
|
Issuance
of Old Skillz common stock upon early exercise of stock options with promissory note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,700,358
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
Surrender
of Old Skillz common stock upon net settlement of promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,037,535
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Taxes
paid related to net share settlement of Old Skillz equity awards
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,102,746
|
)
|
|
|
—
|
|
|
|
(13,404
|
)
|
|
|
—
|
|
|
|
(13,404
|
)
|
Issuance
of Old Skillz convertible Series A, Series A-1 and Series B preferred stock upon exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,860,974
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
2
|
|
Issuance
of Old Skillz common stock upon exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
726,063
|
|
|
|
—
|
|
|
|
382
|
|
|
|
—
|
|
|
|
382
|
|
Repurchase
of Old Skillz common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(468,270
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,339
|
)
|
|
|
(1,339
|
)
|
Repurchase
of Old Skillz preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,739
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1,210
|
)
|
|
|
(1,211
|
)
|
Net
Business Combination and PIPE financing (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,580,578
|
|
|
|
4
|
|
|
|
75,239
|
|
|
|
—
|
|
|
|
75,243
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,757
|
|
|
|
—
|
|
|
|
23,757
|
|
Net loss
(Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(145,510
|
)
|
|
|
(145,510
|
)
|
Balance at December 31,
2020 (Restated)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
369,797,524
|
|
|
$
|
37
|
|
|
$
|
295,065
|
|
|
$
|
(238,315
|
)
|
|
$
|
56,787
|
|
(1) Retroactively restated for the reverse recapitalization as
described in Notes 1 and 4.
See accompanying Notes to the Consolidated Financial
Statements.
SKILLZ INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
​
|
|
Year Ended December 31,
|
|
​
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Net loss
|
|
$
|
(145,510
|
)
|
|
$
|
(23,605
|
)
|
|
$
|
(27,780
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,609
|
|
|
|
711
|
|
|
|
404
|
|
Stock-based compensation
|
|
|
23,757
|
|
|
|
1,237
|
|
|
|
6,680
|
|
Accretion of unamortized discount and amortization of issuance costs
|
|
|
558
|
|
|
|
2,139
|
|
|
|
1,287
|
|
Fair value adjustment of derivatives
|
|
|
21,463
|
|
|
|
(3,649
|
)
|
|
|
45
|
|
Impairment charges
|
|
|
3,573
|
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of common stock warrant liabilities
|
|
|
23,049
|
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(7,505
|
)
|
|
|
(4,307
|
)
|
|
|
(992
|
)
|
Accounts payable
|
|
|
10,729
|
|
|
|
(54
|
)
|
|
|
1,851
|
|
Other liabilities
|
|
|
12,045
|
|
|
|
5,591
|
|
|
|
1,557
|
|
Net cash used in operating activities
|
|
|
(56,232
|
)
|
|
|
(21,937
|
)
|
|
|
(16,948
|
)
|
Investing Activities
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Purchases of property and equipment, including internal-use software
|
|
|
(3,246
|
)
|
|
|
(3,223
|
)
|
|
|
(867
|
)
|
Net cash used in investing activities
|
|
|
(3,246
|
)
|
|
|
(3,223
|
)
|
|
|
(867
|
)
|
Financing Activities
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Borrowings under debt agreements, net of issuance costs
|
|
|
–
|
|
|
|
9,563
|
|
|
|
19,920
|
|
Payments for issuance costs
|
|
|
(201
|
)
|
|
|
—
|
|
|
|
—
|
|
Payments under debt agreements
|
|
|
(10,000
|
)
|
|
|
(3,500
|
)
|
|
|
(5,000
|
)
|
Net cash contributions from Business Combination and PIPE Financing
|
|
|
246,484
|
|
|
|
—
|
|
|
|
—
|
|
Payments made towards offering costs
|
|
|
(1,993
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs
|
|
|
76,617
|
|
|
|
24,908
|
|
|
|
18,218
|
|
Proceeds from exercise of stock options and issuance of common stock
|
|
|
1,243
|
|
|
|
197
|
|
|
|
192
|
|
Proceeds from exercise of common stock warrants
|
|
|
382
|
|
|
|
—
|
|
|
|
—
|
|
Taxes paid related to net share settlement of equity awards
|
|
|
(13,404
|
)
|
|
|
—
|
|
|
|
—
|
|
Payments made to repurchase common stock
|
|
|
(1,339
|
)
|
|
|
—
|
|
|
|
—
|
|
Payments for redemption of preferred stock
|
|
|
(1,211
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
296,578
|
|
|
|
31,168
|
|
|
|
33,330
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
237,100
|
|
|
|
6,008
|
|
|
|
15,515
|
|
Cash, cash equivalents and restricted cash – beginning of year
|
|
|
28,548
|
|
|
|
22,540
|
|
|
|
7,025
|
|
Cash, cash equivalents and restricted cash – end of year
|
|
$
|
265,648
|
|
|
$
|
28,548
|
|
|
$
|
22,540
|
|
Supplemental cash flow data:
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
815
|
|
|
$
|
269
|
|
|
$
|
196
|
|
Noncash investing and financing activities:
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Carrying value of long-term debt and accrued interest converted to redeemable convertible preferred stock
|
|
$
|
—
|
|
|
$
|
14,852
|
|
|
$
|
—
|
|
Settlement of the Redeemable Convertible Series E preferred stock forward contract liability
|
|
$
|
21,688
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred offering costs in accounts payable and accrued liabilities
|
|
$
|
13,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Payment of promissory notes through surrender of shares
|
|
$
|
18,673
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying Notes to the Consolidated Financial
Statements.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Years Ended December 31, 2020, 2019, and
2018
1. Description of the Business and Basis of Presentation
Business
On December 16, 2020 (the “Closing”),
Flying Eagle Acquisition Corp. (“FEAC”), a publicly traded special purpose acquisition company, consummated the merger agreement
(the “Merger Agreement”) dated September 1, 2020, by and among, FEAC, Merger Sub Inc., a Delaware corporation (“Merger
Sub”), Skillz Inc., a Delaware corporation (“Old Skillz”) and Andrew Paradise (the “Founder”), solely in
his capacity as the representative of the stockholders of Old Skillz.
Pursuant to the terms of the Merger Agreement,
a business combination between FEAC and Old Skillz was effected through the merger of Merger Sub with and into Old Skillz, with Old Skillz
surviving as the surviving company and a wholly-owned subsidiary of FEAC (the “Merger” and collectively with the other transaction
described in the Merger Agreement, the “Business Combination”). On the Closing Date FEAC changed its name to Skillz Inc. (the
“Company” or “Skillz”) and Old Skillz changed its name to Skillz Platform Inc.
Skillz Platform Inc. was originally formed as
Professional Gaming, LLC on March 28, 2012, changed its name to Lookout Gaming, LLC on May 18, 2012, and to Skillz LLC on January 31,
2013, before converting to a Delaware corporation with the name Skillz Inc. on April 29, 2013.
Skillz is a mobile eSports platform, driving the
future of entertainment by accelerating the convergence of sports, video games and media. The Company’s principal activities are
to develop and support a proprietary online-hosted technology platform that enables independent game developers to host tournaments and
provide competitive gaming activity (“Competitions”) to end-users worldwide.
Basis of Presentation
The
Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).
Pursuant to the Merger Agreement, the merger between
Merger Sub and Old Skillz was accounted for as a reverse recapitalization in accordance with U.S. GAAP (the “Reverse Recapitalization”).
Under this method of accounting, FEAC was treated as the “acquired” company and Old Skillz is treated as the acquirer for
financial reporting purposes.
Accordingly, for accounting purposes, the Reverse
Recapitalization was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization.
The net assets of FEAC are stated at historical cost, with no goodwill or other intangible assets recorded.
Old Skillz was determined to be the accounting
acquirer based on the following predominant factors:
|
•
|
Old Skillz’s existing stockholders have the greatest
voting interest in the Company;
|
|
•
|
The largest individual minority stockholder in the Company
is an existing stockholder of Old Skillz;
|
|
•
|
Old Skillz’s directors represented the majority of
the new board of directors of the Company;
|
|
•
|
Old Skillz’s senior management is the senior management
of the Company; and
|
|
•
|
Old Skillz is the larger entity based on historical revenue
and has the larger employee base.
|
The consolidated assets, liabilities and results
of operations prior to the Reverse Recapitalization are those of Old Skillz. The shares and corresponding capital amounts and losses per
share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio of 0.7471
established in the Business Combination.
Comprehensive Loss
Through December 31, 2020, there are no components
of comprehensive loss which are not included in net loss; therefore, a separate statement of comprehensive loss has not been presented.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts
of assets and liabilities and the related disclosures at the date of the consolidated financial statements, as well as the reported amounts
of revenues and expenses during the periods presented. Estimates are used in several areas including, but not limited to, stock-based
compensation and valuation of Public and Private Common Stock Warrants. The Company bases these estimates on historical experience and
on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.
Revenue Recognition
The Company generates substantially all its revenues
by providing a service to the game developers aimed at improving the monetization of their game content. The monetization service provided
by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. Skillz
provides developers with a software development kit (“SDK”) that they can download and integrate with their existing games.
The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the
developer.
The Company recognizes revenue for its services
in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC
606”).
Revenues from Contracts with Customers
The Company applies the five-step model to achieve
the core principle of ASC 606. The Company determined that its customer in the provision of its technology platform and services is the
game developer. The Company’s ordinary activities consist of providing game developers services through access to its technology
platform using the Skillz SDK. The SDK acts as an application programming interface enabling communication of data between Skillz and
the game developers, which when integrated with the developer’s game content, facilitates end-user registration into Competitions,
managing and hosting end-user Competition accounts, matching players of similar skill levels, collecting end-user entry fees, distributing
end-user prizes, resolving end-user disputes pertaining to their participation in Competitions, and running third-party marketing campaigns
(“Monetization Services”).
The Company provides Monetization Services to
game developers enabling them to offer competitive games to their end-users. These activities are not distinct from each other as the
Company provides an integrated service enabling the game developers to provide the competitive game service to the end-users, and as a
result, they do not represent separate performance obligations. The Company is entitled to a revenue share based on total entry fees for
paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide
the Monetization services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash
deposits received from end-users. End-user incentives are not paid for by game developers. In addition, the Company reduces revenue for
end-user incentives which are treated as a reduction of revenue.
The Company collects the entry fees and related
charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds
its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is
not subject to significant judgment.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Revenue is recognized at the time the performance
obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that the Company
expects to receive in exchange for the Monetization Services. The Company recognizes revenue upon completion of a game, which is when
its performance obligation to the game developer is satisfied. The Company does not have contract assets or contract liabilities as the
payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, the Company has
the right to receive payment for the services rendered. The Company’s agreements with game developers can generally be terminated
for convenience by either party upon thirty days prior written notice, and in certain of our larger developer agreements, the developer,
if required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company
is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition
does not extend beyond the contractual notification period. The Company does not have any transaction price allocated to performance
obligations that are unsatisfied (or partially satisfied) as of December 31, 2020, 2019 and 2018.
Games provided by two developer partners (A and
B) accounted for 59% and 28% of the Company’s revenue in the year ended December 31, 2020. Games provided by two developer
partners (A and C) accounted for 83% and 7% , and 70% and 16% of the Company’s revenue in years ended December 31, 2019 and
2018, respectively. The Company did not generate material international revenues in the years ended December 31, 2020, 2019,
and 2018.
End-User Incentive Programs
To drive traffic to the platform, the Company
provides promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer
may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction
of revenue at the later of when revenue is recognized or when the Company pays or promises to pay the incentive. Promotions and incentives
recorded as sales and marketing expense are recognized when the related cost is incurred by the Company. In either case, the promotions
and incentives are recognized when they are used by end-users to enter into a paid Competition.
|
•
|
Marketing promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions
in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based
on the Company’s agreement with its developers, the Company considers that the game developers have a valid expectation that certain
incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably
available to the game developers regarding the Company’s customary business practices, published policies and specific statements.
|
An example of an incentive for which the game developer has
a valid expectation is Ticketz, which are a currency earned for every Competition played based on the amount of the entry fee. Ticketz
can be redeemed for Bonus Cash. Another example is initial deposit Bonus Cash which is a promotional incentive that can be earned in fixed
amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future
paid entry fee Competitions and cannot be withdrawn by end-users.
For the years ended December 31, 2020, 2019, and
2018, the Company recognized a reduction of revenue of $51.3 million, $27.7 million, and $11.6 million, respectively, related to these
end-user incentives.
|
•
|
Marketing promotions accounted for as sales and marketing expense. When the Company concludes that the game developers
do not have a valid expectation that the incentive will be offered, the Company records the related cost as sales and marketing expense.
The Company’s assessment is based on an evaluation of all information reasonably available to the game developers regarding the
Company’s customary business practices, published policies and specific statements. These promotions are offered to end-users to
draw, re-engage, or generally increase end-users’ use of the Company’s platform.
|
An example of this type of incentive is limited-time Bonus
Cash offers, which are targeted to specific end-users, typically those who deposit more frequently or have not made a deposit recently,
via email or in-app promotions. The Company targets groups of end-users differently, offering specific promotions it thinks will best
stimulate engagement. Similar to Bonus Cash earned from a redemption of Ticketz or an initial deposit, limited-time Bonus Cash can only
be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users. The Company also hosts engagement
marketing leagues run over a period of days or weeks, which award league prizes in the form of cash or luxury goods to end-users with
the most medals at the end of the league. End-users accumulate medals by winning Skillz enabled paid entry fee Competitions. Skillz determines
whether or not to run a league, what prizes should be awarded, over what time period the league should run, and to which end-users the
prizes should be paid, all at its discretion. The league parameters vary from one league to the next and are not reasonably known to the
game developers. League prizes in the form of cash can be withdrawn or used by end-users to enter into future paid entry fee Competitions.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
For the years ended December 31, 2020, 2019, and
2018, the Company recognized sales and marketing expense of $91.5 million, $45.2 million, and $18.7 million, respectively, related to
these end-user incentives.
Refunds
From time to time, the Company issues credits
or refunds to end-users that are unsatisfied by the level of service provided by the game developer. There is no contractual obligation
for the Company to refund such end-users nor is there a valid expectation by the game developers for the Company to issue such credits
or refunds to end-users on their behalf. The Company accounts for credits or refunds, which are not recoverable from the game developer,
as sales and marketing expenses when incurred.
Cost of Revenue
Cost of revenue primarily comprises of third-party
payment processing fees, direct software costs, amortization of internal use software, hosting expenses, allocation of shared facility
and other costs, and personnel expenses.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and
money market funds with maturities of three months or less when purchased.
Restricted cash maintained under an agreement
that legally restricts the use of such funds is not included within cash and cash equivalents and is reported within other long-term assets
and other current assets as of December 31, 2020 and 2019, respectively. Restricted cash is comprised of $2.9 million which is pledged
in the form of a letter of credit for the Company’s new headquarters in San Francisco.
A reconciliation of the Company’s cash and
cash equivalents in the consolidated balance sheets to cash, cash equivalents and restricted cash in the consolidated statement of cash
flows as of December 31, 2020 and 2019 is as follows:
​
|
|
December 31,
|
|
​
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
262,728
|
|
|
$
|
25,628
|
|
Restricted Cash included in other long-term assets and other current assets as of December 31, 2020 and 2019, respectively
|
|
|
2,920
|
|
|
|
2,920
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
265,648
|
|
|
$
|
28,548
|
|
Concentrations of Credit Risk
Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist of cash, cash equivalents and restricted cash. 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. Management believes that the institutions are financially
stable and, accordingly, minimal credit risk exists.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Fair Value Measurement
The Company applies fair value accounting for
all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the 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.
Advertising and Promotional Expense
Advertising and promotional expenses are included
in sales and marketing expenses within the statements of operations and are expensed when incurred. For the years ended December 31,
2020, 2019, and 2018, advertising expenses, not including marketing promotions related to the Company’s end-user incentive programs,
were $136.8 million, $53.5 million, and $25.3 million, respectively.
Redeemable Convertible Preferred Stock
Prior to the Business Combination, preferred stock
that was redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence
of an event that is not solely within the control of the Company was classified outside of permanent equity. Convertible preferred stock
that was probable of becoming redeemable in the future was recorded at its maximum redemption amount at each balance sheet date, with adjustments
to the redemption amount recorded through equity. The fair value of the redeemable convertible preferred stock was estimated primarily
based on valuation methodologies which utilized certain assumptions, including probability weighting of events, recent sales of stock
to external investors, volatility, time to liquidity, a risk free interest rate, and an assumption for a discount for lack of marketability,
where applicable.
All redeemable convertible preferred stock previously
classified outside of permanent equity was retroactively adjusted, converted into common stock, and reclassified to permanent equity as
a result of the Business Combination. Additionally, changes to the redemption values of the redeemable convertible preferred stock were
eliminated as a result of the retroactive adjustment. The Company recorded changes to the redemption value of its redeemable convertible
preferred stock of $866.0 million, $62.5 million and $18.8 million in the year-to-date periods ended September 30,
2020, December 31, 2019 and December 31, 2018, respectively. The changes to the redemption values of the redeemable convertible
preferred stock were previously presented as adjustments to net loss available to common stockholders for each of the respective periods
ended. For further details regarding the accounting for the Business Combination, see Note 3.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Public and Private Common Stock Warrant Liabilities
As part of FEAC’s initial public offering,
FEAC issued to third party investors 69.0 million units, consisting of one share of Class A common stock of FEAC and one-fourth
of one warrant, at a price of $10.00 per unit. Each whole warrant entitles the holder to purchase one share of Class A common stock
at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously with the closing of FEAC’s initial
public offering, FEAC completed the private sale of 10,033,333 warrants to FEAC’s sponsor at a purchase price of $1.50 per warrant
(the “Private Warrants”). In connection with the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 Private
Warrants. Each Private Warrant allows the sponsor to purchase one share of Class A common stock at $11.50 per share. Subsequent to
the Business Combination, 17,249,977 Public Warrants and 5,016,666 Private Warrants remained outstanding as of December 31, 2020.
The Private Warrants and the shares of common
stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable until after the completion of a Business
Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis,
and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are
held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company
and exercisable by such holders on the same basis as the Public Warrants.
The Company evaluated the Public and Private Common
Stock Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity (“ASC 815-40”),
and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public
and Private Common Stock Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of
our Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender
offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company
concluded that the Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private
Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance
sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of operations at
each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they
were valued based on their trading price as of each reporting date.
The Private Warrants were valued using the Black-Scholes-Merton
Option (“BSM”) pricing model that is based on the individual characteristics of the warrants on the valuation date, which
include the Company’s stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as
the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions
used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability
are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing
of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases
in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely,
decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding
decrease in the fair value of the warrant liability.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
its long-term debt, preferred stock and stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements
for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of
the host contract. Bifurcated embedded derivatives and freestanding derivative financial instruments that are classified as assets or
liabilities are recognized at fair value with changes in fair value recognized as a component of Other income (expense), net in the Statements
of Operations. Bifurcated embedded derivatives and freestanding derivative financial instruments are classified within as Other long-term
assets and Other current liabilities in the Company’s consolidated balance sheets.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
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 and is not reversed if the market condition
is not satisfied. See Note 12 for more information. The Company accounts for forfeitures as they occur. Stock-based awards granted to
employees are primarily stock options.
