UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June 30, 2021~~March 31, 2022


☐			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~~84-4478274

(State or other jurisdiction of incorporation or organization)

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

PO Box 445

San Francisco, California

94104

(Address of Principal Executive Offices)

(Zip Code)

(415) 762-0511

Registrant's telephone number, including area code

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.0001 per share	SKLZ	~~New York Stock Exchange~~
~~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 ☒ No ☐

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

Yes ☒ No ☐

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


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

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

☐

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

As of ~~July 30, 2021,~~May 2, 2022, the registrant had outstanding ~~334,387,219~~340,808,740 shares of Class A common stock and ~~68,601,268~~68,717,138 shares of Class B common stock.

TABLE OF CONTENTS

SKILLZ INC.

TABLE OF CONTENTS


			Page

Note Regarding Forward Looking Statements

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2326
Item 3. Quantitative and Qualitative Disclosures About Market Risk			3334
Item 4. Controls and Procedures			3435

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			3537
Item 1A. Risk Factors			3537
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3537
Item 3. Defaults Upon Senior Securities			3537
Item 4. Mine Safety Disclosures			3537
Item 5. Other Information			3537
Item 6. Exhibits			3537
Signatures			3638

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.~~“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,~~2021, 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.~~end-users, and do so in a cost-effective manner.

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

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

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

~~TABLE OF CONTENTS~~

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

TABLE OF CONTENTS

•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~~Failure to ~~our stockholders.~~

•~~The valuation of our warrants could increase~~timely and effectively remediate the ~~volatility~~material weaknesses in our ~~net loss.~~internal controls over financial reporting.

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,~~2021, 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.

TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS

SKILLZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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


		June 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	692,778	$	262,728	Cash and cash equivalents	$	114,558	$	241,332
Warrant exercise receivable		1,185		0
Marketable securities, current						Marketable securities, current	369,566		319,055
Accounts receivable, net						Accounts receivable, net	13,230		13,497
Prepaid expenses and other current assets	Prepaid expenses and other current assets	14,608		10,491		Prepaid expenses and other current assets	21,967		16,704
Total current assets	Total current assets	708,571		273,219		Total current assets	519,321		590,588
Property and equipment, net	Property and equipment, net	5,701		5,292		Property and equipment, net	8,629		9,988
Operating lease right-of-use assets, net						Operating lease right-of-use assets, net	13,977		14,511
Marketable securities, non-current						Marketable securities, non-current	169,725		182,629
Non-marketable equity securities						Non-marketable equity securities	55,649		55,649
Intangible assets, net						Intangible assets, net	75,066		79,137
Goodwill						Goodwill	86,436		86,845
Other long-term assets	Other long-term assets	6,186		3,910		Other long-term assets	3,733		3,478
Total assets	Total assets	$	720,458	$	282,421	Total assets	$	932,536	$	1,022,825
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	11,071	$	22,039	Accounts payable	$	13,305	$	19,753
Accrued professional fees		725		5,699
Short-term common stock warrant liabilities		77,607		0

Operating lease liabilities, current						Operating lease liabilities, current	2,005		2,110
Other current liabilities	Other current liabilities	35,531		19,618		Other current liabilities	57,607		64,969
Total current liabilities	Total current liabilities	124,934		47,356		Total current liabilities	72,917		86,832

Long-term common stock warrant liabilities		60,688		178,232
Operating lease liabilities, non-current						Operating lease liabilities, non-current	13,199		13,567
Common stock warrant liabilities, non-current						Common stock warrant liabilities, non-current	1,831		6,293
Long-term debt, non-current						Long-term debt, non-current	279,713		278,889
Other long-term liabilities	Other long-term liabilities	24		46		Other long-term liabilities	13,238		13,544
Total liabilities	Total liabilities	185,646		225,634		Total liabilities	380,898		399,125
Commitments and contingencies (Note 6)		0		0
Commitments and contingencies (Note 9)						Commitments and contingencies (Note 9)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of June 30, 2021 and December 31, 2020		0		0
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 328 million and 292 million shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; Class B common stock – 125 million shares authorized; 69 million and 78 million shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		39		37
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of March 31, 2022 and December 31, 2021						Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of March 31, 2022 and December 31, 2021	—		—
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 341 million and 340 million shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively; Class B common stock – 125 million shares authorized; 69 million shares issued and outstanding as of March 31, 2022 and December 31, 2021						Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 341 million and 340 million shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively; Class B common stock – 125 million shares authorized; 69 million shares issued and outstanding as of March 31, 2022 and December 31, 2021	40		40
Additional paid-in capital	Additional paid-in capital	906,275		295,065		Additional paid-in capital	1,121,697		1,043,600
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(2,294)		(248)
Accumulated deficit	Accumulated deficit	(371,502)		(238,315)		Accumulated deficit	(567,805)		(419,692)
Total stockholders’ equity	Total stockholders’ equity	534,812		56,787		Total stockholders’ equity	551,638		623,700
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	720,458	$	282,421	Total liabilities and stockholders’ equity	$	932,536	$	1,022,825