The fair value of stock options that vest solely
based on a service condition is determined by the BSM pricing model on the date of grant. This valuation model for stock-based compensation
expense requires the Company to make assumptions and judgments about the variables used in the BSM model, including the deemed fair value
of common stock, expected term, expected volatility, risk-free interest rate, and dividend yield. These judgments are made as follows:
|
●
|
Fair value of common stock —Subsequent to the Business Combination, the fair value of the Company’s common stock
is based on the closing market price on the date of grant. Prior to the Business Combination, the absence of an active market for
the Company’s common stock required the Company to estimate the fair value of common stock for purposes of granting stock options
and for determining stock-based compensation expense for the periods presented.
|
The Company considered numerous factors in assessing the
fair value of common stock prior to the Business Combination, including:
|
●
|
The results of contemporaneous unrelated third-party valuations of the Company’s common stock
|
|
●
|
The prices of the recent redeemable convertible preferred stock sales by the Company to investors
|
|
●
|
The rights, preferences, and privileges of preferred stock relative to those of common stock
|
|
●
|
Market multiples of comparable public companies in the industry as indicated by their market capitalization and guideline merger and
acquisition transactions
|
|
●
|
The Company’s performance and market position relative to competitors, which may change from time to time
|
|
●
|
The Company’s historical financial results and estimated trends and prospects for the Company’s future performance
|
|
●
|
The economic and competitive environment
|
|
●
|
The financial condition, results of operations, and capital resources
|
|
●
|
The valuation of comparable companies
|
|
●
|
The likelihood and timeline of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing
market conditions
|
|
●
|
Any adjustments necessary to recognize a lack of marketability for the Company’s common stock
|
|
●
|
Precedent sales of or offers to purchase the Company’s capital stock
|
|
●
|
Expected term — The Company determines the expected term based on the average period the stock options are expected
to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period,
as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior.
|
|
●
|
Expected volatility — Given the limited market trading history prior to the Business Combination and no public
market for the Company’s shares prior to the Business Combination, the expected volatility rate is based on an average historical
stock price volatility of comparable publicly-traded companies in the industry group.
|
|
●
|
Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected term of the option.
|
|
●
|
Expected dividend yield — The Company has not paid and does not expect to pay dividends. Consequently, the Company
uses an expected dividend yield of zero.
|
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
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, and expected capital raise percentage.
Given the limited market trading history subsequent to the Business Combination and no public market for the Company’s shares prior
to the Business Combination, the Company estimates the volatility of common stock on the date of grant based on the weighted average
historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimates the expected term
based on various exercise scenarios, as these awards are not considered “plain vanilla.” The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates the expected date of a qualifying event and the
expected capital raise percentage based on management’s expectations at the time of measurement of the award’s value.
Income Taxes
The Company accounts for income taxes using the
asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred income taxes
are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates
in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. Realization of deferred tax assets is dependent upon future
earnings, the timing and amount of which are uncertain.
The Company records a valuation allowance to reduce
deferred tax assets to the net amount that the Company believes is more likely than not to be realized. In assessing the need for a valuation
allowance, the Company considered historical levels of income, expectations of future taxable income and ongoing tax planning strategies.
Because of the uncertainty of the realization of the deferred tax assets, the Company recorded a full valuation allowance against deferred
tax assets. Realization of deferred tax assets is dependent primarily upon future U.S. taxable income.
The Company utilizes a two-step approach to recognize
and measure uncertain tax positions. The first step is to evaluate the tax positions for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution
of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon ultimate settlement.
Although the Company believes it has adequately
reserved for the Company’s uncertain tax positions, the Company can provide no assurance that the final tax outcome of these matters
will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a
number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course
of an audit and effective settlement of audit issues.
To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such
determination is made and could have a material impact on the Company’s financial condition and operating results. The provision
for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and
penalties.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Property and Equipment, Net
Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the
related asset, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the term of the related lease. Maintenance and repairs that do not extend the life or improve the asset are
expensed as incurred. Upon disposal of property and equipment, assets and related accumulated depreciation are removed from the accounts,
and the related gain or loss is included in the results from operations.
Property and equipment are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets
is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property
and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset
exceeds its fair value. No impairment to any long-lived assets has been recorded in any of the periods presented.
The Company capitalizes certain costs related
to developed or modified software solely for the Company’s internal use to deliver the Company’s services. The Company capitalizes
costs during the application development stage once the preliminary project stage is complete, management authorizes and commits to funding
the project, it is probable that the project will be completed, and that the software will be used to perform the function intended. Costs
related to preliminary project activities and post-implementation activities are expensed as incurred.
The following table presents the estimated useful lives of the Company’s
property and equipment:
Property and Equipment
|
​
|
Useful Life
|
Computer equipment and servers
|
​
|
3 years
|
Capitalized internal-use software
|
​
|
3 years
|
Office equipment and other
|
​
|
5 years
|
Leased equipment and leasehold improvements
|
​
|
Lesser of estimated useful life or
remaining
lease term
|
Leases
Leases are reviewed and classified as capital
or operating at their inception. The Company records rent expense associated with its operating lease on a straight-line basis over the
term of the lease.
Net Loss Per Share
Basic and diluted net loss per share attributable
to common stockholders is presented in conformity with the two-class method required for participating securities. Basic loss per share
is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Net loss
available to common stockholders represents net loss attributable to common stockholders reduced by the allocation of earnings to participating
securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual
obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options,
warrants, restricted stock, and contingently issuable earnout shares. As the Company has reported losses for all periods presented, all
potentially dilutive securities including stock options, warrants and contingently issuable earnout shares, are antidilutive and accordingly,
basic net loss per share equals diluted net loss per share.
The Company considers certain restricted shares
of Class A Common stock issued upon exercise of executive stock options but subject to continued vesting requirements (Note 15) to
be participating securities.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Net loss per share calculations for all periods
prior to the Business Combination have been retrospectively adjusted for the equivalent number of shares outstanding immediately after
the Business Combination to effect the reverse recapitalization. Subsequent to the Business Combination, net loss per share was calculated
based on the weighted average number of common stock then outstanding.
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. The Company has determined that its Chief
Executive Officer is the CODM. The Company operates in a single operating segment as the CODM reviews financial information presented
on a consolidated basis, at the Company level, for the purposes of making operating decisions, allocation of resources, and evaluating
financial performance.
As of December 31, 2020 and 2019 and for
the years ended December 31, 2020, 2019, and 2018, the Company did not have material revenue earned or assets located outside of
the United States.
Recently Issued Accounting Pronouncements Not Yet Adopted
As an emerging growth company (“EGC”),
the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements
applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended
transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC.
In August 2020, the FASB issued Accounting
Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major
separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts
to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The
ASU is effective for public companies, excluding entities eligible to be smaller reporting companies, for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than
fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal
year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill
and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset
in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of operations as the
costs related to the hosting fees. For public business entities, this standard is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. For all other entities, this standard is effective for fiscal years
beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption
is permitted for all entities, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively
to all implementation costs incurred after adoption. The Company will be required to adopt this standard in its annual period ending December 31,
2021 and is currently evaluating the impact of adopting this standard on its consolidated financial statements.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
In June 2016, the FASB issued ASU 2016-13
(Topic 326), Financial Instruments — Credit Losses. ASU 2016-13 changes how to recognize expected
credit losses on financial assets. The standard requires more timely recognition of credit losses on loans and other financial assets
and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually
be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition
of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect
adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments — Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13
for non-public companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements for future periods and has not
elected early adoption.
In February 2016, the FASB issued ASU 2016-02
(Topic 842), Leases, and issued subsequent amendments to the initial guidance or implementation guidance including ASU 2017-13,
2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively, including ASU 2016-02, “ASC 842”), which supersedes the guidance
in topic ASC 840, Leases. The new standard requires lessees to classify leases as either finance or operating based on whether
or not the lease is effectively a financed purchase by the lessee. This classification will determine whether related expenses are recognized
based on the effective interest method or on a straight-line basis over the term of the lease. For any leases with a term of greater than
12 months, ASU 2016-02 requires lessees to recognize a lease liability for the obligation to make the lease payments arising from
a lease, and a right-of-use asset for the right to use the underlying asset for the lease term. An election can be made to account for
leases with a term of 12 months or less similar to existing guidance for operating leases under ASC 840. The new standard will also
require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded
in the financial statements. For non-public entities, ASU No. 2016-02 is effective for financial statements issued for fiscal years
beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption
is permitted. The Company is in the initial stage of its assessment of the new standard and is currently evaluating the quantitative impact
of adoption, and the related disclosure requirements. The Company expects that the adoption will result in the recognition of right-of-use
assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on the Company’s
balance sheet. The Company does not expect the adoption of Topic 842 to have a material impact to the statements of operations or to have
any impact on its cash flows from operating, investing, or financing activities.
Recently Adopted Accounting Pronouncements
In November 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740 and also improves consistent application of and simplify GAAP for other areas of Topic
740 by clarifying and amending existing guidance. The Company adopted this standard as of January 1, 2020, with no material impact
on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation — Stock
Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting, which expands the scope of Topic 718, to include
share-based payments issued to non-employees for goods or services. The new standard supersedes Subtopic 505-50. The Company adopted this
standard as of January 1, 2020, with no material impact on the Company’s consolidated financial statements.
3. Restatement of Consolidated Financial Statements
On April 29, 2021, the Company, in consultation
with its Audit Committee, concluded that, because of a misapplication of the accounting guidance applicable to Public and Private Common
Stock Warrants acquired in connection with the Company’s Business Combination with FEAC in December 2020, the Company’s
previously issued consolidated financial statements for the year ended December 31, 2020 should no longer be relied upon. As such,
the Company is restating its consolidated financial statements for the year ended December 31, 2020 included in this Annual Report.
The Public and Private Common Stock Warrants subject
to the misapplication of the applicable accounting guidance were originally issued as part of FEAC’s initial public offering.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
On April 12, 2021, the staff of the Securities
and Exchange Commission (the “SEC Staff”) issued a public statement entitled “Staff Statement on Accounting and Reporting
Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Staff Statement”).
In the SEC Staff Statement, the SEC Staff expressed its view that certain terms and conditions common to SPAC warrants may require the
warrants to be classified as liabilities on the SPAC’s financial statements as opposed to equity, with subsequent changes in fair
value reported in the Company’s statement of operations each reporting period. Since they were acquired in connection with the Business
Combination, the Company’s Public and Private Common Stock Warrants were accounted for as equity within the Company’s previously
reported consolidated financial statements, and after discussion and evaluation, including with the Company’s independent auditors,
management concluded that the Public and Private Common Stock Warrants should be classified as liabilities as of the acquisition date
and reported at fair value with subsequent changes in fair value at each reporting period recognized as gains or losses through the consolidated
statement of operations.
The material terms of the Public and Private Common
Stock Warrants are more fully described in Note 10 — Common Stock Warrants. Amounts were restated in the following notes:
|
●
|
Note 2, Summary of Significant Accounting Policies
|
|
●
|
Note 4, Business Combination
|
|
●
|
Note 6, Fair Value Measurements
|
|
●
|
Note 15, Net Loss Per Share
|
Impact of the Restatement
The impact of the restatement on the consolidated
balance sheet, consolidated statement of operations and consolidated statement of cash flows for the year ended December 31, 2020
is presented below. The restatement had no impact on net cash flows from operating, investing or financing activities.
|
|
As of December 31, 2020
|
|
|
|
As Previously
Reported
|
|
|
Restatement
Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except for Number of Shares and Par Value Per Share Amounts)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
273,219
|
|
|
$
|
—
|
|
|
$
|
273,219
|
|
Total assets
|
|
|
282,421
|
|
|
|
—
|
|
|
|
282,421
|
|
Liabilities and stockholders’ equity
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Total current liabilities
|
|
|
47,356
|
|
|
|
—
|
|
|
|
47,356
|
|
Common stock warrant liabilities (1)
|
|
|
—
|
|
|
|
178,232
|
|
|
|
178,232
|
|
Total liabilities
|
|
|
47,402
|
|
|
|
178,232
|
|
|
|
225,634
|
|
Stockholders’ equity:(1)
|
|
|
​
|
|
|
|
​
|
|
|
|
|
|
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of December 31, 2020 and 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stock $0.0001 par value; 625 million shares authorized; Class A
common stock – 500 million shares authorized; 292 million and 212 million
shares issued and outstanding as of December 31, 2020 and 2019, respectively; Class B common stock – 125 million shares authorized; 78 million and 74 million shares issued and outstanding as of December 31, 2020 and 2019, respectively
|
|
|
37
|
|
|
|
—
|
|
|
|
37
|
|
Additional paid-in capital
|
|
|
450,248
|
|
|
|
(155,183
|
) (1)
|
|
|
295,065
|
|
Accumulated deficit
|
|
|
(215,266
|
)
|
|
|
(23,049
|
) (2)
|
|
|
(238,315
|
)
|
Total stockholders’ equity
|
|
|
235,019
|
|
|
|
(178,232
|
)
|
|
|
56,787
|
|
Total liabilities and stockholders’ equity
|
|
$
|
282,421
|
|
|
$
|
—
|
|
|
$
|
282,421
|
|
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
|
|
For the Year Ended December 31, 2020
|
|
|
|
As Previously
Reported
|
|
|
Restatement
Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except for Number of Shares and Per Share Amounts)
|
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
230,115
|
|
|
$
|
—
|
|
|
$
|
230,115
|
|
Total cost and expenses
|
|
$
|
329,736
|
|
|
$
|
—
|
|
|
$
|
329,736
|
|
Loss from operations
|
|
$
|
(99,621
|
)
|
|
$
|
—
|
|
|
$
|
(99,621
|
)
|
Change in fair value of common stock warrant liabilities
|
|
$
|
—
|
|
|
$
|
(23,049
|
)(2)
|
|
$
|
(23,049
|
)
|
Loss before income taxes
|
|
$
|
(122,346
|
)
|
|
$
|
(23,049
|
)
|
|
$
|
(145,395
|
)
|
Provision for income taxes
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
115
|
|
Net loss
|
|
$
|
(122,461
|
)
|
|
$
|
(23,049
|
)
|
|
$
|
(145,510
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.42
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.49
|
)
|
Basic and diluted weighted-average common shares outstanding
|
|
|
294,549,146
|
|
|
|
—
|
|
|
|
294,549,146
|
|
|
|
As of December 31, 2020
|
|
|
|
As Previously
Reported
|
|
|
Restatement
Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Consolidated Statement of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Business Combination and PIPE Financing
|
|
$
|
230,426
|
|
|
$
|
(155,183
|
)(1)
|
|
$
|
75,243
|
|
Net loss
|
|
$
|
(122,461
|
)
|
|
$
|
(23,049
|
)(2)
|
|
$
|
(145,510
|
)
|
Balance at December 31, 2020
|
|
$
|
235,019
|
|
|
$
|
(178,232
|
)
|
|
$
|
56,787
|
|
|
|
For the Year Ended December 31, 2020
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(122,461
|
)
|
|
$
|
(23,049
|
)(2)
|
|
$
|
(145,510
|
)
|
Change in fair value of common stock warrant liabilities
|
|
$
|
—
|
|
|
|
$23,049
|
(2)
|
|
$
|
23,049
|
|
Net cash used in operating activities
|
|
$
|
(56,232
|
)
|
|
$
|
—
|
|
|
$
|
(56,232
|
)
|
(1) Reclassification of common stock warrants from equity classified
to liability classified.
(2) Amounts represent the fair value adjustments related to the
revaluation of liability classified common stock warrants and transaction costs and advisor fees
incurred by Skillz attributable to the liability classified common stock warrants.
Subsequent Exercises
From January 1, 2021 through May 13,
2021, 9,518,203 of Public Warrants were exercised for total proceeds of $109.5 million.
4. Business Combination
As discussed in Note 1, on December 16, 2020,
the Company consummated the Merger Agreement dated September 1, 2020, with Old Skillz surviving the merger as a wholly owned subsidiary
of the Company.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Old Skillz common stock issued and outstanding
were canceled and converted into the right to receive 0.7471 shares (the "Exchange Ratio") of Common Stock. Unless otherwise
stated, the Exchange Ratio was applied to the number of shares and share prices of Old Skillz throughout these consolidated financial
statements.
At the effective time of the Business Combination
(the “Effective Time”), and subject to the terms and conditions of the Merger Agreement, holders of 359,518,849 shares of
Old Skillz (“Stock Election Shares”) received merger consideration in the form of 191,932,860 shares of the Company’s
Class A common stock and 76,663,551 shares of the Company’s Class B common stock, and holders of 75,786,931 shares of
Old Skillz (“Cash Election Shares”) received cash consideration of $566,204,152.
Pursuant to the Merger Agreement, Eagle Equity
Partners II, LLC (the “Sponsor”) delivered 10,000,000 of its shares of FEAC Class B common stock into escrow that are
subject to forfeiture if certain earnout conditions are not satisfied. If the earnout conditions are fully satisfied, 5,000,000 of such
shares will be released to the Sponsor in the form of shares of the Company’s Class A common stock (the “Sponsor Earnout
Shares”), and the other 5,000,000 shares will be released to the Old Skillz stockholders (the “Skillz Earnout Shares”,
and collectively with the Sponsor Earnout Shares, the “Earnout Shares”), who will receive shares of the Company’s common
stock as a result of the Business Combination in the form of shares of Class A common stock of the Company (other than the Founder
and a trust for the benefit of his family members, who will receive shares of Class B common stock of the Company). The Earnout Shares
are accounted for as equity classified equity instruments, were included as merger consideration as part of the Reverse Recapitalization,
and recorded in Additional paid-in capital.
Upon the closing of the Business Combination,
the Company's certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares
of all classes of capital stock to 635,000,000 shares, $0.0001 par value per share, of which, 500,000,000 shares are designated as Class A
Common Stock, 125,000,000 shares are designated as Class B Common Stock, and 10,000,000 shares are designated as Preferred Stock.
In connection with the Business Combination, certain
institutional investors (the “Investors”) purchased from the Company an aggregate of 15,853,052 shares of Class A Common
Stock (the “Private Placement”), for a purchase price of $10.00 per share and an aggregate purchase price of $158.5 million
(the “Private Placement Shares”), pursuant to separate subscription agreements (each, a “Subscription Agreement”)
entered into effective as of September 1, 2020.
The Business Combination is accounted for as a
reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, FEAC was treated as the “acquired”
company and Old Skillz is treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the Business
Combination was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization. The
net assets of FEAC were stated at historical cost, with no goodwill or other intangible assets recorded.
The following table reconciles the elements of
the Business Combination to the consolidated statement of cash flows and the consolidated statement of stockholders’ equity for
the year ended December 31, 2020:
|
|
Recapitalization
|
|
Cash - FEAC trust and cash, net of redemptions
|
|
$
|
689,979
|
|
Cash - Private Placement Financing
|
|
|
158,531
|
|
Non-cash net assets assumed from FEAC
|
|
|
—
|
|
Less: cash consideration paid to Old Skillz stockholders
|
|
|
(566,204
|
)
|
Less: transaction costs and advisory fees incurred by FEAC
|
|
|
(35,822
|
)
|
Net cash contributions from Business Combination and PIPE Financing
|
|
|
246,484
|
|
Less: non-cash fair value of Public and Private Common Stock Warrants (Restated)(1)
|
|
|
(155,183
|
)
|
Less: non-cash net assets assumed from FEAC
|
|
|
—
|
|
Less: accrued transaction costs and advisor fees incurred by Skillz
|
|
|
(16,058
|
)
|
Net Business Combination and PIPE financing (Restated)
|
|
$
|
75,243
|
|
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
(1) Net of $1.0 million
of transaction costs and advisor fees incurred by Skillz attributable to the Public and Private Common Stock Warrants.
The number
of shares of common stock issued immediately following the consummation of the Business Combination (share numbers are not in thousands):
|
|
Recapitalization
|
|
Common stock, outstanding prior to Business Combination
|
|
|
69,000,000
|
|
Less: redemption of FEAC shares
|
|
|
(2,140
|
)
|
Common stock of FEAC
|
|
|
68,997,860
|
|
FEAC sponsor shares
|
|
|
6,350,200
|
|
Earnout shares
|
|
|
10,000,000
|
|
Shares issued in Private Placement Financing
|
|
|
15,853,052
|
|
Business Combination and Private Placement Financing shares - Class A common stock
|
|
|
101,201,112
|
|
Old Skillz shares converted to New Skillz Class A common stock(1)
|
|
|
191,932,861
|
|
Old Skillz shares converted to New Skillz Class B common stock(2)
|
|
|
76,663,551
|
|
Total shares of common stock immediately after Business Combination
|
|
|
369,797,524
|
|
|
(1)
|
The number of Old Skillz shares converted to Class A common stock was determined from 332,690,933 shares of Old Skillz Class B
common stock outstanding immediately prior to the closing of the Business Combination, including shares of redeemable convertible preferred
stock, converted at the Exchange Ratio, less 56,620,419 shares of New Skillz stock which were repurchased from Old Skillz stockholders
as part of the Business Combination. All fractional shares were rounded down.
|
|
(2)
|
The number of Old Skillz shares converted to Class B common stock was determined from the 102,614,847 shares of Old Skillz Class A
common stock outstanding immediately prior to the closing of the Business Combination, including shares of convertible preferred stock,
converted at the Exchange Ratio. All fractional shares were rounded down.
|
5. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted
of the following as of December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Credit card processing reserve
|
|
$
|
5,854
|
|
|
$
|
2,650
|
|
Prepaid expenses
|
|
|
3,772
|
|
|
|
2,460
|
|
Other current assets
|
|
|
865
|
|
|
|
4,354
|
|
Prepaid expenses and other current assets
|
|
$
|
10,491
|
|
|
$
|
9,464
|
|
The Company recorded an impairment charge of $3.4 million
related to prepaid expenses and other current assets for the year ended December 31, 2020, in connection with a lease agreement for
corporate facilities.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Property and Equipment, Net
Property and equipment consisted of the following
as of December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Capitalized internal-use software
|
|
$
|
6,167
|
|
|
$
|
3,554
|
|
Computer equipment and servers
|
|
|
631
|
|
|
|
458
|
|
Furniture and fixtures
|
|
|
184
|
|
|
|
238
|
|
Leasehold improvements
|
|
|
114
|
|
|
|
143
|
|
Construction in progress
|
|
|
1,037
|
|
|
|
519
|
|
Total property and equipment
|
|
|
8,133
|
|
|
|
4,912
|
|
Accumulated depreciation and amortization
|
|
|
(2,841
|
)
|
|
|
(1,264
|
)
|
Property and equipment, net
|
|
$
|
5,292
|
|
|
$
|
3,648
|
|
Depreciation and amortization expense related
to property and equipment was $1.6 million, $0.7 million, and $0.4 million in 2020, 2019, and 2018, respectively.
Other Current Liabilities
Other current liabilities consisted of the following
as of December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued sales and marketing expenses
|
|
$
|
7,204
|
|
|
$
|
1,630
|
|
Accrued compensation
|
|
|
3,825
|
|
|
|
2,531
|
|
End-user liability, net
|
|
|
2,789
|
|
|
|
1,418
|
|
Accrued developer revenue share
|
|
|
907
|
|
|
|
540
|
|
Other accrued expenses
|
|
|
4,893
|
|
|
|
1,418
|
|
Other current liabilities
|
|
$
|
19,618
|
|
|
$
|
7,537
|
|
6. Fair Value Measurements
As of December 31, 2020 and 2019, the recorded
values of cash and cash equivalents, restricted cash 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 December 31, 2020 and 2019 were $262.7 million and $25.6 million, respectively, and were comprised of cash on hand and money
market funds classified within Level 1 of the fair value hierarchy.
Forward Contract Liability
The Company had no outstanding forward contract
liability as it was settled during the year ended December 31, 2020.
Prior to the Business Combination, the Company
measured the Redeemable Convertible Series E preferred stock forward contract liability at fair value based on significant inputs
not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation
of the Redeemable Convertible Series E preferred stock forward contract liability uses assumptions and estimates the Company believes
would be made by a market participant in making the same valuation. The Company assessed these assumptions and estimates on an on-going
basis in 2020 until settlement of the contract as additional data impacting the assumptions and estimates was obtained. Changes in the
fair value of the redeemable convertible Series E preferred stock forward contract liability related to updated assumptions and estimates
are recognized within Other income (expense), net in the consolidated statements of operations.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
The table below reflects the fair value measurement
of the Company’s Level 3 inputs as of September 10, 2020, the date on which the Redeemable Convertible Series E preferred
forward contract liability was settled, prior to giving effect to the Business Combination:
|
|
|
Fair Value as of
September 10, 2020
|
|
|
Valuation
Technique
|
|
|
Unobservable Input Description
|
|
|
Input
|
Redeemable Convertible Series E preferred stock forward contract liability
|
|
|
$
|
21,688
|
|
|
|
Discounted cash flow
|
|
|
Fair value of Redeemable Convertible Series E preferred stock
|
|
|
$
|
9.17
|
|
The following table presents changes in Level
3 liabilities measured at fair value for the year ended December 31, 2020:
|
|
Series E forward
contract liability
|
|
Fair value as of December 31, 2019
|
|
$
|
—
|
|
Issuance of the Redeemable convertible Series E preferred stock forward contract liability
|
|
|
—
|
|
Change in fair value
|
|
|
21,688
|
|
Settlement of the Redeemable convertible Series E preferred stock forward contract liability
|
|
|
(21,688
|
)
|
Fair value as of December 31, 2020
|
|
$
|
—
|
|
The fair value of the redeemable convertible Series E
preferred stock forward contract liability as of the September 10, 2020 settlement date was determined by multiplying the number
of additional shares issued by the Company by the difference between the issuance price in accordance with the forward contract agreement
and the estimated fair value of the redeemable convertible Series E preferred stock.
Public and Private Common Stock Warrants
|
|
Fair Value Measured as of December 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public common stock warrants (Restated)
|
|
$
|
124,545
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,545
|
|
Private common stock warrants (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
53,687
|
|
|
|
53,687
|
|
Total fair value (Restated)
|
|
$
|
124,545
|
|
|
$
|
—
|
|
|
$
|
53,687
|
|
|
$
|
178,232
|
|
As of December 16, 2020, the effective date
of the Business Combination, the fair value of the Private Common Stock Warrants liability was $43.9 million. During the year ended
December 31, 2020, the fair value of the Private Common Stock Warrants liability increased by $9.8 million. As of December 31,
2020, the fair value of the Private Common Stock Warrants was $53.7 million.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Earnout Shares
Pursuant to the Merger Agreement, FEAC delivered
10,000,000 of its shares of FEAC Class B common stock into escrow that are subject to forfeiture if certain earnout conditions described
more fully in the Merger Agreement are not satisfied. If the earnout conditions are fully satisfied, 5,000,000 of such shares will be
released to the Sponsor in the form of shares of Class A common stock of New Skillz, and the other 5,000,000 shares will be released
to the Old Skillz stockholders, who will receive shares of New Skillz common stock as a result of the Business Combination in the form
of shares of Class A common stock of New Skillz (other than the Founder and a trust for the benefit of his family members, who will
receive shares of Class B common stock of New Skillz), in each case as further described in the Merger Agreement. The fair value
of the Earnout Shares of $172.3 million 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 Earnout Shares were included in the net consideration from the Business Combination and recorded in Additional paid-in capital with
a corresponding offset to Additional paid-in capital. In January 2021, the earnout conditions were fully satisfied.
7. Long-Term Debt
Components of long-term debt were as follows as
of December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
2019 Mezzanine Term Loan
|
|
$
|
—
|
|
|
$
|
10,000
|
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(372
|
)
|
Net carrying amount
|
|
$
|
—
|
|
|
$
|
9,628
|
|
2019 Mezzanine Term Loan
In December 2019, the Company entered into
a mezzanine term loan for up to $40.0 million; $30.0 million of which is immediately available and an additional $10.0 million
available upon the achievement of certain performance milestones (“2019 Mezzanine Term Loan”). No payments are due until the
loan maturity date of December 2023.
The facility shall bear interest on the outstanding
daily balance for each 2019 Mezzanine Term Loan advance at a floating per annum rate equal to the greater of five percentage points
(5.0%) above the prime rate or 9.75%. In 2019, the Company drew $10.0 million of the $30 million immediately available from
the 2019 Mezzanine Term Loan and used the proceeds to pay off the outstanding balance and interest of a previous term loan. There are
no financial covenants associated with the 2019 Mezzanine Term Loan.
In June 2020, the Company paid the $10.0 million
outstanding principal amount related to the 2019 Mezzanine Loan, plus all accrued and unpaid interest. The Company recognized a loss on
extinguishment of $0.4 million related to unamortized issuance costs within Interest expense in the consolidated statements of operations.
8. Commitments and Contingencies
Operating Leases
In November 2018, the Company entered into
an operating lease agreement related to its office in Portland, Oregon, which requires monthly lease payments through May 2022.
In May 2019, the Company entered into an
operating lease related to its new headquarters in San Francisco. The lease is through July 2029 and will result in a total of $25.6 million
in future minimum lease payments, which exclude a tenant improvement allowance from the landlord of up to $2.5 million.
In December 2019, the Company entered into
an operating lease related to additional office space in San Francisco. The lease is through March 31, 2021 and included a total
of $8.8 million in minimum lease payments. The Company recorded an impairment charge of $3.4 million related to prepaid expenses
and other current assets for the year ended December 31, 2020, in connection with this lease agreement.
The Company recognizes rent expense on a straight-line
basis over the lease period and accounts for the difference between straight-line rent and actual lease payments as deferred rent. Rent
expense for all facility leases was $6.5 million, $1.9 million, and $1.2 million for the years ended December 31, 2020, 2019,
and 2018, respectively.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Future minimum payments under the Company’s
non-cancelable leases as of December 31, 2020, are as follows:
|
|
Operating
Lease
Commitments
|
|
Year ended December 31,
|
|
|
|
|
2021
|
|
$
|
4,528
|
|
2022
|
|
|
2,498
|
|
2023
|
|
|
2,368
|
|
2024
|
|
|
2,439
|
|
2025
|
|
|
2,513
|
|
Thereafter
|
|
|
11,795
|
|
Future minimum lease payments
|
|
$
|
26,141
|
|
Legal Matters
The Company is a party to certain claims, suits,
and proceedings which arise in the ordinary course of business. The Company records a liability when it believes that it is probable that
a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the
loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s opinion,
resolution of pending matters is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s
financial position, as of December 31, 2020. 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, any such amount is either immaterial
or it is not possible to provide an estimated range of any such possible loss.
9. Retirement Plans
401(k) Plan
The Company adopted a 401(k) Plan that qualifies
as a deferred salary arrangement under Section 401 of the IRC. Under the 401(k) Plan, participating employees may defer a portion
of their pretax earnings not to exceed the maximum amount allowable. Contributions for eligible employees for the year ended December 31,
2020 were $0.1 million. No contributions for eligible employees were made for the years ended December 31, 2019 and 2018.
10. Common Stock Warrants
As of December 31, 2020, the Company had
17,249,977 Public Warrants and 5,016,666 Private Warrants outstanding.
As part of FEAC’s initial public offering,
17,250,000 Public Warrants were sold. The Public Warrants entitle the holder thereof to purchase one share of Class A common stock
at a price of $11.50 per share, subject to adjustments. The Public Warrants may be exercised only for a whole number of shares of Class A
common stock. No fractional shares will be issued upon exercise of the warrants. The Public Warrants will expire at 5:00 p.m. New
York City time on December 16, 2025, or earlier upon redemption or liquidation. The Public Warrants are listed on the NYSE under
the symbol “SKLZ.WS.”
The Company may call the Public Warrants for redemption
starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than 30 days’
prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of Class A common stock
equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the
date the Company sends the notice of redemption to the warrant holders provided there is an effective registration statement covering
the shares of Class A common stock issuable upon exercise of the warrants.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Simultaneously with FEAC’s initial public
offering, FEAC consummated a private placement of 10,033,333 Private Warrants with FEAC’s sponsor. In connection with the Business
Combination, FEAC’s sponsor agreed to forfeit 5,016,666 Private Warrants. Each Private Warrant is exercisable for one share of Class A
common stock at a price of $11.50 per share, subject to adjustment.
The Private Warrants are identical to the Public
Warrants, except that the Private Warrants and the shares of Class A common stock issuable upon exercise of the Private Warrants
will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited
exceptions. Additionally, the Private Warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’
permitted transferees. If the Private Warrants are held by someone other than their initial purchasers or their permitted transferees,
the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
11. Stockholders’ Equity
The consolidated statements of equity (deficit)
reflect the Business Combination as defined in Note 1 as of December 16, 2020. As Old Skillz was deemed the accounting acquirer in
the Business Combination with FEAC, all periods prior to the consummation date reflect the balances and activity of Old Skillz. The balances
as of December 31, 2019 and 2018 from the consolidated financial statements of Old Skillz as of that date, share activity (redeemable
convertible preferred stock, preferred stock, common stock, additional paid in capital, and accumulated deficit) and per share amounts
were retroactively adjusted, where applicable, using the recapitalization exchange ratio of 0.7471. All redeemable convertible preferred
stock classified as redeemable equity was retroactively adjusted, converted into Class A common stock, and reclassified into permanent
equity as a result of the Business Combination.
Common Stock
The Company’s amended and restated certificate
of incorporation following the Business Combination 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 December 31, 2020, the Company has
authorized a total of 635 million shares, consisting of 500 million shares of Class A Common Stock, par value $0.0001 per share (“Class A
Common Stock”), 125 million shares of Class B Common Stock, par value $0.0001 per share (“Class B Common Stock”),
and 10 million shares of Preferred Stock, par value $0.0001 per share (“Preferred Stock”).
Old Skillz Warrants
As of December 31, 2020, the Company had
48,135 Old Skillz private warrants outstanding. These warrants are equity classified.
In connection with the Business Combination, the
Old Skillz private warrants outstanding immediately prior to the Business Combination converted into warrants exercisable for New Skillz
Class A common stock on the same terms and conditions as applied to the Old Skillz warrants, which were adjusted for the Exchange
Ratio. The private warrants entitle the holder to purchase one share of Class A common stock at a price of $1.4991.
Old Skillz Convertible Preferred Stock
Immediately prior to the completion of the Business
Combination on December 16, 2020, all outstanding shares of the Old Skillz’s Series A, Series A-1, and Series B
convertible preferred stock converted into an aggregate 139.0 million shares of common stock. Each share of Old Skillz redeemable convertible
preferred stock was converted to ten shares of Old Skillz common stock.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Old Skillz Redeemable Convertible Preferred Stock
In September 2019, the Company received $25.0 million
in cash proceeds from the issuance of redeemable convertible Series D-1 preferred stock to a private investor at a price per share
of $21.516. In conjunction with the issuance of the redeemable convertible Series D-1 preferred stock, $9.8 million of the convertible
promissory notes issued in 2018, plus accrued interest, were converted into shares of redeemable convertible Series D-1 preferred
stock. In March 2019, $5.0 million of the convertible promissory notes issued in 2018 plus accrued interest were converted into
shares of redeemable convertible Series D preferred stock.
In April and May 2020, the Old Skillz
received $65.0 million in cash proceeds from the issuance of redeemable convertible Series E preferred stock to private investors
at a price per share of $43.11. The Series E Stock Purchase Agreement required the Old Skillz to issue and sell, and the Series E
investors to purchase, additional shares of redeemable convertible Series E preferred stock subsequent to the initial closing (the
“redeemable convertible Series E preferred stock forward contract liability”). The Company concluded that the redeemable
convertible Series E preferred stock forward contract liability met the definition of a freestanding financial instrument, as it
was legally detachable and separately exercisable from the initial closing of the redeemable convertible Series E preferred stock.
The forward contract liability had an immaterial value at the issue date.
In September 2020, the Old Skillz received
$11.7 million in cash proceeds as settlement for the outstanding redeemable convertible Series E preferred stock forward contract
liability and issuance of the underlying redeemable convertible Series E preferred stock to a private investor at a price per share
of $43.11. During the year ended December 31, 2020, the Company recognized a non-cash charge of $21.7 million related to changes
in the fair value of the redeemable convertible Series E preferred stock forward contract liability, which was included in Other
income (expense), net in the consolidated statements of operations.
Immediately prior to the completion of the Business
Combination on December 16, 2020, all outstanding shares of the Company’s Series C, Series D, Series D-1, and
Series E redeemable convertible preferred stock converted into an aggregate 122.0 million shares of common stock.
Conversion of Old Skillz Preferred Stock and Redeemable Convertible
Preferred Stock
All preferred stock and redeemable convertible
preferred stock classified as redeemable was retroactively adjusted, converted into New Skillz Class A common stock each as a result
of the Business Combination using the recapitalization exchange ratio of 0.7471. Redeemable convertible preferred stock was also reclassified
into permanent equity as a result of the Business Combination. Based on the conversion price set forth in the Company’s certificate
of incorporation, amended in June 2018 to effect for a 10-for-1 stock split of its common stock, the Conversion Rate in effect as
of the Closing Date of the Business Combination was ten shares of Class B common stock for each share of preferred stock.
There were no redemption rights for the Series A,
A-1, or B convertible preferred stock and the holders of these preferred shares could not unilaterally force a liquidation of the Company.
Series C, Series D, Series D-1, Series E redeemable convertible preferred stock, redeemable convertible Series E
preferred stock forward contract liability were redeemable at the option the of stockholder.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
12. Stock Based Compensation
The following table summarizes stock-based compensation
expense recognized for the years ended December 31, 2020, 2019 and 2018, as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
6,110
|
|
|
$
|
181
|
|
|
$
|
361
|
|
Sales and marketing
|
|
|
4,505
|
|
|
|
111
|
|
|
|
114
|
|
General and administrative
|
|
|
13,142
|
|
|
|
945
|
|
|
|
6,205
|
|
Total stock-based compensation expense
|
|
$
|
23,757
|
|
|
$
|
1,237
|
|
|
$
|
6,680
|
|
Equity Incentive Plans
2012, 2015, and 2017 Equity Incentive Plans
Prior to the Business Combination, the Company
maintained a stock based compensation plan. Old Skillz’s 2012, 2015, and 2017 Equity Incentive Plans (the “Legacy Equity Incentive
Plans”) provided for the grant of stock-based awards to purchase or directly issue shares of common stock to employees, directors
and consultants. Options were granted at a price per share equal to the fair market value of the underlying common stock at the date of
grant. Options granted to newly hired employees typically vest 25% on the first anniversary date of hire and ratably each quarter over
the ensuing 36 month period. The maximum term for stock options granted under the Legacy Equity Incentive Plans may not exceed ten years
from date of grant.
Each Old Skillz option from the Legacy Equity
Incentive Plans that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an
option to acquire a number of shares of Class A Common Stock (other than in the case of the Founder, who received options exercisable
for Class B common stock of the Company) (each such option, an "Exchanged Option") equal to the product (rounded down to
the nearest whole number) of (i) the number of shares of Old Skillz common stock subject to such Old Skillz option immediately prior
to the Business Combination and (ii) the Exchange Ratio, at an exercise price per share (rounded up to the nearest whole cent) equal
to (A) the exercise price per share of such Old Skillz option immediately prior to the consummation of the Business Combination,
divided by (B) the Exchange Ratio. Except as specifically provided in the Business Combination Agreement, following the Business
Combination, each Exchanged Option will continue to be governed by the same terms and conditions (including vesting and exercisability
terms) as were applicable to the corresponding former Old Skillz option immediately prior to the consummation of the Business Combination.
All stock option activity was retroactively restated to reflect the Exchanged Options.
Skillz Inc. 2020 Omnibus Incentive Plan
In December 2020, the Board of Directors
of the Company adopted the Skillz Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective upon
consummation of the Business Combination and succeeds the Company’s Legacy Equity Incentive Plans. Under the 2020 Plan, the Company
may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are
granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are exercisable
over a maximum term of 10 years from the date of grant. Restricted stock units (“RSUs”) are also granted under the 2020 Plan.
These awards typically have a cliff vesting period of one year and continue to vest quarterly thereafter. The 2020 Plan permits the Company
to deliver up to 47,841,859 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 15,000,000 shares which
may be Class A and/or Class B common stock, 24,669,278 shares of Class A common stock and 8,172,581 shares of the Class B
common stock. The total number of shares of Class A common stock and Class B Common stock, respectively, that will be reserved
and that may be issued under the 2020 Plan will automatically increase on the first trading day of each calendar year, beginning with
calendar year 2021, by a number of shares equal to five percent (5%) of the total number of shares of Class A common stock and Class B
common stock, respectively, outstanding on the last day of the prior calendar year.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Stock Options and Restricted Stock Units
Stock option and RSU activity, prices, and values
adjusted by the Exchange Ratio, during the year ended December 31, 2020 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, 2019
|
|
|
3,855,385
|
|
|
|
38,794,307
|
|
|
$
|
0.14
|
|
|
|
7.67
|
|
|
$
|
13,056
|
|
|
|
|
|
|
|
|
|
Recapitalization Impact
|
|
|
(975,027
|
)
|
|
|
(9,811,081
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
2,880,358
|
|
|
|
28,983,226
|
|
|
$
|
0.19
|
|
|
|
7.67
|
|
|
$
|
13,056
|
|
|
|
—
|
|
|
$
|
—
|
|
Additional shares authorized
|
|
|
62,903,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and restricted stock units granted
|
|
|
(36,074,010
|
)
|
|
|
35,732,754
|
|
|
|
6.70
|
|
|
|
|
|
|
|
|
|
|
|
341,256
|
|
|
|
17.68
|
|
Options exercised(1) and restricted stock units released
|
|
|
—
|
|
|
|
(20,138,817
|
)
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Options and restricted stock units canceled
|
|
|
5,791,227
|
|
|
|
(6,172,670
|
)
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2020
|
|
|
35,500,603
|
|
|
|
38,404,493
|
|
|
$
|
5.89
|
|
|
|
8.27
|
|
|
$
|
542,074
|
|
|
|
341,256
|
|
|
$
|
17.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
|
|
|
|
15,225,162
|
|
|
$
|
0.08
|
|
|
|
6.85
|
|
|
$
|
8,492
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
|
|
|
|
14,248,234
|
|
|
$
|
0.18
|
|
|
|
6.45
|
|
|
$
|
282,364
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2019
|
|
|
|
|
|
|
13,758,064
|
|
|
$
|
0.31
|
|
|
|
8.58
|
|
|
$
|
4,564
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2020
|
|
|
|
|
|
|
24,156,259
|
|
|
$
|
9.25
|
|
|
|
9.34
|
|
|
$
|
259,710
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The number of options exercised includes early exercises related to the Executive grants noted below.
|
The number of unvested stock options as of December 31,
2020 and December 31, 2019 does not include 13.3 million and 8.2 million shares of restricted common stock issued upon the early
exercise of the certain Executive grants described below.