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~(1)~~ AND COMPREHENSIVE LOSS

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

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue $ 89,491 $ 58,878 $ 173,168 $ 102,437
Costs and expenses:
Cost of revenue 4,386 2,937 8,642 5,704
Research and development 10,140 4,518 17,422 8,884
Sales and marketing 99,523 52,369 195,846 99,194
General and administrative 25,432 11,642 52,716 16,475
Total costs and expenses 139,481 71,466 274,626 130,257
Loss from operations (49,990) (12,588) (101,458) (27,820)
Interest expense, net (25) (957) (49) (1,273)
Change in fair value of common stock warrant liabilities (29,595) 0 (31,703) 0
Other income (expense), net 80 (6,584) 130 (6,533)
Loss before income taxes (79,530) (20,129) (133,080) (35,626)
Provision for income taxes 65 28 107 53
Net loss $ (79,595) $ (20,157) $ (133,187) $ (35,679)
Net loss per share attributable to common stockholders – basic and diluted $ (0.21) $ (0.07) $ (0.36) $ (0.13)
Weighted average common shares outstanding – basic and diluted 385,945,332 289,823,175 371,519,800 284,054,689

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


	Three Months Ended March 31,
	2022		2021
Revenue	$	93,438	$	83,677
Costs and expenses:
Cost of revenue	9,265		4,256
Research and development	18,653		7,282
Sales and marketing	117,332		96,323
General and administrative	92,792		27,284
Total costs and expenses	238,042		135,145
Loss from operations	(144,604)		(51,468)
Interest expense, net	(8,157)		(24)
Change in fair value of common stock warrant liabilities	4,462		(2,108)
Other (expense) income, net	(27)		50
Loss before income taxes	(148,326)		(53,550)
(Benefit from) provision for income taxes	(213)		42
Net loss	$	(148,113)	$	(53,592)
Net loss per share attributable to common stockholders:
Basic	$	(0.37)	$	(0.15)
Diluted	$	(0.37)	$	(0.16)
Weighted average shares outstanding:
Basic	401,653,954		356,818,954
Diluted	401,653,954		359,827,649

Other comprehensive loss:
Change in unrealized loss on available-for-sale investments, net of tax	(2,046)		—
Total other comprehensive loss:	(2,046)		—
Comprehensive loss	$	(150,159)	$	(53,592)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~(1)~~

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

Preferred stock Common stock Additional paid-in capital Accumulated deficit Total stockholders’ equity
Shares Amount Shares Amount
Balance at December 31, 2019 — $ — 286,074,923 $ 29 $ 108,892 $ (90,256) $ 18,665
Issuance of common stock upon exercise of stock options — — 829,348 — 241 — 241
Stock-based compensation — — — — 357 — 357
Net loss — — — — — (15,522) (15,522)
Balance at March 31, 2020 — — 286,904,271 29 109,490 (105,778) 3,741
Issuance of redeemable convertible Series E preferred stock — — 15,091,869 2 64,877 — 64,879
Issuance of common stock upon exercise of stock options — — 1,029,833 — 130 — 130
Issuance of common stock upon exercise of stock options with promissory note — — 12,700,357 1 — — 1
Repurchase of common stock — — (270,599) — — (543) (543)
Stock-based compensation — — — — 5,546 — 5,546
Net loss — — — — — (20,157) (20,157)
Balance at June 30, 2020 — $ — 315,455,731 $ 32 $ 180,043 $ (126,478) $ 53,597
Balance at December 31, 2020 — $ — 369,797,524 $ 37 $ 295,065 $ (238,315) $ 56,787
Issuance of common stock upon exercise of stock options — — 268,426 — 12 — 12
Issuance of common stock upon exercise of warrants and other, net — — 8,741,863 — 172,519 — 172,519
Net cash contributions from follow-on offering — — 17,000,000 2 402,238 — 402,240
Stock-based compensation — — — — 10,945 — 10,945
Net loss — — — — — (53,592) (53,592)
Balance at March 31, 2021 — — 395,807,813 39 880,779 (291,907) 588,911
Issuance of common stock upon exercise of stock options — — 235,054 — 97 — 97
Issuance of common stock upon exercise of warrants and other, net — — 628,576 — 9,625 — 9,625
Stock-based compensation — — — — 15,774 — 15,774
Net loss — — — — — (79,595) (79,595)
Balance at June 30, 2021 — $ — 396,671,443 $ 39 $ 906,275 $ (371,502) $ 534,812