As of December 31, 2020, unrecognized stock-based
compensation expense related to unvested stock options, restricted common stock, and RSUs was $156.9 million. The weighted-average
period over which such compensation expense will be recognized is 3.53 years.
The aggregate intrinsic value of options exercised
was $89.9 million, $1.4 million and $0.5 million during the years ended December 31, 2020, 2019 and 2018, respectively.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
The assumptions used to estimate the fair value
of stock options granted and the resulting fair values for the year ended December 31, 2020, 2019 and 2018 were as follows:
​
|
2020
|
​
|
2019
|
|
2018
|
Expected volatility
|
45.00% – 50.00%
|
​
|
47.17% – 55.47%
|
|
47.69% – 49.17%
|
Risk-free interest rate
|
0.27% – 1.44%
|
|
1.57% – 2.64%
|
|
2.60% – 3.06%
|
Expected term (in years)
|
4.14 – 6.25
|
|
5.00 – 6.86
|
|
5.49 – 6.13
|
Expected dividend yield
|
—
|
|
—
|
|
—
|
Weighted average estimated fair value of stock options granted during the year
|
$5.06
|
|
$0.21
|
|
$0.11
|
Executive grants
Executive Grants below were retroactively adjusted
to give effect of the Reverse Recapitalization Exchange Ratio of 0.7471.
2019 CEO Executive Grant
On April 29, 2019, the Board of Directors
approved a grant to the Company’s co-founder and Chief Executive Officer of two separate options to purchase shares of Class A
common stock at an exercise price of $0.43 per share.
The first option was to purchase 2,990,172 shares
of Old Skillz Class A common stock, which vest subject to continuous service over a four-year period, whereby 1/48th of the shares
vest each month. Vesting will accelerate and (i) vest as to 50% of the then-outstanding shares upon the consummation of an IPO; and
(ii) vest as to 100% of the then-outstanding shares upon the earlier of (A) the consummation of an Exit Transaction and (B) termination
of service by the Company other than for cause (as defined by the plan), subject to continuous services through the consummation of such
event. The $1.7 million grant date fair value of this option, estimated based on the BSM pricing model, will be recognized as compensation
expense over the requisite service period. As of December 31, 2020, the Company recognized $0.7 million in compensation expense related
to this grant. In connection with the Business Combination, the CEO elected to waive the right to vest as to 100% of the then-outstanding
shares upon the consummation of an Exit Transaction.
The second option was to purchase 5,980,344 shares
of Old Skillz Class A common stock, which vest subject to continuous service and the achievement of eight market condition targets
related to the valuation of the Company, ranging from $600 million to $2.7 billion, upon closing of either an Exit Transaction,
Financing Event, or Initial Public Offering, on or before April 29, 2023 (“Market Condition Grant”). The Market Condition
Grant has implied performance-based vesting conditions because no shares will vest unless the Exit Transaction, Financing Event, or Initial
Public Offering occur. The $0.9 million grant date fair value of the Market Condition Grant 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. All compensation expense related to the Market Condition Grant was recognized during the
year ended December 31, 2020 because the performance-based vesting condition was achieved.
On April 30, 2019, the two separate options
to purchase shares of Old Skillz Class A common stock were early exercised by entering into a promissory note and security agreement
with the Company. The promissory note includes outstanding principal of $3.8 million and bears interest at a rate of 2.55%, compounded
annually. The principal amount of the promissory note, together with all accrued but unpaid interest, shall become due upon the first
to occur of (i) immediately prior to the closing of a deemed liquidation event or Exit Transaction, (ii) termination of the
grantees’s employment, (iii) immediately prior to the filing of a registration statement under the Securities Act of 1933,
(iv) immediately prior to this note becoming prohibited under Section 13(k) of the Securities Exchange Act of 1934, and
(v) nine years. The promissory note is deemed to be non-recourse. Accordingly, the promissory note was recorded as a reduction to
Additional paid-in capital, offsetting the proceeds from the early exercise, rather than as a note receivable on the Company’s Balance
Sheet. The total 8,970,517 shares issued related to the executive grants are included in common stock issued and outstanding within these
consolidated financial statements, as they provide the holder with stockholder rights, such as the right to vote the shares with the other
holders of common stock and a right to cumulative declared dividends. Immediately prior to the consummation of the Business Combination,
the CEO surrendered a portion of these shares to pay off the promissory note and security agreement with the Company.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
2020 CEO Executive Grant
On April 15, 2020, the Board of Directors
approved a grant to the Company’s co-founder and Chief Executive Officer of options to purchase shares of Old Skillz Class A
common stock at an exercise price of $1.15 per share.
The option was to purchase 9,921,314 shares of
Old Skillz Class A common stock, which vest subject to continuous service over a four-year period, whereby 25% of the shares shall
vest on the one year anniversary of the grant date and 6.25% of the shares vest quarterly thereafter. Vesting will accelerate and (i) vest
as to 50% of the then-outstanding shares upon the consummation of an IPO; and (ii) vest as to 100% of the then-outstanding shares
upon the earlier of (A) the consummation of an Exit Transaction and (B) termination of service by the Company other than for
cause (as defined by the plan), subject to continuous services through the consummation of such event. The grant date fair value of this
option was estimated based on the BSM pricing model, and the total compensation expense that will be recognized over the requisite service
period is $21.5 million. As of December 31, 2020, the Company recognized $3.8 million in compensation expense related to this
grant. In connection with the Business Combination, the CEO elected to waive the right to vest as to 100% of the then-outstanding shares
upon the consummation of an Exit Transaction.
On May 14, 2020, the option to purchase shares
of Old Skillz Class A common stock was early exercised by entering into a promissory note and security agreement with the Company.
The promissory note includes outstanding principal of $11.4 million and bears interest at a rate of 0.58%, compounded annually. The
principal amount of the promissory note, together with all accrued but unpaid interest, shall become due upon the first to occur of (i) immediately
prior to the closing of a deemed liquidation event or Exit Transaction, (ii) termination of the grantee’s employment, (iii) immediately
prior to the filing of a registration statement under the Securities Act of 1933, (iv) immediately prior to this note becoming prohibited
under Section 13(k) of the Securities Exchange Act of 1934, and (v) nine years. The promissory note is deemed to be non-recourse.
Accordingly, the promissory note was recorded as a reduction to Additional paid-in capital, offsetting the proceeds from the early exercise,
rather than as a note receivable on the Company’s Balance Sheet. The 9,921,314 shares issued related to the 2020 CEO Executive grants
are included in common stock issued and outstanding within these consolidated financial statements as they provide the holder with stockholder
rights, such as the right to vote the shares with the other holders of common stock and a right to cumulative declared dividends. Immediately
prior to the consummation of the Business Combination, the CEO surrendered a portion of these shares to pay off the promissory note and
security agreement with the Company.
2020 CRO Executive Grant
On April 15, 2020, the Board of Directors
approved a grant to the Company’s co-founder and Chief Revenue Officer of two separate options to purchase shares of Class B
common stock at an exercise price of $1.15 per share.
The first option was to purchase 1,852,695 shares
of Old Skillz Class B common stock, which vest subject to continuous service over a four-year period, whereby 25% of the shares shall
vest on the one year anniversary of the grant date and 6.25% of the shares vest quarterly thereafter. Vesting will accelerate and (i) vest
as to 50% of the then-outstanding shares upon the consummation of an IPO; and (ii) vest as to 100% of the then-outstanding shares
upon the earlier of (A) the consummation of an Exit Transaction and (B) termination of service by the Company other than for
cause (as defined by the plan), subject to continuous services through the consummation of such event. The grant date fair value of this
option was estimated based on the BSM pricing model, and the total compensation expense that will be recognized over the requisite service
period is $3.5 million. As of December 31, 2020, the Company recognized $0.6 million in compensation expense related to this
grant. In connection with the Business Combination, the CRO elected to waive his right to vest as to 100% of the then-outstanding shares
upon the consummation of an Exit Transaction.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
The second option was to purchase 926,347 shares
of Old Skillz Class B common stock, which vest subject to continuous service and the achievement of five market condition targets
related to the valuation of the Company, ranging from $1.5 billion to $2.7 billion, upon closing of either an Exit Transaction,
Financing Event, or Initial Public Offering, on or before April 15, 2024 (“CRO Market Condition Grant”). The CRO Market
Condition Grant has implied performance-based vesting conditions because no shares will vest unless the Exit Transaction, Financing Event,
or Initial Public Offering occur. The $2.0 million grant date fair value of the CRO Market Condition Grant 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. As of December 31, 2020, all compensation expense related to the CRO Market
Condition Grant was recognized because the performance-based vesting condition was achieved through the consummation of the Business Combination.
On May 14, 2020, the two separate options
to purchase shares of Old Skillz Class B common stock were early exercised by entering into a promissory note and security agreement
with the Company. The promissory note includes outstanding principal of $3.2 million and bears interest at a rate of 0.58%, compounded
annually. The principal amount of the promissory note, together with all accrued but unpaid interest, shall become due upon the first
to occur of (i) immediately prior to the closing of a deemed liquidation event or Exit Transaction, (ii) termination of the
grantee’s employment, (iii) immediately prior to the filing of a registration statement under the Securities Act of 1933, (iv) immediately
prior to this note becoming prohibited under Section 13(k) of the Securities Exchange Act of 1934, and (v) nine years.
The promissory note is deemed to be non-recourse and recorded as a reduction to Additional paid-in capital, offsetting the proceeds from
the early exercise, rather than as a note receivable on the Company’s Balance Sheet. The total 2,779,042 shares issued related to
the co-founder grants are included in common stock issued and outstanding within these consolidated financial statements as they provide
the holder with stockholder rights, such as the right to vote the shares with the other holders of common stock and a right to cumulative
declared dividends. Immediately prior to the consummation of the Business Combination, the CRO surrendered a portion of these shares to
pay off the promissory note and security agreement with the Company.
2020 CTO Executive Grant
On June 8, 2020, the Board of Directors approved
a grant to the Company’s Chief Technology Officer of two separate options to purchase shares of Old Skillz Class B common stock
at an exercise price of $1.33 per share.
The first option was to purchase 1,520,736 shares
of Old Skillz Class B common stock, which vest subject to continuous service over a four-year period, whereby 25% of the shares shall
vest on the one year anniversary of the grant date and 6.25% of the shares vest quarterly thereafter. Vesting will accelerate and (i) vest
as to 50% of the then-outstanding shares upon the consummation of an IPO; and (ii) vest as to 100% of the then-outstanding shares
upon the earlier of (A) the consummation of an Exit Transaction and (B) termination of service by the Company for cause (as
defined by the plan), subject to continuous services through the consummation of such event. The grant date fair value of this option
was estimated based on the BSM pricing model, and the total compensation expense that will be recognized over the requisite service period
is $9.0 million. As of December 31, 2020, the Company recognized $0.9 million in compensation expense related to this grant.
In connection with the Business Combination, the CTO elected to waive the right to vest as to 100% of the then-outstanding shares upon
the consummation of an Exit Transaction.
The second option was to purchase 919,862 shares
of Old Skillz Class B common stock, which vest subject to continuous service and the achievement of five market condition targets
related to the valuation of the Company, ranging from $1.8 billion to $3.0 billion, upon closing of either an Exit Transaction,
Financing Event, or Initial Public Offering, on or before June 8, 2024 (“CTO Market Condition Grant”). The CTO Market
Condition Grant has implied performance-based vesting conditions because no shares will vest unless the Exit Transaction, Financing Event,
or Initial Public Offering occur. The $3.7 million grant date fair value of the CTO Market Condition Grant 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. As of December 31, 2020, all compensation expense related to the CTO Market
Condition Grant was recognized because the performance-based vesting condition was achieved through the consummation of the Business Combination.
Founders’ Option Agreements
In connection with the closing of the Business
Combination, the Company entered into option agreements with each of the CEO and CRO (the “Option Agreements”) awarding options
to purchase (i) 9,960,000 shares of New Skillz Class B common stock to the CEO and (ii) 2,040,000 shares of New Skillz
Class A common stock to the CRO. 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 New Skillz Class A common stock (“VWAP”) equals or exceeds 3.0x the VWAP
of the shares as of the Closing Date, (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 Company’s Class A stock price and the risk-free interest rate as of the grant date, as well as the estimated volatility
of the Company’s Class A common stock. As of December 31, 2020, the Company recognized $0.8 million in compensation expense
related to these grants.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
Other Stock-Based Compensation
During the year ended December 31, 2019,
certain existing and new external investors acquired $0.7 million of outstanding Old Skillz Class B common stock from a current
employee at a purchase price greater than the estimated fair value at the time of the transactions. The Company recorded stock-based compensation
expense for the difference between the price paid and the estimated fair value on the date of the transactions of $0.5 million in general
and administrative expense.
In April and May 2020, certain existing
and new investors acquired $11.0 million of outstanding Old Skillz Class B common stock from employees. The Company recorded
stock-based compensation expense for the difference between the price paid and the estimated fair value on the date of the transaction
of $2.3 million in general and administrative, $0.7 million in sales and marketing, and $0.4 million in research and development.
In August 2020, the Company’s Board
of Directors granted an executive officer 2,757,886 non-qualified stock options, which vest 25% on the one year anniversary of the start
of the vesting period, and 6.25% after each three months of continuous service subsequent to the first year. The grant date fair value
of this option was estimated based on the BSM pricing model, and the total compensation expense that will be recognized over the requisite
service period is $23.5 million. As of December 31, 2020, the Company recognized $2.3 million in compensation expense related
to this grant.
13. Income Taxes
The Company has historically generated net operating
losses in each of the tax jurisdictions in which it operates and has provided a valuation allowance against net deferred tax assets due
to uncertainties regarding the Company’s ability to realize these assets.
The provision for income taxes consists of the
following:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
Total Current
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Provision for income taxes
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
A reconciliation of the Company’s effective tax rate to the statutory
U.S. federal rate of 21% is as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
U.S. Federal provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
At statutory rate
|
|
$
|
(30,533
|
)
|
|
$
|
(5,956
|
)
|
|
$
|
(5,608
|
)
|
State taxes
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
26,245
|
|
|
|
6,320
|
|
|
|
5,671
|
|
Stock based compensation
|
|
|
(7,257
|
)
|
|
|
(182
|
)
|
|
|
(141
|
)
|
Permanent differences related to fair value adjustments
|
|
|
8,573
|
|
|
|
—
|
|
|
|
—
|
|
Other permanent differences
|
|
|
2,997
|
|
|
|
(182
|
)
|
|
|
78
|
|
Total
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects
of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities
for federal and state income taxes are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
47,864
|
|
|
$
|
21,309
|
|
Stock-based compensation
|
|
|
2,492
|
|
|
|
1,646
|
|
Reserves and accruals
|
|
|
1,239
|
|
|
|
513
|
|
Other
|
|
|
291
|
|
|
|
2
|
|
Total deferred tax assets
|
|
$
|
51,886
|
|
|
$
|
23,470
|
|
Less: valuation allowance
|
|
|
(51,859
|
)
|
|
|
(23,455
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
27
|
|
|
$
|
15
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(27
|
)
|
|
|
(15
|
)
|
Total deferred tax liabilities
|
|
$
|
(27
|
)
|
|
$
|
(15
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
A valuation allowance is required to be established
when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets
is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs
to be considered. As of December 31, 2020 and 2019, the Company has provided a full valuation allowance on its deferred tax assets.
The change in total valuation allowance from 2019 to 2020 was an increase of $28.4 million .
The Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $201.3 million and $64.9 million, respectively, as of December 31, 2020.
The federal and state net operating loss carryforwards, if not utilized, will expire beginning in 2033 and 2031, respectively. $165.3
million of the federal net operating loss carryforwards are not subject to expiration. Utilization of some of the federal and state net
operating loss and credit carryforwards may be subject to annual limitations due to the “change in ownership” provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses
and credits before utilization. The Company has not performed a Section 382 study as of December 31, 2020.
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
On March 27, 2020, the Coronavirus Aid, Relief
and Economic Security (“CARES Act”) was signed into law. Among other things, the CARES Act permits NOL carryovers and carrybacks
to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019,
and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES
Act also contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to
Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable
income. The CARES Act did not have a significant impact to the Company for any years.
On June 29, 2020, California Governor Newsom
signed to law the state’s budget package which included Assembly Bill 85 (AB 85). AB 85 contained two major tax changes: (1) it
suspends the usage of net operating losses (NOLs) for certain taxpayers; and (2) it limits certain business tax credits for tax years
2020, 2021, and 2022. Skillz is in a taxable loss position in 2020 and thus the bill has no impact on the 2020 provision. The Company
will continue to monitor the impact of AB 85, if any, on future periods.
The Company files tax returns in the U.S., California,
Massachusetts, and Oregon. The Company is not currently under examination in any of these jurisdictions and all its tax years remain
open to examination due to net operating loss carryforwards. The Company does not have any reserves for uncertain tax positions.
14. Related-Party Transactions
Aside from preferred financing equity transactions
discussed and Executive grants discussed in Note 10, the Company did not have any other significant related party transactions in the years
ended December 31, 2020, 2019, and 2018.
15. Net Loss Per Share
Net loss per share calculations for all periods
prior to the Business Combination have been retrospectively adjusted for the equivalent number of shares outstanding immediately after
the Business Combination to effect the reverse recapitalization. Subsequent to the Business Combination, net loss per share was calculated
based on the weighted average number of common stock then outstanding.
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 was the same for each period presented as the inclusion of all potential Class A Common Stock and Class B Common
Stock outstanding would have been antidilutive. 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 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):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss – basic and diluted
|
|
$
|
(145,510
|
)
|
|
$
|
(23,605
|
)
|
|
$
|
(27,780
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
294,549,146
|
|
|
|
261,228,108
|
|
|
|
236,040,717
|
|
Net loss per share attributable to common stockholders – basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
SKILLZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, unless
otherwise noted)
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):
|
|
Number of Securities
Outstanding at December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
12,099,120
|
|
Common and preferred stock warrants
|
|
|
22,314,778
|
|
|
|
3,635,180
|
|
|
|
3,087,307
|
|
Common stock options
|
|
|
51,735,883
|
|
|
|
37,206,199
|
|
|
|
30,911,188
|
|
Restricted stock units
|
|
|
341,256
|
|
|
|
—
|
|
|
|
—
|
|
Earnout shares
|
|
|
10,000,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
84,391,917
|
|
|
|
40,841,379
|
|
|
|
46,097,615
|
|
16. Subsequent Events
In January 2021, the conditions for the release
of the Earnout Shares were satisfied. The Sponsor will release 10,000,000 of its shares of FEAC Class B common stock from escrow
as certain earnout conditions were satisfied. 5,000,000 of such shares will be released to the Sponsor in the form of shares of the Company’s
Class A common stock and the other 5,000,000 shares will be released to the Old Skillz stockholders, who will receive shares of the
Company’s common stock as a result of the Business Combination in the form of shares of Class A common stock of the Company
(other than the Founder and a trust for the benefit of his family members, who will receive shares of Class B common stock of the
Company).
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Item 9A. Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures
as of the end of the period covered by this report. On March 12, 2021, we filed our original audited Annual Report on Form 10-K
for the year ended December 31, 2020. Based upon their evaluation as of that date, our Chief Executive Officer and Chief Financial
Officer had concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) were effective.
Subsequent to that evaluation, as a result of
the material weakness as described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2020, our disclosure controls and procedures were not effective.
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement
of our annual or interim financial statements could not be prevented or detected on a timely basis.
On April 12, 2021, the SEC issued a Staff
Statement (“the SEC Staff Statement”) in which the SEC Staff clarified its interpretations of certain generally accepted accounting
principles related to warrants issued by Special Purpose Acquisition Companies (“SPACs”). Prior to the SEC Staff Statement,
we believed that our warrant accounting was consistent with generally accepted accounting principles. Our belief was supported by the
fact that most other SPACs and parties who have merged with SPACs similarly interpreted the warrant accounting principles at issue. However,
based on the clarifications expressed in the SEC Staff Statement, the Company has determined to classify its Public and Private Common
Stock Warrants as liabilities, and will subsequently remeasure them at fair value through earnings pursuant to Accounting Standards Codification
815 (“ASC 815”), resulting in the restatement discussed further in Note 3 to the consolidated financial statements. In connection
with the restatement, the Company’s management and the Chief Executive Officer and Chief Financial Officer concluded there was a
material weakness in controls related to the classification and accounting for warrants issued by a SPAC, which did not operate effectively
to appropriately apply the provisions of ASC 815.
Notwithstanding the material weakness discussed
above, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our financial statements
included in this Form 10-K/A present fairly, in all material respects, our financial position, results of operations and cash flows
for the periods presented in accordance with U.S. generally accepted accounting principles.
Remediation of Material Weakness
To remediate the material weakness, the Company
studied and clarified its understanding of the accounting of contracts that may be settled in the Company’s own stock, such as warrants,
as equity of the entity or as an asset or liability as highlighted in the SEC Staff Statement, and is in the process of implementing additional
review procedures and enhanced its accounting policy related to the accounting for such contracts to determine proper accounting in accordance
with GAAP as clarified by the SEC Staff Statement. Finally, the Company restated its consolidated financial statements as of and for the
year ended December 31, 2020 upon completing its evaluation of the Staff Statement. All necessary revisions are properly reflected
in Note 3 – “Restatement of Consolidated Financial Statements” to the financial statements included herein.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K/A does not
include a report of management’s assessment regarding internal control over financial reporting as permitted in this transition
period under the rules of the SEC for newly public companies.
Attestation of Independent Registered Public Accounting Firm
This Annual Report on Form 10-K/A does not
include an attestation by our independent registered public accounting firm regarding our internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) due to a transition period established by the rules of
the SEC.
Changes in Internal Control
There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly
period ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting other than the changes described above related to the material weakness related to the accounting for the Assumed
Common Stock Warrants as equity instead of liability.
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.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Refer to the information under the captions “Election
of Directors (Proposal No. 1)” “Directors and Management,” “Corporate Governance - Controlled Company Exemption,”
“Corporate Governance - Other Board Information; Committees of the Board,” “Corporate Governance - Other Board Information;
Code of Ethics and Conduct,” “Corporate Governance - Other Board Information; Compensation Committee Interlocks and Insider
Participation” and “Corporate Governance - Delinquent Section 16(a) Reports” in the Company’s definitive
Proxy Statement filed with the SEC on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held May 26, 2021, all of which information is incorporated herein by reference.
Item 11. Executive Compensation.
Refer to the information under the captions “Executive
Compensation - Introduction” “Executive Compensation - Summary Compensation Table,” “Executive Compensation -
Outstanding Equity Awards at 2020 Fiscal Year-End; 2020 Pre-Business Combination Grants to NEOs,” “Executive Compensation
- Outstanding Equity Awards at 2020 Fiscal Year-End; Closing Option Grants,” “Executive Compensation - Outstanding Equity
Awards at 2020 Fiscal Year-End; Skillz Inc. 2020 Omnibus Incentive Plan,” “Corporate Governance - Director Compensation”
and “Corporate Governance - Director Compensation Program” in the Company’s definitive Proxy Statement filed with the
SEC on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 26,
2021, all of which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
Refer to the information under the captions “Corporate
Governance - Security Ownership of Certain Beneficial Owners, Directors and Management” and “Corporate Governance - “Executive
Compensation - Outstanding Equity Awards at 2020 Fiscal Year-End; Equity Compensation Plan Information” in the Company’s definitive
Proxy Statement filed with the SEC on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held May 26, 2021, all of which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Refer to the information under the captions “Certain
Relationships and Related Transactions” and “Corporate Governance - Independence of Directors” in the Company’s
definitive Proxy Statement filed with the SEC on April 14, 2021 and delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held May 26, 2021, all of which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Refer to the information under the caption “Fees
of Independent Accountants” in the Company’s definitive Proxy Statement filed with the SEC on April 14, 2021 and delivered
to stockholders in connection with the Annual Meeting of Stockholders to be held May 26, 2021, all of which information is incorporated
herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) We have filed the following documents as part of this Annual
Report on Form 10-K/A:
1. Financial Statements
Our consolidated financial statements are listed in the “Index
to Consolidated Financial Statements and Schedule” under Part II, Item 8 of this Annual Report on Form 10-K/A.
2. Exhibits
The documents listed in the Exhibit Index of this Annual Report
on Form 10-K/A are incorporated by reference or are filed with this Annual Report on Form 10-K/A, in each case as indicated
therein (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
|
Exhibit Description
|
Form
|
Exhibit
|
Filing Date
|
2.1
|
Merger Agreement, dated as of September 1, 2020, by and among Flying Eagle Acquisition Corp., FEAC Merger Sub Inc., Skillz Inc., and Andrew Paradise, solely in his capacity as representative of the stockholders of Skillz Inc.
|
8-K(1)
|
2.1
|
9/2/20
|
3.1
|
Amended
and Restated Certificate of Incorporation of Skillz Inc.
|
8-K
|
3.1
|
12/21/20
|
3.2
|
Amended
and Restated Bylaws of Skillz Inc.
|
8-K
|
3.2
|
12/21/20
|
4.1
|
Form of
Specimen Class A Common Stock Certificate of Skillz Inc.
|
8-K
|
4.1
|
12/21/20
|
4.2
|
Warrant
Agreement, dated March 5, 2020, by and between Flying Eagle Acquisition Corp. and Continental Stock Transfer & Trust
Company, as warrant agent
|
8-K(1)
|
4.1
|
3/10/20
|
4.3
|
Description
of Skillz Inc.’s Securities
|
10-K
|
4.3
|
3/12/21
|
10.1+
|
Skillz
Inc. 2020 Omnibus Incentive Plan
|
S-4(1)
|
Annex F
|
9/8/20
|
10.2+
|
Skillz
Inc. 2020 Employee Stock Purchase Plan
|
S-4(1)
|
Annex G
|
9/8/20
|
10.3+
|
Form of
Indemnification Agreement
|
8-K
|
10.1
|
2/26/21
|
10.4
|
Support
Agreement, dated as of September 1, 2020, by and among Flying Eagle Acquisition Corp. and certain Supporting Stockholders of
Skillz Inc.
|
8-K(1)
|
10.3
|
9/2/20
|
10.5
|
Eighth
Amended and Restated Investors’ Rights Agreement, dated September 1, 2020, by and among Flying Eagle Acquisition Corp.,
Skillz Inc. and certain of its stockholders
|
8-K(1)
|
10.2
|
9/2/20
|
10.6†
|
Earnout
Escrow Agreement, dated December 16, 2020 by and among Skillz Inc., Andrew Paradise, solely in his capacity as representative
of the stockholders of Skillz Inc., Eagle Equity Partners II LLC and Continental Stock Transfer & Trust Company
|
8-K
|
10.6
|
12/21/20
|
10.7
|
Director
Nomination Agreement, dated December 16, 2020, by and between Skillz Inc. and Eagle Equity Partner II, LLC
|
8-K
|
10.7
|
12/21/20
|
10.8
|
Note
Cancellation Agreement dated as of December 16, 2020 by and between Skillz Inc. and Andrew Paradise
|
8-K
|
10.8
|
12/21/20
|
10.9
|
Note
Cancellation Agreement dated as of December 16, 2020 by and between Skillz Inc. and Casey Chafkin
|
8-K
|
10.9
|
12/21/20
|
10.10†*
|
Amendment
to Skillz Online Developer Terms and Conditions of Service, dated January 15, 2020, by and between Skillz Inc and Tether Studios, Inc.
|
S-4(1)
|
10.9
|
11/2/20
|
10.11+
|
Form of
Option Agreement
|
8-K
|
10.11
|
12/21/20
|
10.12+
|
Skillz
Inc. Executive Severance and Change in Control Plan
|
8-K
|
10.12
|
12/21/20
|
10.13+
|
Form of
Severance Plan Participation Agreement
|
8-K
|
10.13
|
12/21/20
|
10.14
|
Investor
Rights Agreement dated September 1, 2020 by and among Flying Eagle Acquisition Corp., Skillz Inc., and the stockholders named
therein
|
8-K
|
10.14
|
12/21/20
|
21.1
|
List
of Subsidiaries
|
10-K
|
21.1
|
3/12/21
|
23.1**
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
|
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).
|
|
|
|
(1) Filed by Flying Eagle Acquisition Corp.
† Certain of the exhibits and schedules
to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all
omitted exhibits and schedules to the SEC upon its request.
* Certain portions of this exhibit have been omitted
pursuant to Regulation S-K Item 601(b)(10)(iv). The Registrant agrees to furnish an unredacted copy of the exhibit to the SEC upon its
request.
**Filed herewith.
***Submitted electronically with the report.
+ Management contract or compensatory plan or
arrangement
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
SKILLZ INC.
|
|
|
|
|
By:
|
/s/ Andrew Paradise
|
|
Name:
|
Andrew Paradise
|
|
Title:
|
Chief Executive Officer and Chairman
|
|
Date:
|
May 13, 2021
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Andrew Paradise
|
|
Chief Executive Officer and Chairman
(Principal Executive Officer)
|
|
May 13, 2021
|
Andrew Paradise
|
|
|
|
|
|
|
|
/s/ Scott Henry
|
|
Chief Financial Officer
(Principal Financial and Accounting
Officer)
|
|
May 13, 2021
|
Scott Henry
|
|
|
|
|
|
|
|
/s/ Casey Chafkin
|
|
Chief Revenue Officer and Director
|
|
May 13, 2021
|
Casey Chafkin
|
|
|
|
|
|
|
|
Board of Directors:
|
|
|
|
|
|
|
|
|
|
Jerry Bruckheimer*
|
|
Director
|
|
|
|
|
|
|
|
|
|
Christopher S. Gaffney*
|
|
Director
|
|
|
|
|
|
|
|
|
|
Vandana Mehta-Krantz*
|
|
Director
|
|
|
|
|
|
|
|
|
|
Harry E. Sloan*
|
|
Director
|
|
|
|
|
|
|
|
|
|
Kent E. Wakeford*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
* By: /s/ Andrew Paradise
|
|
May 13, 2021
|
|
|
Andrew Paradise, Attorney-in-Fact
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly period ended March 31, 2021
|
OR
¨
|
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
|
46-2682070
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
|
PO Box 445
San Francisco, California
|
94104
|
|
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
(415) 762-0511
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
Class A common stock, par value $0.0001 per share
|
SKLZ
|
New York Stock Exchange
|
Warrants to purchase one share of Class A common stock, each at an exercise price of $11.50 per share
|
SKLZ.WS
|
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 x 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 x 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
|
x
|
Smaller reporting company
|
¨
|
|
|
Emerging growth company
|
x
|
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 x
As of May 5, 2021, the registrant had outstanding 326,901,690
shares of Class A common stock and 69,587,138 shares of Class B common stock.
SKILLZ INC.
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about Skillz Inc. (“we,” “us,”
“our.” or the “Company”) and our industry that involve substantial risks and uncertainties. All statements other
than statements of historical facts contained in this report, including statements regarding guidance, our future results of operations
or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for
future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words
such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,”
“expect,” “going to,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “should,” “target,” “will,” or “would” or the negative of these
words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made
in this report.
You should not rely on forward-looking statements
as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily
on our current expectations and projections about future events and trends that we believe may affect our business, financial condition,
results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described
in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, as
supplemented by our other Securities and Exchange Commission filings, including among other things:
|
•
|
Our rapid growth may not be sustainable and depends on our ability to attract and retain end-users.
|
|
•
|
Our business could be harmed if we fail to manage our growth effectively.
|
|
•
|
We have a history of losses and we may be unable to achieve profitability.
|
|
•
|
We rely on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform.
|
|
•
|
A limited number of games account for a substantial portion of our revenue.
|
|
•
|
We rely on third-party service providers including cloud computing services, payment processors, and infrastructure service providers,
and if we cannot manage our relationships with such providers or lose access to such services, our business, financial condition, results
of operations and prospects could be adversely affected.
|
|
•
|
Failure to maintain our brand and reputation could harm our business, financial condition and results of operations.
|
|
•
|
The broader entertainment industry is highly competitive and our existing and potential users may be attracted to competing forms
of entertainment.
|
|
•
|
Our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business.
|
|
•
|
Failure to obtain, maintain, protect or enforce our intellectual property rights could harm our business, results of operations and
financial condition.
|
|
•
|
Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition
and results of operations.
|
|
•
|
The occurrence of a data breach or other failure of our cybersecurity.
|
|
•
|
Failure to properly contain COVID-19 or another global pandemic in a timely manner could materially affect how we and our business
partners are operating.
|
|
•
|
Exercise of our outstanding warrants would result in dilution to our stockholders.
|
|
•
|
The valuation of our warrants could increase the volatility in our net loss.
|
These statements are based on our historical performance
and on our current plans, estimates and projections in light of information currently available to us, and therefore you should not place
undue reliance on them. The inclusion of this forward-looking information should not be regarded as a representation by us or any other
person that the future plans, estimates or expectations contemplated by us will be achieved. Forward-looking statements made in this Quarterly
Report on Form 10-Q speak only as of the date on which such statements are made, and we undertake no obligation to update them in
light of new information or future events, except as required by law.
You should carefully consider the above factors,
as well as the factors discussed in other risks described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K
for the year ended December 31, 2020, as amended, as supplemented by our other Securities and Exchange Commission filings. The factors
identified above should not be construed as an exhaustive list of factors that could affect our future results and should be read in conjunction
with the other cautionary statements that are included in this Quarterly Report. Furthermore, new risks and uncertainties arise from time
to time, and it is impossible for us to predict those events or how they may affect us. If any of these trends, risks or uncertainties
actually occurs or continues, our business, revenue and financial results could be harmed, the trading price of our Class A common
stock could decline and you could lose all or part of your investment.
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)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
612,578
|
|
|
$
|
262,728
|
|
Warrant exercise receivable
|
|
|
104,558
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
14,981
|
|
|
|
10,491
|
|
Total current assets
|
|
|
732,117
|
|
|
|
273,219
|
|
Property and equipment, net
|
|
|
5,398
|
|
|
|
5,292
|
|
Other long-term assets
|
|
|
3,908
|
|
|
|
3,910
|
|
Total assets
|
|
$
|
741,423
|
|
|
$
|
282,421
|
|
Liabilities and stockholders’ equity
|
|
|
​
|
|
|
|
​
|
|
Current liabilities:
|
|
|
​
|
|
|
|
​
|
|
Accounts payable
|
|
$
|
9,513
|
|
|
$
|
22,039
|
|
Accrued professional fees
|
|
|
725
|
|
|
|
5,699
|
|
Other current liabilities
|
|
|
29,860
|
|
|
|
19,618
|
|
Total current liabilities
|
|
|
40,098
|
|
|
|
47,356
|
|
Common stock warrant liabilities
|
|
|
112,378
|
|
|
|
178,232
|
|
Other long-term liabilities
|
|
|
36
|
|
|
|
46
|
|
Total liabilities
|
|
|
152,512
|
|
|
|
225,634
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
​
|
|
|
|
​
|
|
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of March 31, 2021 and December 31, 2020
|
|
|
—
|
|
|
|
—
|
|
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 326 million and 292 million shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively; Class B common stock – 125 million shares authorized; 70 million and 78 million shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
|
|
|
39
|
|
|
|
37
|
|
Additional paid-in capital
|
|
|
880,779
|
|
|
|
295,065
|
|
Accumulated deficit
|
|
|
(291,907
|
)
|
|
|
(238,315
|
)
|
Total stockholders’ equity
|
|
|
588,911
|
|
|
|
56,787
|
|
Total liabilities and stockholders’ equity
|
|
$
|
741,423
|
|
|
$
|
282,421
|
|
See accompanying Notes to the Condensed Consolidated
Financial Statements.
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(1)
(Unaudited, in thousands, except for number
of shares and per share amounts)
​
|
|
Three Months Ended March 31,
|
|
​
|
|
2021
|
|
|
2020
|
|
Revenue
|
|
$
|
83,677
|
|
|
$
|
43,559
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
4,256
|
|
|
|
2,767
|
|
Research and development
|
|
|
7,282
|
|
|
|
4,366
|
|
Sales and marketing
|
|
|
96,323
|
|
|
|
46,825
|
|
General and administrative
|
|
|
27,284
|
|
|
|
4,833
|
|
Total costs and expenses
|
|
|
135,145
|
|
|
|
58,791
|
|
Loss from operations
|
|
|
(51,468
|
)
|
|
|
(15,232
|
)
|
Interest expense, net
|
|
|
(24
|
)
|
|
|
(316
|
)
|
Change in fair value of common stock warrant liabilities
|
|
|
(2,108
|
)
|
|
|
—
|
|
Other income, net
|
|
|
50
|
|
|
|
51
|
|
Loss before income taxes
|
|
|
(53,550
|
)
|
|
|
(15,497
|
)
|
Provision for income taxes
|
|
|
42
|
|
|
|
25
|
|
Net loss
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Net loss per share attributable to common stockholders – basic
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
Weighted average common shares outstanding – basic
|
|
|
356,818,954
|
|
|
|
278,348,903
|
|
Net loss attributable to common stockholders – diluted
|
|
$
|
(57,391
|
)
|
|
$
|
(15,522
|
)
|
Net loss per share attributable to common stockholders – diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
Weighted average common shares outstanding – diluted
|
|
|
359,827,649
|
|
|
|
278,348,903
|
|
(1) Retroactively restated for the reverse
recapitalization as described in Notes 1 and 3.
See accompanying Notes to the Condensed Consolidated
Financial Statements.
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)(1)
(Unaudited, in thousands, except for number
of shares)
|
|
Redeemable convertible
preferred stock
|
|
|
Preferred stock
|
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Total
stockholders’
equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
(deficit)
|
|
Balance at December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
286,074,923
|
|
|
$
|
29
|
|
|
$
|
108,892
|
|
|
$
|
(90,256
|
)
|
|
$
|
18,665
|
|
Issuance of common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
829,348
|
|
|
|
—
|
|
|
|
241
|
|
|
|
—
|
|
|
|
241
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
357
|
|
|
|
—
|
|
|
|
357
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,522
|
)
|
|
|
(15,522
|
)
|
Balance at March 31, 2020
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
286,904,271
|
|
|
$
|
29
|
|
|
$
|
109,490
|
|
|
$
|
(105,778
|
)
|
|
$
|
3,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
369,797,524
|
|
|
$
|
37
|
|
|
$
|
295,065
|
|
|
$
|
(238,315
|
)
|
|
$
|
56,787
|
|
Issuance of common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
268,426
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
Issuance of common stock upon exercise of warrants and other, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,741,863
|
|
|
|
—
|
|
|
|
172,519
|
|
|
|
—
|
|
|
|
172,519
|
|
Net cash contributions from follow-on offering
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,000,000
|
|
|
|
2
|
|
|
|
402,238
|
|
|
|
—
|
|
|
|
402,240
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,945
|
|
|
|
—
|
|
|
|
10,945
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(53,592
|
)
|
|
|
(53,592
|
)
|
Balance at March 31, 2021
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
395,807,813
|
|
|
$
|
39
|
|
|
$
|
880,779
|
|
|
$
|
(291,907
|
)
|
|
$
|
588,911
|
|
(1) Retroactively restated for the reverse
recapitalization as described in Notes 1 and 3.
See accompanying Notes to the Condensed Consolidated
Financial Statements.
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
​
|
|
Three Months Ended March 31,
|
|
​
|
|
2021
|
|
|
2020
|
|
Operating Activities
|
|
​
|
|
|
​
|
|
Net loss
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
555
|
|
|
|
308
|
|
Stock-based compensation
|
|
|
10,945
|
|
|
|
357
|
|
Accretion of unamortized discount and amortization of issuance costs
|
|
|
9
|
|
|
|
171
|
|
Change in fair value of common stock warrant liabilities
|
|
|
2,108
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
​
|
|
|
|
​
|
|
Prepaid expenses and other assets
|
|
|
(4,499
|
)
|
|
|
(2,290
|
)
|
Accounts payable
|
|
|
(4,060
|
)
|
|
|
2,109
|
|
Accrued professional fees
|
|
|
(851
|
)
|
|
|
—
|
|
Other liabilities
|
|
|
10,232
|
|
|
|
5,758
|
|
Net cash used in operating activities
|
|
|
(39,153
|
)
|
|
|
(9,109
|
)
|
Investing Activities
|
|
|
​
|
|
|
|
​
|
|
Purchases of property and equipment, including internal-use software
|
|
|
(659
|
)
|
|
|
(860
|
)
|
Net cash used in investing activities
|
|
|
(659
|
)
|
|
|
(860
|
)
|
Financing Activities
|
|
|
​
|
|
|
|
​
|
|
Borrowings under debt agreements, net of issuance costs
|
|
|
—
|
|
|
|
(95
|
)
|
Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs
|
|
|
402,817
|
|
|
|
—
|
|
Payments made towards offering costs
|
|
|
(13,167
|
)
|
|
|
—
|
|
Proceeds from exercise of stock options and issuance of common stock
|
|
|
12
|
|
|
|
241
|
|
Net cash provided by financing activities
|
|
|
389,662
|
|
|
|
146
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
349,850
|
|
|
|
(9,823
|
)
|
Cash, cash equivalents and restricted cash – beginning of year
|
|
|
265,648
|
|
|
|
28,548
|
|
Cash, cash equivalents and restricted cash – end of year
|
|
$
|
615,498
|
|
|
$
|
18,725
|
|
Supplemental cash flow data:
|
|
|
​
|
|
|
|
​
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
15
|
|
|
$
|
178
|
|
Noncash investing and financing activities:
|
|
|
​
|
|
|
|
​
|
|
Deferred offering costs in accounts payable and accrued liabilities
|
|
$
|
1,449
|
|
|
$
|
—
|
|
Warrant exercise receivable
|
|
$
|
104,558
|
|
|
$
|
—
|
|
Warrant liability reclassified to additional paid-in capital
|
|
$
|
67,961
|
|
|
$
|
—
|
|
See accompanying Notes to the Condensed Consolidated
Financial Statements.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
1. Description of the Business and Basis of Presentation
Business
Skillz is a mobile eSports platform, driving the
future of entertainment by accelerating the convergence of sports, video games and media. The Company’s principal activities are
to develop and support a proprietary online-hosted technology platform that enables independent game developers to host tournaments and
provide competitive gaming activity (“Competitions”) to end-users worldwide.
The Company was originally incorporated in Delaware
on March 2, 2020 as a special purpose acquisition company under the name Flying Eagle Acquisition Corp. (“FEAC”) for
the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination
involving FEAC and one or more businesses. On December 16, 2020 (the “Closing”), the Company consummated the merger agreement
(the “Merger Agreement”) dated September 1, 2020, by and among, FEAC, Merger Sub Inc., a Delaware corporation (“Merger
Sub”), Skillz Inc., a Delaware corporation (“Old Skillz”) and Andrew Paradise (the “Founder”), solely in
his capacity as the representative of the stockholders of Old Skillz.
Pursuant to the terms of the Merger Agreement,
a business combination between FEAC and Old Skillz was effected through the merger of Merger Sub with and into Old Skillz, with Old Skillz
surviving as the surviving company and a wholly-owned subsidiary of FEAC (the “Merger” and collectively with the other transaction
described in the Merger Agreement, the “Business Combination”). On the closing date of the Business Combination, FEAC changed
its name to Skillz Inc. (the “Company” or “Skillz”) and Old Skillz changed its name to Skillz Platform Inc. The
Company’s common stock is now listed on the NYSE under the symbol “SKLZ” and warrants to purchase the common stock at
an exercise price of $11.50 per share are listed on the NYSE under the symbol “SKLZ.WS.”
Skillz Platform Inc. was originally formed as
Professional Gaming, LLC on March 28, 2012, changed its name to Lookout Gaming, LLC on May 18, 2012, and to Skillz LLC on January 31,
2013, before converting to a Delaware corporation with the name Skillz Inc. on April 29, 2013.
Basis of Presentation
The
Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).
Pursuant to the Merger Agreement, the merger between
Merger Sub and Old Skillz was accounted for as a reverse recapitalization in accordance with U.S. GAAP (the “Reverse Recapitalization”).
Under this method of accounting, FEAC was treated as the “acquired” company and Old Skillz is treated as the acquirer for
financial reporting purposes.
Accordingly, for accounting purposes, the Reverse
Recapitalization was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization.
The net assets of FEAC are stated at historical cost, with no goodwill or other intangible assets recorded.
Old Skillz was determined to be the accounting
acquirer based on the following predominant factors:
• Old
Skillz’s existing stockholders have the greatest voting interest in the Company;
• The
largest individual minority stockholder in the Company is an existing stockholder of Old Skillz;
• Old
Skillz’s directors represented the majority of the new board of directors of the Company;
• Old
Skillz’s senior management is the senior management of the Company; and
• Old
Skillz is the larger entity based on historical revenue and has the larger employee base.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
The consolidated assets, liabilities and results
of operations prior to the Reverse Recapitalization are those of Old Skillz. The shares and corresponding capital amounts and losses per
share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio of 0.7471
established in the Business Combination.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and
regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion
of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating
results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the fiscal year ended December 31,
2020, as filed with the SEC on May 13, 2021.
Comprehensive Loss
Through March 31, 2021, there are no components
of comprehensive loss which are not included in net loss; therefore, a separate statement of comprehensive loss has not been presented.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts
of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported
amounts of revenues and expenses during the periods presented. Estimates are used in several areas including, but not limited to, stock-based
compensation and valuation of Public and Private Common Stock Warrants. The Company bases these estimates on historical experience and
on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.
Revenue Recognition
The Company generates substantially all its revenues
by providing a service to the game developers aimed at improving the monetization of their game content. The monetization service provided
by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. Skillz
provides developers with a software development kit (“SDK”) that they can download and integrate with their existing games.
The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the
developer.
The Company recognizes revenue for its services
in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC
606”).
Revenues from Contracts with Customers
The Company applies the five-step model to achieve
the core principle of ASC 606. The Company determined that its customer in the provision of its technology platform and services is the
game developer. The Company’s ordinary activities consist of providing game developers services through access to its technology
platform using the Skillz SDK. The SDK acts as an application programming interface enabling communication of data between Skillz and
the game developers, which when integrated with the developer’s game content, facilitates end-user registration into Competitions,
managing and hosting end-user Competition accounts, matching players of similar skill levels, collecting end-user entry fees, distributing
end-user prizes, resolving end-user disputes pertaining to their participation in Competitions, and running third-party marketing campaigns
(“Monetization Services”).
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
The Company provides Monetization Services to
game developers enabling them to offer competitive games to their end-users. These activities are not distinct from each other as the
Company provides an integrated service enabling the game developers to provide the competitive game service to the end-users, and as a
result, they do not represent separate performance obligations. The Company is entitled to a revenue share based on total entry fees for
paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide
the Monetization Services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash
deposits received from end-users. End-user incentives are not paid for by game developers. In addition, the Company reduces revenue for
end-user incentives which are treated as a reduction of revenue.
The Company collects the entry fees and related
charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds
its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is
not subject to significant judgment.
Revenue is recognized at the time the performance
obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that the Company
expects to receive in exchange for the Monetization Services. The Company recognizes revenue upon completion of a game, which is when
its performance obligation to the game developer is satisfied. The Company does not have contract assets or contract liabilities as the
payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, the Company has the
right to receive payment for the services rendered. The Company’s agreements with game developers can generally be terminated for
convenience by either party upon thirty days prior written notice, and in certain of our larger developer agreements, the developer, if
required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company
is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition
does not extend beyond the contractual notification period. The Company does not have any transaction price allocated to performance obligations
that are unsatisfied (or partially satisfied) as of March 31, 2021 and 2020.
Games provided by two developer partners accounted
for 42% and 41% of the Company’s revenue in the three months ended March 31, 2021 and 74% and 12% of the Company’s revenue
in the three months ended March 31, 2020. The Company did not generate material international revenue in the three months ended
March 31, 2021 and 2020.
End-User Incentive Programs
To drive traffic to the platform, the Company
provides promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer
may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction
of revenue at the later of when revenue is recognized or when the Company pays or promises to pay the incentive. Promotions and incentives
recorded as sales and marketing expense are recognized when the related cost is incurred by the Company. In either case, the promotions
and incentives are recognized when they are used by end-users to enter into a paid Competition.
|
•
|
Marketing promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions
in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based
on the Company’s agreement with its developers, the Company considers that the game developers have a valid expectation that certain
incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably
available to the game developers regarding the Company’s customary business practices, published policies and specific statements.
|
An example of an incentive for which the game developer has
a valid expectation is Ticketz, which are a currency earned for every Competition played based on the amount of the entry fee. Ticketz
can be redeemed for Bonus Cash. Another example is initial deposit Bonus Cash which is a promotional incentive that can be earned in fixed
amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future
paid entry fee Competitions and cannot be withdrawn by end-users.
For the three months ended March 31, 2021 and 2020,
the Company recognized a reduction of revenue of $17.6 million and $10.0 million, respectively, related to these end-user incentives.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
|
•
|
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 March 31, 2021 and 2020,
the Company recognized sales and marketing expense of $33.3 million and $15.6 million, respectively, related to these end-user incentives.
Refunds
From time to time, the Company issues credits
or refunds to end-users that are unsatisfied by the level of service provided by the game developer. There is no contractual obligation
for the Company to refund such end-users nor is there a valid expectation by the game developers for the Company to issue such credits
or refunds to end-users on their behalf. The Company accounts for credits or refunds, which are not recoverable from the game developer,
as sales and marketing expenses when incurred.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and
money market funds with maturities of three months or less when purchased.
Restricted cash maintained under an agreement
that legally restricts the use of such funds is not included within cash and cash equivalents and is reported within other long-term assets.
Restricted cash is comprised of $2.9 million which is pledged in the form of a letter of credit for the Company’s new headquarters
in San Francisco.
A reconciliation of the Company’s cash and
cash equivalents in the Condensed Consolidated Balance Sheet to cash, cash equivalents and restricted cash in the Condensed Consolidated
Statement of Cash Flows is as follows:
​
|
|
March 31,
|
|
|
December 31,
|
|
​
|
|
2021
|
|
|
2020
|
|
Cash and cash equivalents
|
|
$
|
612,578
|
|
|
$
|
262,728
|
|
Restricted cash included in other long-term assets
|
|
|
2,920
|
|
|
|
2,920
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
615,498
|
|
|
$
|
265,648
|
|
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
all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed
consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would
transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such
as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy,
which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest
level of input that is available and significant to the fair value measurement:
Level 1 — Observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs reflect quoted
prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets;
inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3 — Unobservable inputs reflecting
management’s estimate of assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required
to be consistent with market participant assumptions that are reasonably available.
The fair value hierarchy also requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities
measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Advertising and Promotional Expense
Advertising and promotional expenses are included
in sales and marketing expenses within the statements of operations and are expensed when incurred. For the three months ended March 31,
2021 and 2020, advertising expenses, not including marketing promotions related to the Company’s end-user incentive programs, were
$54.5 million and $27.0 million, respectively.
Redeemable Convertible Preferred Stock
Prior to the Business Combination, preferred stock
that was redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence
of an event that is not solely within the control of the Company was classified outside of permanent equity. Convertible preferred stock
that was probable of becoming redeemable in the future was recorded at its maximum redemption amount at each balance sheet date, with adjustments
to the redemption amount recorded through equity.
All redeemable convertible preferred stock previously
classified outside of permanent equity was retroactively adjusted, converted into common stock, and reclassified to permanent equity as
a result of the Business Combination. Additionally, changes to the redemption values of the redeemable convertible preferred stock were
eliminated as a result of the retroactive adjustment. The Company recorded changes to the redemption value of its redeemable convertible
preferred stock of $158.4 million in the year-to-date period ended March 31, 2020. The changes to the redemption values of the redeemable
convertible preferred stock were previously accounted for as adjustments to net loss available to common stockholders for each of the
respective periods ended. For further details regarding the accounting for the Business Combination, see Note 3.
Public and Private Common Stock Warrant Liabilities
As part of FEAC’s initial public offering,
FEAC issued to third party investors 69.0 million units, consisting of one share of Class A common stock of FEAC and one-fourth
of one warrant, at a price of $10.00 per unit. Each whole warrant entitles the holder to purchase one share of Class A common stock
at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously with the closing of FEAC’s initial
public offering, FEAC completed the private sale of 10,033,333 warrants to FEAC’s sponsor at a purchase price of $1.50 per warrant
(the “Private Warrants”). In connection with the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 Private
Warrants. Each Private Warrant allows the sponsor to purchase one share of Class A common stock at $11.50 per share. Subsequent to
the Business Combination, 8,157,942 Public Warrants and 5,016,666 Private Warrants remained outstanding as of March 31, 2021.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
The Private Warrants and the shares of common
stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable until after the completion of a Business
Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis,
and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are
held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company
and exercisable by such holders on the same basis as the Public Warrants.
The Company evaluated the Public and Private Common
Stock Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, (“ASC 815-40”),
and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public
and Private Common Stock Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of
our Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender
offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company
concluded that the Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private
Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance
sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of operations at
each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they
were valued based on their trading price as of each reporting date.
The Private Warrants were valued using the Black-Scholes-Merton
Option (“BSM”) pricing model that is based on the individual characteristics of the warrants on the valuation date, which
include the Company’s stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as
the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions
used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability
are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing
of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases
in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely,
decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding
decrease in the fair value of the warrant liability.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
its long-term debt, preferred stock and stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements
for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of
the host contract. Bifurcated embedded derivatives and freestanding derivative financial instruments that are classified as assets or
liabilities are recognized at fair value with changes in fair value recognized as a component of Other income (expense), net in the Statements
of Operations. Bifurcated embedded derivatives and freestanding derivative financial instruments are classified within as Other long-term
assets and Other current liabilities in the Company’s Consolidated Balance Sheets.
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 and is not reversed if the market condition is not
satisfied. See Note 10 for more information. The Company accounts for forfeitures as they occur. Stock-based awards granted to employees
are primarily stock options.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
The fair value of stock options that vest solely
based on a service condition is determined by the BSM pricing model on the date of grant. This valuation model for stock-based compensation
expense requires the Company to make assumptions and judgments about the variables used in the BSM model, including the deemed fair value
of common stock, expected term, expected volatility, risk-free interest rate, and dividend yield. These judgments are made as follows:
|
•
|
Fair value of common stock —Subsequent to the Business Combination, the fair value of the Company’s common stock
is based on the closing market price on the date of grant. Prior to the Business Combination, the absence of an active market for
the Company’s common stock required the Company to estimate the fair value of common stock for purposes of granting stock options
and for determining stock-based compensation expense for the periods presented.
|
The Company considered numerous factors in assessing the
fair value of common stock prior to the Business Combination, including:
|
•
|
The results of contemporaneous unrelated third-party valuations of the Company’s common stock
|
|
•
|
The prices of the recent redeemable convertible preferred stock sales by the Company to investors
|
|
•
|
The rights, preferences, and privileges of preferred stock relative to those of common stock
|
|
•
|
Market multiples of comparable public companies in the industry as indicated by their market capitalization and guideline merger and
acquisition transactions
|
|
•
|
The Company’s performance and market position relative to competitors, which may change from time to time
|
|
•
|
The Company’s historical financial results and estimated trends and prospects for the Company’s future performance
|
|
•
|
The economic and competitive environment
|
|
•
|
The financial condition, results of operations, and capital resources
|
|
•
|
The valuation of comparable companies
|
|
•
|
The likelihood and timeline of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing
market conditions
|
|
•
|
Any adjustments necessary to recognize a lack of marketability for the Company’s common stock
|
|
•
|
Precedent sales of or offers to purchase the Company’s capital stock
|
|
•
|
Expected term — The Company determines the expected term based on the average period the stock options are expected
to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period,
as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior.
|
|
•
|
Expected volatility — Given the limited market trading history prior to the Business Combination and no public
market for the Company’s shares prior to the Business Combination, the expected volatility rate is based on an average historical
stock price volatility of comparable publicly-traded companies in the industry group.
|
|
•
|
Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected term of the option.
|
|
•
|
Expected dividend yield — The Company has not paid and does not expect to pay dividends. Consequently, the Company
uses an expected dividend yield of zero.
|
SKILLZ INC.
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
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, and expected capital raise percentage.
Given the limited market trading history subsequent to the Business Combination and no public market for the Company’s shares prior
to the Business Combination, the Company estimates the volatility of common stock on the date of grant based on the weighted average
historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimates the expected term
based on various exercise scenarios, as these awards are not considered “plain vanilla.” The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates the expected date of a qualifying event and the
expected capital raise percentage based on management’s expectations at the time of measurement of the award’s value.
Recently Issued Accounting Pronouncements Not Yet Adopted
As an emerging growth company (“EGC”),
the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements
applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended
transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC.
In August 2020, the FASB issued Accounting
Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major
separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts
to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The
ASU is effective for public companies, excluding entities eligible to be smaller reporting companies, for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than
fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s fiscal year.
The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill
and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset
in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of operations as the
costs related to the hosting fees. For public business entities, this standard is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. For all other entities, this standard is effective for fiscal years
beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption
is permitted for all entities, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively
to all implementation costs incurred after adoption. The Company will be required to adopt this standard in its annual period ending
December 31, 2021 and is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13
(Topic 326), Financial Instruments — Credit Losses. ASU 2016-13 changes how to recognize expected
credit losses on financial assets. The standard requires more timely recognition of credit losses on loans and other financial assets
and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually
be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition
of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative
effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments — Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13
for non-public companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements for future periods and has not
elected early adoption.
SKILLZ INC.
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
In February 2016, the FASB issued ASU 2016-02
(Topic 842), Leases, and issued subsequent amendments to the initial guidance or implementation guidance including ASU 2017-13,
2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively, including ASU 2016-02, “ASC 842”), which supersedes the guidance
in topic ASC 840, Leases. The new standard requires lessees to classify leases as either finance or operating based on whether
or not the lease is effectively a financed purchase by the lessee. This classification will determine whether related expenses are recognized
based on the effective interest method or on a straight-line basis over the term of the lease. For any leases with a term of greater
than 12 months, ASU 2016-02 requires lessees to recognize a lease liability for the obligation to make the lease payments arising
from a lease, and a right-of-use asset for the right to use the underlying asset for the lease term. An election can be made to account
for leases with a term of 12 months or less similar to existing guidance for operating leases under ASC 840. The new standard will
also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts
recorded in the financial statements. For non-public entities, ASU No. 2016-02 is effective for financial statements issued for
fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
Early adoption is permitted. The Company is in the initial stage of its assessment of the new standard and is currently evaluating the
quantitative impact of adoption, and the related disclosure requirements. The Company expects that the adoption will result in the recognition
of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on
the Company’s balance sheet. The Company does not expect the adoption of Topic 842 to have a material impact to the statements
of operations or to have any impact on its cash flows from operating, investing, or financing activities.
3. Business Combination
As discussed in Note 1, on December 16,
2020, the Company consummated the Merger Agreement dated September 1, 2020, with Old Skillz surviving the merger as a wholly owned
subsidiary of the Company.
Shares of Old Skillz common stock issued and
outstanding were canceled and converted into the right to receive 0.7471 shares (the "Exchange Ratio") of common stock. Unless
otherwise stated, the Exchange Ratio was applied to the number of shares and share prices of Old Skillz throughout these consolidated
financial statements.
At the effective time of the Business Combination
(the “Effective Time”), and subject to the terms and conditions of the Merger Agreement, holders of 359,518,849 shares of
Old Skillz (“Stock Election Shares”) received merger consideration in the form of 191,932,860 shares of the Company’s
Class A common stock and 76,663,551 shares of the Company’s Class B common stock, and holders of 75,786,931 shares of
Old Skillz (“Cash Election Shares”) received cash consideration of $566,204,152.
Pursuant to the Merger Agreement, Eagle Equity
Partners II, LLC (the “Sponsor”) delivered 10,000,000 of its shares of FEAC Class B common stock into escrow that were
subject to forfeiture if certain earnout conditions described more fully in the Merger Agreement were not satisfied. The earnout conditions
have been fully satisfied and, in March 2021, the Earnout Shares (as defined below) were released from escrow in accordance with
the terms of the Merger Agreement. When the earnout conditions were fully satisfied, 5,000,000 of such shares were released to the Sponsor
in the form of shares of the Company’s Class A common stock (the “Sponsor Earnout Shares”), and the other 5,000,000
shares were released to the Old Skillz stockholders (the “Skillz Earnout Shares”, and collectively with the Sponsor Earnout
Shares, the “Earnout Shares”), who received shares of the Company’s common stock as a result of the Business Combination
in the form of shares of Class A common stock of the Company (other than the Founder and a trust for the benefit of his family members,
who received shares of Class B common stock of the Company). The Earnout Shares are accounted for as equity classified equity instruments,
were included as merger consideration as part of the Reverse Recapitalization, and recorded in additional paid-in capital.
In connection with the Business Combination,
certain institutional investors (the “Investors”) purchased from the Company an aggregate of 15,853,052 shares of Class A
common stock (the “Private Placement”), for a purchase price of $10.00 per share and an aggregate purchase price of $158.5 million
(the “Private Placement Shares”), pursuant to separate subscription agreements (each, a “Subscription Agreement”)
entered into effective as of September 1, 2020.
The Business Combination is accounted for as
a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, FEAC was treated as the “acquired”
company and Old Skillz is treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the Business
Combination was treated as the equivalent of Old Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization.
The net assets of FEAC were stated at historical cost, with no goodwill or other intangible assets recorded.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
Upon the closing of the Business Combination,
the Company's certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares
of all classes of capital stock to 635,000,000 shares, $0.0001 par value per share, of which, 500,000,000 shares are designated as Class A
common stock, 125,000,000 shares are designated as Class B common stock, and 10,000,000 shares are designated as preferred stock.
4. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted
of the following as of March 31, 2021 and December 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Credit card processing reserve
|
|
$
|
6,861
|
|
|
$
|
5,854
|
|
Prepaid expenses
|
|
|
6,740
|
|
|
|
3,772
|
|
Other current assets
|
|
|
1,380
|
|
|
|
865
|
|
Prepaid expenses and other current assets
|
|
$
|
14,981
|
|
|
$
|
10,491
|
|
Property and Equipment, Net
Property and equipment consisted of the following
as of March 31, 2021 and December 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Capitalized internal-use software
|
|
$
|
6,568
|
|
|
$
|
6,167
|
|
Computer equipment and servers
|
|
|
707
|
|
|
|
631
|
|
Furniture and fixtures
|
|
|
184
|
|
|
|
184
|
|
Leasehold improvements
|
|
|
114
|
|
|
|
114
|
|
Construction in progress
|
|
|
1,219
|
|
|
|
1,037
|
|
Total property and equipment
|
|
|
8,792
|
|
|
|
8,133
|
|
Accumulated depreciation and amortization
|
|
|
(3,394
|
)
|
|
|
(2,841
|
)
|
Property and equipment, net
|
|
$
|
5,398
|
|
|
$
|
5,292
|
|
Depreciation and amortization expense related
to property and equipment was $0.6 million and $0.3 million in the three months ended March 31, 2021 and 2020, respectively.
Other Current Liabilities
Other current liabilities consisted of the following as of March 31,
2021 and December 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accrued sales and marketing expenses
|
|
$
|
13,340
|
|
|
$
|
7,204
|
|
Accrued compensation
|
|
|
6,330
|
|
|
|
3,825
|
|
End-user liability, net
|
|
|
4,479
|
|
|
|
2,789
|
|
Accrued developer revenue share
|
|
|
1,143
|
|
|
|
907
|
|
Other accrued expenses
|
|
|
4,568
|
|
|
|
4,893
|
|
Other current liabilities
|
|
$
|
29,860
|
|
|
$
|
19,618
|
|
SKILLZ INC.
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
5. Fair Value Measurements
As of March 31, 2021 and December 31,
2020, the recorded values of cash and cash equivalents, restricted cash 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 March 31, 2021 and December 31, 2020 were $612.6 million and $262.7 million, respectively, and were comprised of cash
on hand and money market funds classified within Level 1 of the fair value hierarchy.
Public and Private Common Stock Warrants
|
|
Fair Value Measured as of March 31, 2021
|
|
Liabilities included in:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Public Common Stock Warrants
|
|
$
|
62,490
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,490
|
|
Private Common Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
49,888
|
|
|
|
49,888
|
|
Total fair value
|
|
$
|
62,490
|
|
|
$
|
—
|
|
|
$
|
49,888
|
|
|
$
|
112,378
|
|
|
|
Fair Value Measured as of December 31, 2020
|
|
Liabilities included in:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Public Common Stock Warrants
|
|
$
|
124,545
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,545
|
|
Private Common Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
53,687
|
|
|
|
53,687
|
|
Total fair value
|
|
$
|
124,545
|
|
|
$
|
—
|
|
|
$
|
53,687
|
|
|
$
|
178,232
|
|
The Public Warrants were classified within Level
1 as they are publicly traded and had an observable market price in an active market. The Private Warrants were classified within Level
3 as they were valued based on a BSM pricing model, which involved the use of certain unobservable inputs, such as expected volatility
estimated based on the average historical stock price volatility of comparable companies. As of December 31, 2020, the fair value
of the Private Warrants liability was $53.7 million. During the three months ended March 31, 2021, the fair value of the Private
Warrants liability decreased by $3.8 million. As of March 31, 2021, the fair value of the Private Warrants was $49.9 million.
6. Commitments and Contingencies
Legal Matters
The Company is a party to certain claims, suits,
and proceedings which arise in the ordinary course of business. The Company records a liability when it believes that it is probable
that a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible
and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s
opinion, resolution of pending matters is not expected to have a material adverse impact on the results of operations, cash flows, or
the Company’s financial position, as of March 31, 2021. Given the unpredictable nature of legal proceedings, there is a reasonable
possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the results of operations,
cash flows, or financial position in a particular period. However, based on the information known by the Company, any such amount is
either immaterial or it is not possible to provide an estimated range of any such possible loss.
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
7. Common Stock Warrants
As of March 31, 2021, the Company had 8,157,942
Public Warrants and 5,016,666 Private Warrants outstanding. During the three months ended March 31, 2021, 9,092,053 Public Warrants
were exercised for total proceeds of $104.6 million, which had not been collected are recorded as a warrant exercise receivable in the
consolidated balance sheet.
As part of FEAC’s initial public offering,
17,250,000 Public Warrants were sold. The Public Warrants entitle the holder thereof to purchase one share of Class A common stock
at a price of $11.50 per share, subject to adjustments. The Public Warrants may be exercised only for a whole number of shares of Class A
common stock. No fractional shares will be issued upon exercise of the warrants. The Public Warrants will expire at 5:00 p.m. New
York City time on December 16, 2025, or earlier upon redemption or liquidation. The Public Warrants are listed on the NYSE under
the symbol “SKLZ.WS.”
The Company may call the Public Warrants for
redemption starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than
30 days’ prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of Class A
common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day
prior to the date the Company sends the notice of redemption to the warrant holders provided there is an effective registration statement
covering the shares of Class A common stock issuable upon exercise of the warrants.
Simultaneously with FEAC’s initial public
offering, FEAC consummated a private placement of 10,033,333 Private Placement Warrants with FEAC’s sponsor. In connection with
the Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 private placement warrants. Each Private Placement Warrant
is exercisable for one share of Class A common stock at a price of $11.50 per share, subject to adjustment.
The Private Warrants are identical to the Public
Warrants, except that the Private Warrants and the shares of Class A common stock issuable upon exercise of the Private Warrants
will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited
exceptions. Additionally, the Private Warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’
permitted transferees. If the Private Warrants are held by someone other than their initial purchasers or their permitted transferees,
the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
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, expect with respect to voting and conversion. Holders of Class A common
stock are entitled to one vote per share and holders of Class B common stock are entitled to 20 votes per share. Shares of Class B
common stock are convertible into an equivalent number of shares of Class A common stock and generally convert into shares of Class A
common stock upon transfer. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid
on a pro rata basis. On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the
Class A common stock and Class B common stock.
As of March 31, 2021, the Company has authorized
a total of 635 million shares, consisting of 500 million shares of Class A common stock, par value $0.0001 per share (“Class A
common stock”), 125 million shares of Class B common stock, par value $0.0001 per share (“Class B common stock”),
and 10 million shares of preferred stock, par value $0.0001 per share (“preferred stock”).
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited, amounts in tables are in thousands,
unless otherwise noted)
In March 2021, the Company completed an
underwritten public offering of its Class A common stock and issued 17,000,000 shares of Class A common stock, for an aggregate
purchase price of $408.0 million, before issuance costs of $5.9 million. In connection with the public offering, certain stockholders
of the Company sold an aggregate of 19,800,000 shares, including the full exercise of the underwriters’ option to purchase an additional
4,800,000 additional shares. The purchase price per share, net of the underwriter discount, was $23.34. The Company incurred transaction
costs of $6.8 million in connection with this sale of shares by certain stockholders, which was recorded as expense during the quarter.
9. Stock-Based Compensation
The following table summarizes stock-based compensation
expense recognized for the three months ended March 31, 2021 and 2020 as follows:
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
1,207
|
|
|
$
|
205
|
|
Sales and marketing
|
|
|
1,838
|
|
|
|
116
|
|
General and administrative
|
|
|
7,900
|
|
|
|
36
|
|
Total stock-based compensation expense
|
|
$
|
10,945
|
|
|
$
|
357
|
|
Equity Incentive Plans
Skillz Inc. 2020 Omnibus Incentive Plan
In December 2020, the Board of Directors
of the Company adopted the Skillz Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective upon
consummation of the Business Combination and succeeds the Company’s legacy equity incentive plans. Under the 2020 Plan, the Company
may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are
granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are
exercisable over a maximum term of 10 years from the date of grant. Restricted stock units (“RSUs”) are also granted under
the 2020 Plan. These awards typically have a cliff vesting period of 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 Business
Combination, the Company entered into certain option agreements that include vesting conditions contingent upon the attainment of volume
weighted average price targets related to the Company’s Class A common stock on the NYSE.
The 2020 Plan permits the Company to deliver
up to 47,841,859 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 15,000,000 shares which may be of
Class A and/or Class B common stock, 24,669,278 shares of Class A common stock and 8,172,581 shares of Class B common
stock. The total number of shares of Class A common stock and Class B common stock that will be reserved and that may be issued
under the 2020 Plan will automatically increase on the first trading day of each calendar year, beginning with calendar year 2021, by
a number of shares equal to five percent (5%) of the total number of shares of Class A common stock and Class B common stock,
respectively, outstanding on the last day of the prior calendar year.
SKILLZ
INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited,
amounts in tables are in thousands, unless otherwise noted)
Stock Options and Restricted Stock Units
Stock option and RSU activity during the three
months ended March 31, 2021 is as follows (in thousands, except for share, per share, and contractual term data):
​
|
|
|
|
|
Options Outstanding
|
|
|
Restricted Stock Units
|
|
|
|
Number of
Shares
Available for
Issuance
Under the
Plan
|
|
|
Number of
Shares
Outstanding
Under the
Plan
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number of
Plan shares
outstanding
|
|
|
Weighted-
Average
Grant Date
Fair Value
per share
|
|
Balance at December 31, 2020
|
|
|
35,500,603
|
|
|
|
38,404,493
|
|
|
$
|
5.89
|
|
|
|
8.27
|
|
|
$
|
542,074
|
|
|
|
341,256
|
|
|
$
|
17.68
|
|
Options and restricted stock units granted
|
|
|
(1,206,775
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,206,775
|
|
|
|
27.40
|
|
Options exercised and restricted stock units released
|
|
|
—
|
|
|
|
(268,426
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Options and restricted stock units canceled
|
|
|
185,920
|
|
|
|
(159,224
|
)
|
|
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
(26,696
|
)
|
|
|
17.68
|
|
Balance at March 31, 2021
|
|
|
34,479,748
|
|
|
|
37,976,843
|
|
|
$
|
5.90
|
|
|
|
8.02
|
|
|
$
|
497,842
|
|
|
|
1,521,335
|
|
|
$
|
25.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
|
|
|
|
14,248,234
|
|
|
$
|
0.18
|
|
|
|
6.45
|
|
|
$
|
282,364
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2021
|
|
|
|
|
|
|
15,392,444
|
|
|
$
|
0.20
|
|
|
|
6.26
|
|
|
$
|
290,033
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2020
|
|
|
|
|
|
|
24,156,259
|
|
|
$
|
9.25
|
|
|
|
9.34
|
|
|
$
|
259,710
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2021
|
|
|
|
|
|
|
22,584,399
|
|
|
$
|
9.84
|
|
|
|
9.22
|
|
|
$
|
207,809
|
|
|
|
|
|
|
|
|
|
SKILLZ
INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited,
amounts in tables are in thousands, unless otherwise noted)
The number of unvested stock options as of March 31,
2021 and December 31, 2020 does not include 13.1 million and 13.3 million shares of restricted common stock, respectively, previously
issued upon the early exercise of grants by certain executives.
As of March 31, 2021, unrecognized stock-based
compensation expense related to unvested stock options, restricted common stock, and RSUs was $180.4 million. The weighted-average
period over which such compensation expense will be recognized is 3.42 years.
The aggregate intrinsic value of options exercised
was $7.9 million and $0.3 million during the three months ended March 31, 2021 and 2020, respectively.
The assumptions used to estimate the fair value
of stock options granted and the resulting fair values for the three months ended March 31, 2020 were as follows. No options were
granted during the three months ended March 31, 2021:
|
|
Three Months Ended March 31,
|
|
|
2020
|
Expected volatility
|
|
47.19 % – 47.68 %
|
Risk-free interest rate
|
|
1.44 %
|
Expected term (in years)
|
|
5.95 – 6.14
|
Expected dividend yield
|
|
—
|
Weighted average estimated fair value of stock options granted during the period
|
|
$2.77
|
10. Income Taxes
The Company’s income tax provision was $42 thousand
and $25 thousand for the three months ended March 31, 2021 and 2020, respectively. This represents an effective tax rate for
the respective periods of -0.082% and -0.162%. The Company has historically been in an overall loss position and is only subject to state
taxes. The Company maintains a full valuation allowance for all of its deferred tax assets. The effective tax rate differs from the federal
statutory rate due to the change in need for valuation allowance and state taxes.
11. Related-Party Transactions
The Company did not have any significant related
party transactions in the three months ended March 31, 2021 and 2020 other than stock option grants made to certain executives
and the secondary sale as part of the follow-on offering.
12. Net Loss Per Share
Net loss per share calculations for all periods
prior to the Business Combination have been retrospectively adjusted for the equivalent number of shares outstanding immediately after
the Business Combination to effect the reverse recapitalization. Subsequent to the Business Combination, net loss per share was calculated
based on the weighted average number of common stock then outstanding.
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):
SKILLZ
INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited,
amounts in tables are in thousands, unless otherwise noted)
|
|
Three Month Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
Net loss – Basic
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
356,818,954
|
|
|
|
278,348,903
|
|
Net loss per share attributable to common stockholders – basic
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss – Basic
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Decrease in fair value of Private common stock warrant liabilities
|
|
|
(3,799
|
)
|
|
|
—
|
|
Net loss – Diluted
|
|
$
|
(57,391
|
)
|
|
$
|
(15,522
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
356,818,954
|
|
|
|
278,348,903
|
|
Incremental common shares from assumed exercise of Private Warrants
|
|
|
3,008,695
|
|
|
|
—
|
|
Weighted average common shares outstanding – diluted
|
|
|
359,827,649
|
|
|
|
278,348,903
|
|
Net loss per share attributable to common stockholders – diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
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):
|
|
Number of Securities Outstanding at
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Common and preferred stock warrants
|
|
|
8,157,942
|
|
|
|
3,635,180
|
|
Common stock options
|
|
|
51,121,618
|
|
|
|
40,326,727
|
|
Restricted stock units
|
|
|
1,521,335
|
|
|
|
—
|
|
Total
|
|
|
60,800,895
|
|
|
|
43,961,907
|
|
13. Subsequent Events
In April and May of 2021, 426,168 Public
Warrants were exercised at a price of $11.50 per share.
On May 4, 2021, the Company entered into
a transition and release agreement providing for Mr. Henry’s retirement from his position as Chief Financial Officer (“CFO”)
of the Company, effective June 20, 2021. As part of the transition and release agreement, certain stock options of the CFO will vest
through the separation date, which the Company estimates will result in approximately $7.0 million of stock-based compensation expense
recorded in the condensed consolidated statement of operations through the third quarter of 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand
the results of operations and financial condition of Skillz Inc. MD&A is provided as a supplement to, and should be read in conjunction
with, our Annual Report on Form 10-K/A for the year ended December 31, 2020, and our financial statements and the accompanying
Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Overview
We operate a marketplace that
connects the world through competition, serving both developers and users. Our platform enables fair, fun and competitive gaming experiences
and the trust we foster with users is the foundation upon which our community is built. We believe our marketplace benefits from a powerful
network effect: compelling content attracts users to our platform, while the increasing size of our audience attracts more developers
to create new interactive experiences on our platform.
Skillz
was founded in 2012 by Andrew Paradise and Casey Chafkin with the vision to make eSports accessible to everyone possible. Today, the platform
has 2.7 million monthly active users (“MAUs”) and hosts an average of over 6.5 million daily tournaments, including
1.9 million paid entry daily tournaments, offering over $150 million in prizes each month. As of March 31, 2021, we had over
9,000 registered game developers on our platform that have launched a game integration. For the three months ended March 31, 2021,
Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 76% of our revenue. For the three months ended March 31, 2020, Solitaire
Cube and 21 Blitz (each developed by Tether) together with Blackout Bingo (developed by Big Run) accounted for 78% of revenue. For
the three months ended March 31, 2021, Tether and Big Run accounted for 42% and 41%, respectively, of our revenue. For the three
months ended March 31, 2020, Tether and Big Run accounted for 74% and 12%, respectively, of our revenue. Our top titles rotate
over time as more games generate success on the Skillz platform. In the three months ended March 31, 2021, the number of games that
generated over $1 million of annualized GMV has grown 54% to 40 from 26 in the three months ended March 31, 2020. GMV represents
entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives.
Our culture is built upon a set
of values established by our founders, aligning the company and its employees in a common vision. Our seven values are: Honor; Mission;
Collaboration; Productivity; Willingness; Frugality; and Balance. Our approach has focused on trust and fairness for users enabling game
developers to focus on what they do best: build great content.
Our technology capabilities are
industry-leading and provide the tools necessary for developers to compete with the largest and most sophisticated mobile game developers
in the world. Our easy-to-integrate software development kit (“SDK”) and developer console allow our developers to monitor,
integrate and update their games seamlessly over the air. We ingest and analyze over 300 data points from each game play session, enhancing
our data-driven algorithms and LiveOps systems. Moreover, we have developed a robust platform enabling fun, fair and meaningful competitive
gameplay.
For
the three months ended March 31, 2021 and 2020, we served 2.7 million and 2.6 million MAUs, respectively, and had monthly average
revenue per user (“ARPU”) of $10.35 and $5.57, respectively. We monitor the conversion of users to paying users based on the
ratio of Paying MAU to MAU. For each of the first quarters of 2021 and 2020, our Paying MAU to MAU ratio was 17% and 10%, respectively
and our Paying MAU was 0.5 million and 0.3 million, respectively and our monthly average revenue per paying user (“ARPPU”)
was $60 and $56, respectively. We see a substantial opportunity for our developers to expand beyond casual content into other genres of
interactive entertainment, from first-person shooters to racing games. In the three months ended March 31, 2021 and 2020, we generated
less than 10% of our revenue from users outside of North America, leaving us with several large untapped international markets. We see
a significant opportunity to build partnerships with brands to sponsor tournaments on our platform to both increase our brand awareness
and achieve improvements in profitability through advertiser sponsored prizes.
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 more than five times higher what our developers would generate through advertisements or
in-game purchases.
Our platform allows users to participate
in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage
of player entry fees in paid contests, after deducting end-user prize money (i.e., winnings from the Competitions), end-user incentives
accounted for as reduction of revenue and the profit share paid to developers (the “Take Rate”). GMV represents entry fees
that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives. Cash deposits represented
approximately 11% of total entry fees for the three months ended March 31, 2021 and 2020. Prior cash winnings that have not been
withdrawn represented approximately 82% of total entry fees for the three months ended March 31, 2021 and 2020. End-user incentives
represented approximately 7% of total entry fees for the three months ended March 31, 2021 and 2020. Our model has allowed us to
grow users, developers and revenue steadily while driving meaningful operating leverage.
The following are key elements
of our financial model:
|
•
|
The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable
players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement
and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously
improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading
to ever-improving gaming experiences. In the three months ended March 31, 2021 and 2020, we estimate
that paying users spent an average of 62 and 63 minutes per day, respectively, in game play on our platform1.
|
|
•
|
The scale, growth and partnership of our developers — We have created a platform that drives economic success for
our developers. Our end-to-end platform allows developers to focus on creating games by automating and optimizing integral parts of their
businesses — from user acquisition and monetization to game optimization. Our built-in payments, analytics, customer
support, and live operations platform enables our developers to consistently learn, grow, earn and share in our success.
|
|
•
|
Product-first philosophy and data science capabilities — We have built a culture that puts product first, driving
our impact with users and developers and then scaling marketing investment. In the three months ended March 31, 2021, 42% of our
salary costs were spent on product development. Our easy-to-integrate SDK contains over 220 features in a 16-MB package which allows for
over-the-air upgrades. Our intuitive Developer Console dashboard enables our developers to rapidly integrate and monitor the performance
of their games. Our LiveOps system enables us to manage and optimize the user experience across the thousands of games on our platform.
|
We collect over 300 data points during each gameplay session
to feed our big data assets which augment all elements of our platform. Our key data science technologies drive our player rating and
matching, anti-cheat and anti-fraud, and user experience personalization engine.
|
•
|
Our unit economics — Our proprietary and highly scalable software platform produces revenue at a low direct cost,
contributing to our gross margins. Once acquired, each user cohort contributes predictably to revenue over its life. A cohort is all the
users acquired in the period presented. A user is considered part of a cohort based on the first time they make a deposit and enter a
paid tournament. Once a user is considered part of a cohort, they are always counted in that cohort.
|
For example, our 2016 cohort contributed $6.0 million
in revenue in the first year, $5.5 million in the second year, $5.5 million in the third year, $6.6 million in the fourth
year, and $7.2 million in the fifth year. Our 2017 cohort contributed $9.9 million in revenue in the first year, $10.3 million
in the second year. $9.6 million in the third year and $9.5 million in the fourth year. Our 2018 cohort contributed $33.2 million
in revenue in the first year, $36.1 million in the second year, and $31.5 million in the third year. Our 2019 cohort contributed
$65.2 million in revenue in the first year and $64.3 million in the second year. Our 2020 cohort contributed $115.8 million in revenue
in the first year.
We also complement these stable cohort dynamics with disciplined
user acquisition spending. We currently expect that the average Three-Year Lifetime Value of our 2018, 2019 and 2020 cohorts will be 3.8x
our total user acquisition costs (and after taking into account the end-user incentives recorded and expected to be recorded in sales
and marketing expense, which is expected to be 2.5x).
“Three-Year Lifetime Value” means the cumulative
gross profit from a paying user over the thirty-six (36) months following user acquisition, which is based on a combination of historic
data and extrapolation of historic data for future periods. User acquisition costs include expenses incurred in the period to acquire
that cohort of users, including digital advertising costs, affiliate marketing costs, third-party vendors and software tools used by the
user acquisition marketing team. Historically, our Three-Year Lifetime Value to user acquisition costs has fluctuated over time. Rising
digital advertising costs in 2020 reduced our expected average Three-Year Lifetime Value to user acquisition costs relative to prior periods.
1
Based on the average number of tournament entries per day multiplied by 4 minutes per tournament. Skillz tracks the number of games that
end users play but does not monitor end user playing time on its platform, and this estimate is based on the time allowed to complete
a tournament in the top three games for paying users featured on our platform. Accordingly, the actual time paying users spend per day
on the platform may be less than such estimate.
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 rewarding them with prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and
can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). 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 prizes and tickets (“Ticketz”) which can be redeemed
in the Skillz virtual store. Ticketz are earned in every match and can be redeemed for prizes or credits to be used towards future paid
entry fee tournaments;
|
|
•
|
Marketing campaigns through main-stream online advertising networks and social media platforms to drive end-user traffic to developers’
games within the Skillz ecosystem;
|
|
•
|
Systematic calls to end-user action via push notifications to users with game results, promotional offers, and time-sensitive actions;
and
|
|
•
|
Process end-user payments, billings and settlements on behalf of the developer to enable players to connect their preferred payment
method to deposit and enter into the game developers’ multi-player competitions for cash prizes.
|
Generally, end-users are required to deposit funds
into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services, Skillz is
responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer
does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users
pay an entry fee using cash deposits, prior cash winnings in the end-users’ accounts that have not been withdrawn, and end-user
incentives (specifically Bonus Cash). Skillz recognizes revenue related to each game regardless of how entry fees are paid. Skillz is
responsible for distributing the prize money to the winner on behalf of the game developer. Skillz typically withholds 16% to 20% of the
total entry fees when distributing the prize money as a commission. That commission is shared between Skillz and the game developers;
however, the game developers’ share is calculated solely based upon entry fees paid by net cash deposits received from end-users,
adjusted for certain costs incurred by Skillz to provide monetization services.
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.
Research and Development
Research and development expenses consist of software
development costs, comprised mainly of product and platform development, server and software costs that support research and development
activities, and to a lesser extent, allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses
consist of salaries, benefits, and stock-based compensation. We expect research and development expenses will fluctuate both in terms
of absolute dollars and as a percentage of revenue in the future.
Sales and Marketing
Sales and marketing expenses consist primarily
of direct advertising costs and end-user incentives that are not recorded as a reduction of revenue. Sales and marketing also includes
allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits,
and stock-based compensation. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage
of revenue in the future.
General and Administrative
General and administrative expenses consist of
personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional
services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries,
benefits, and stock-based compensation.
We expect our general and administrative expenses
to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public
company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations
activities, and other administrative and professional services.
Results of Operations
The following table sets forth a summary of our
results of operations for the periods indicated.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per
share data)
|
|
Revenue
|
|
$
|
83,677
|
|
|
$
|
43,559
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
4,256
|
|
|
|
2,767
|
|
Research and development
|
|
|
7,282
|
|
|
|
4,366
|
|
Sales and marketing
|
|
|
96,323
|
|
|
|
46,825
|
|
General and administrative
|
|
|
27,284
|
|
|
|
4,833
|
|
Total costs and expenses
|
|
|
135,145
|
|
|
|
58,791
|
|
Loss from operations
|
|
|
(51,468
|
)
|
|
|
(15,232
|
)
|
Interest expense, net
|
|
|
(24
|
)
|
|
|
(316
|
)
|
Change in fair value of common stock warrants
|
|
|
(2,108
|
)
|
|
|
—
|
|
Other income, net
|
|
|
50
|
|
|
|
51
|
|
Loss before income taxes
|
|
|
(53,550
|
)
|
|
|
(15,497
|
)
|
Provision for income taxes
|
|
|
42
|
|
|
|
25
|
|
Net loss
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Net loss per share attributable to common stockholders – basic
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
Weighted average common shares outstanding – basic
|
|
|
356,818,954
|
|
|
|
278,348,903
|
|
Net loss attributable to common stockholders – diluted
|
|
$
|
(57,391
|
)
|
|
$
|
(15,522
|
)
|
Net loss per share attributable to common stockholders – diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
Weighted average common shares outstanding – diluted
|
|
|
359,827,649
|
|
|
|
278,348,903
|
|
Revenue
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Revenue
|
|
$
|
83,677
|
|
|
$
|
43,559
|
|
|
|
92
|
%
|
Revenue increased by $40.1 million, or 92%, to
$83.7 million in the three months ended March 31, 2021 from $43.6 million in the three months ended March 31, 2020. The increase
was attributable primarily to an increase in paying MAUs, driven by sales and marketing investment to acquire new paying users. ARPU increased
86% over the same period.
Cost of Revenue
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Cost of revenue
|
|
$
|
4,256
|
|
|
$
|
2,767
|
|
|
|
54
|
%
|
Cost of revenue increased by $1.5 million, or
54%, to $4.3 million in the three months ended March 31, 2021 from $2.8 million in the three months ended March 31, 2020, growing
in line with revenue. The increase in cost of revenue was primarily driven by payment processing and software costs. Cost of revenue as
a percentage of revenue decreased to 5% in 2021 from 6% in 2020.
Research and Development
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Research and development
|
|
$
|
7,282
|
|
|
$
|
4,366
|
|
|
|
67
|
%
|
Research and development costs increased by $2.9
million, or 67%, to $7.3 million in the three months ended March 31, 2021 from $4.4 million in the three months ended March 31,
2020. The increase was primarily driven by a $2.3 million increase in research and development headcount costs, of which $1.0 million
was related to stock-based compensation, and a $0.6 million increase in server and software costs. Research and development expenses accounted
for 9% of revenue in the three months ended March 31, 2021 compared to 10% in the three months ended March 31, 2020.
Sales and Marketing
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Sales and marketing
|
|
$
|
96,323
|
|
|
$
|
46,825
|
|
|
|
106
|
%
|
Sales and marketing costs increased by $49.5 million,
or 106%, to $96.3 million in the three months ended March 31, 2021 from $46.8 million in the three months ended March 31, 2020.
The increase was attributable primarily to a 101% increase in spend to acquire new paying users and a 111% increase in engagement marketing
spend. User acquisition marketing costs were $54.2 million and $27.0 million in three months ended March 31, 2021 and 2020, respectively.
This increase reflects higher digital advertising costs that resulted in an increase in our acquisition cost per user in the three months
ended March 31, 2021 compared to the three months ended March 31, 2020. Engagement marketing costs were $36.0 million and $17.1
million in the three months ended March 31, 2021 and 2020, respectively. Engagement marketing as a percentage of revenue increased
to 43% in the three months ended March 31, 2021 from 39% the three months ended March 31, 2020. This increase reflects investment
in marketing programs that resulted in an increase in our engagement marketing cost per user in the three months ended March 31,
2021 compared to the three months ended March 31, 2020.
General and Administrative
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
General and administrative
|
|
$
|
27,284
|
|
|
$
|
4,833
|
|
|
|
465
|
%
|
General and administrative costs increased by
$22.5 million, or 465%, to 27.3 million in the three months ended March 31, 2021 from $4.8 million in the three months ended March 31,
2020. The increase was primarily driven by a $10.8 million increase in headcount costs, of which $8.2 million is related to stock-based
compensation expense, a $9.0 million increase in professional expenses related to the follow-on offering, a $2.4 million increase in public
company-related insurance costs and fees, and a $0.4 million increase in software costs. General and administrative expenses accounted
for 33% of revenue in the three months ended March 31, 2021 compared to 11% in the three months ended March 31, 2020.
Interest expense, net
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Interest expense, net
|
|
$
|
(24
|
)
|
|
$
|
(316
|
)
|
|
|
(92
|
)%
|
Interest expense, net decreased by $0.3 million,
or 92%, to $24.0 thousand in the three months ended March 31, 2021 from $0.3 million in the three months ended March 31, 2020.
The decrease was primarily driven by the repayment of our long-term debt in 2020.
Change in fair value common stock of warrant
liabilities
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Change in fair value of common stock warrant liabilities
|
|
|
(2,108
|
)
|
|
|
—
|
|
|
|
NM
|
|
The change in fair value of warrant liabilities
was due to the increase in the estimated fair value of the Public and Private Common Stock Warrants.
Other income), net
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Other income, net
|
|
$
|
50
|
|
|
$
|
51
|
|
|
|
NM
|
|
Other income, net decreased to $50.0 thousand
in the three months ended March 31, 2021 from $51.0 thousand in the three months ended March 31, 2020. The decrease was primarily
driven by less interest income generated due to lower interest rates.
Provision for income taxes
|
|
Three Months Ended March 31,
|
|
|
|
|
(In thousands, except percentages)
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Provision for income taxes
|
|
$
|
42
|
|
|
$
|
25
|
|
|
|
NM
|
|
Provision for income taxes increased by $17.0
thousand in the three months ended March 31, 2021. The increase was primarily driven by accrued state tax liabilities.
Non-GAAP Financial Measures
In addition to our results determined in accordance
with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP
financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP
financial information, when taken collectively with GAAP financial information, may be helpful to investors in assessing our operating
performance. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.
Adjusted EBITDA
“Adjusted EBITDA” is defined as net
income (loss), excluding interest income (expense); change in fair value of common stock warrant liabilities; other income (expense),
net; income tax provision; depreciation and amortization; stock-based compensation expense and related payroll tax expense; and certain
other non-cash or non-recurring items impacting net income (loss) from time to time, including, but not limited to fair value adjustments
for certain financial liabilities (including derivatives) associated with debt and equity transactions, and impairment charges as they
are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required
by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use
in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies,
which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating Adjusted EBITDA
we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should
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 March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net loss
|
|
$
|
(53,592
|
)
|
|
$
|
(15,522
|
)
|
Interest expense, net
|
|
|
24
|
|
|
|
316
|
|
Stock-based compensation
|
|
|
10,945
|
|
|
|
357
|
|
Change in fair value of common stock warrant liabilities(2)
|
|
|
2,108
|
|
|
|
—
|
|
Provision for income taxes
|
|
|
42
|
|
|
|
25
|
|
Depreciation and amortization
|
|
|
555
|
|
|
|
308
|
|
Other non-operating costs (income)
|
|
|
(50
|
)
|
|
|
(51
|
)
|
Transaction related expenses(1)
|
|
|
8,839
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(31,129
|
)
|
|
$
|
(14,567
|
)
|
|
(1)
|
For the three months ended March 31, 2021, amounts represent transaction expenses related to the follow-on offering.
|
|
(2)
|
For the three months ended March 31, 2021, amounts represent the fair value adjustments related to the revaluation of liability
classified warrants.
|
Liquidity and Capital Resources
Since inception, we have financed our operations
primarily from the sales of capital stock. As of March 31, 2021, our principal sources of liquidity were our cash and cash equivalents
in the amount of $612.6 million, which are primarily invested in money market funds.
In December 2019, we entered into a mezzanine
term loan for up to $40.0 million; $30.0 million of which is immediately available, with an additional $10.0 million available
upon the achievement of certain performance milestones (“2019 Mezzanine Term Loan”). As of March 31, 2021 and December 31,
2020, we had $30.0 million of availability under the 2019 Mezzanine Term Loan and no amounts outstanding. As of March 31, 2021, the
Company had 8,157,942 FEAC Public Warrants and 5,016,666 FEAC Private Warrants outstanding that entitle the holder to purchase one share
of Class A Common Stock at a price of $11.50 per share, subject to adjustments. During the three months ended March 31, 2021,
9,092,053 of Public Warrants were exercised for total proceeds of $104.6 million, which had not been collected and were recorded in warrant
exercise receivable in the consolidated balance sheet.
As of the date of this statement, our existing
cash resources are sufficient to continue operating activities for at least one year past the issuance date of the condensed consolidated
financial statements.
The following table provides a summary of cash flow data (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash used in operating activities
|
|
$
|
(39,153
|
)
|
|
$
|
(9,109
|
)
|
Net cash used in investing activities
|
|
$
|
(659
|
)
|
|
$
|
(860
|
)
|
Net cash provided by financing activities
|
|
$
|
389,662
|
|
|
$
|
146
|
|
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 $39.2
million for the three months ended March 31, 2021. The most significant component of our cash used during this period was a net loss
of $53.6 million, which included non-cash expenses of $10.9 million related to stock-based compensation, $2.1 million for the change in
fair value related to Public and Private Common Stock Warrants, $0.6 million related to depreciation and amortization, accretion of unamortized
discounts and amortization of issuance costs, and net cash inflows of $0.8 million from changes in operating assets and liabilities.
Net cash used in operating activities was $9.1
million for the three months ended March 31, 2020. The most significant component of our cash used during this period was a net loss
of $15.5 million, which included non-cash expenses of $0.8 million related to stock-based compensation, depreciation, amortization, and
net cash inflows of $5.6 million from changes in operating assets and liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $0.7
million and $0.9 million for the three months ended March 31, 2021 and 2020, respectively. In all periods, the net cash used in investing
activities related to purchases of property and equipment, including internal-use software.
Cash Flows from Financing Activities
Net cash provided by financing activities was
$389.7 million for three months ended March 31, 2021, which was primarily due to $402.8 million in net proceeds from the issuance
of common stock in connection with the Company’s follow-on offering, partially offset by $13.2 million in payments made towards
offering costs.
Net cash provided by financing activities was
$0.1 million for the three months ended March 31, 2020, which was primarily due to $0.2 million in net proceeds from the issuance
of common stock and net payments from borrowings of $0.1 million under our debt facilities.
Contractual Obligations and Commitments
The following table summarizes our contractual
obligations and other commitments as of March 31, 2021, and the years in which these obligations are due:
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
More than
5 Years
|
|
Operating lease obligations
|
|
$
|
23,487
|
|
|
$
|
1,874
|
|
|
$
|
4,867
|
|
|
$
|
4,952
|
|
|
$
|
11,794
|
|
Off-Balance Sheet Arrangements
We did not have during the periods presented,
and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial
partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
See critical accounting policies and estimates
in our Form 10-K/A filed May 13, 2021 as there have been no material changes.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements
for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made
one, of their potential impact on our financial condition and our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market and other
risks, including the effects of changes in interest rates, inflation, as well as risks to the availability of funding sources.
Interest Rate Risk
The market risk inherent in our financial instruments
and our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2021, we
had cash and cash equivalents of $612.6 million, which consisted of money market fund accounts for which the fair market value would be
affected by changes in the general level of U.S. interest rates. However, due to the low-risk profile of our investments, an immediate
10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.
Foreign Currency Risk
There was no material foreign currency risk for
the years ended March 31, 2021 and 2020.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))
designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer)
and Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our
Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under
the Exchange Act as of March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures
were not effective solely due to the material weakness in our internal control over financial reporting as described below.
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. That evaluation included consideration of the views expressed in the
SEC’s Staff Statement of April 12, 2021 (“the SEC Staff Statement”) in which the SEC Staff clarified its interpretations
of certain generally accepted accounting principles related to warrants issued by Special Purpose Acquisition Companies (“SPACs”).
Prior to the SEC Staff Statement, we believed that our warrant accounting was consistent with generally accepted accounting principles.
Our belief was supported by the fact that most other SPACs and parties who have merged with SPACs similarly interpreted the warrant accounting
principles at issue. However, based on the clarifications expressed in the SEC Staff Statement which resulted in the restatement discussed
in our Annual Report on Form 10-K/A for the year ended December 31, 2020, the Company’s management and the Chief Executive
Officer and Chief Financial Officer concluded there was a material weakness in controls related to the classification and accounting for
warrants issued by a SPAC, which did not operate effectively to appropriately apply the provisions of ASC 815.
Remediation of Material Weakness
To remediate the material weakness, the Company
studied and clarified its understanding of the accounting of contracts that may be settled in the Company’s own stock, such as warrants,
as equity of the entity or as an asset or liability as highlighted in the SEC Staff Statement, and is in the process of implementing additional
review procedures and enhanced its accounting policy related to the accounting for such contracts to determine proper accounting in accordance
with GAAP as clarified by the SEC Staff Statement.
Changes in Internal Control
There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal
quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting other than the changes described above related to the material weakness related to the accounting for the warrants
issued by SPACs.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are engaged in the defense of certain claims
and lawsuits arising out of the ordinary course and conduct of our business and have certain unresolved claims pending, the outcomes of
which are not determinable at this time. We have insurance policies covering certain potential losses where such coverage is available
and cost effective. In our opinion, any liability that might be incurred by us upon the resolution of any claims or lawsuits will not,
in the aggregate, have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk
factors as previously disclosed in Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended
December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
*Filed herewith.
**Submitted electronically with the report.
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 fourteenth day of May, 2021.
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SKILLZ INC.
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By:
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/s/ Andrew Paradise
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Name:
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Andrew Paradise
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Title:
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Chief Executive Officer and Chairman
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