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


	Preferred stock			Common stock			Additional paid-in capital		Accumulated Other Comprehensive Loss		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	—	—		369,797,524	37		295,065		—		(238,315)		56,787
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		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
Other comprehensive loss	—	—		—	—		—		—		—		—
Net income	—	—		—	—		—		—		(53,592)		(53,592)
Balance at March 31, 2021	—	$	—	395,807,813	$	39	$	880,779	$	—	$	(291,907)	$	588,911

Balance at December 31, 2021	—	$	—	408,753,837	$	40	$	1,043,600	$	(248)	$	(419,692)	$	623,700
Issuance of common stock upon exercise of stock options and release of restricted stock units	—	—		879,936	—		236		—		—		236


Stock-based compensation	—	—		—	—		77,925				—		77,925
Other comprehensive loss	—	—		—	—		—		(2,046)		—		(2,046)
Other, net	—	—		—	—		(64)		—		—		(64)
Net loss	—	—		—	—		—		—		(148,113)		(148,113)
Balance at March 31, 2022	—	$	—	409,633,773	$	40	$	1,121,697	$	(2,294)	$	(567,805)	$	551,638

See accompanying Notes to the Condensed Consolidated Financial Statements.

TABLE OF CONTENTS

SKILLZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended June 30,
2021 2020
Operating Activities
Net loss $ (133,187) $ (35,679)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,102 635
Stock-based compensation 26,719 5,903
Accretion of unamortized discount and amortization of issuance costs 19 539
Fair value adjustment of derivatives 0 6,589
Impairment charges 0 3,395
Change in fair value of common stock warrant liabilities 31,703 0
Changes in operating assets and liabilities:
Prepaid expenses and other assets (4,417) (3,024)
Accounts payable (2,701) 3,737
Accrued professional fees (119) 0
Other liabilities 15,891 8,589
Net cash used in operating activities (64,990) (9,316)
Investing Activities
Purchases of property and equipment, including internal-use software (1,508) (1,875)
Investment in non-marketable equity securities (2,000) 0
Net cash used in investing activities (3,508) (1,875)
Financing Activities
Payments for debt issuance costs 0 (201)
Payments under debt agreements 0 (10,000)
Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs 402,139 0
Payments made towards offering costs (13,221) 0
Proceeds from issuance of redeemable convertible preferred stock, net of
issuance costs
0 64,877
Proceeds from exercise of stock options and issuance of common stock 109 371
Proceeds from exercise of common stock warrants 109,521 0
Payments made to repurchase common stock 0 (543)
Net cash provided by financing activities 498,548 54,504
Net change in cash, cash equivalents and restricted cash 430,050 43,313
Cash, cash equivalents and restricted cash – beginning of year 265,648 28,548
Cash, cash equivalents and restricted cash – end of year $ 695,698 $ 71,861
Supplemental cash flow data:
Cash paid during the period for:
Interest $ 30 $ 785
Noncash investing and financing activities:
Deferred offering costs in accounts payable and accrued liabilities $ 725 $ 0
Warrant exercise receivable $ 1,185 $ 0
Warrant liability reclassified to additional paid-in capital $ 71,640 $ 0


	Three Months Ended March 31,
		2022		2021
Operating Activities
Net loss		$	(148,113)	$	(53,592)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,539		555
Stock-based compensation		77,925		10,945
Accretion of unamortized debt discount and amortization of debt issuance costs		824		9

Amortization of premium (accretion of discount) for marketable securities		984		—
Deferred income taxes		(318)		—
Change in fair value of common stock warrant liabilities		(4,462)		2,108
Changes in operating assets and liabilities:
Accounts receivable, net		267		—
Prepaid expenses and other assets		(5,676)		(4,499)
Operating lease right-of-use assets		534		(13,453)
Accounts payable		(5,613)		(4,060)

Operating lease liabilities		(473)		14,386
Other accruals and liabilities		(4,868)		8,448
Net cash used in operating activities		(83,450)		(39,153)
Investing Activities
Purchases of property and equipment, including internal-use software		(107)		(659)

Purchases of marketable securities		(149,495)		—
Proceeds from maturities of marketable securities		83,265		—
Proceeds from sales of marketable securities		25,593		—
Net cash used in investing activities		(40,744)		(659)
Financing Activities
Principal payments on finance leases obligations		(840)		—
Payments for debt issuance costs		(1,976)		—
Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs		—		402,817
Payments made towards deferred offering costs		—		(13,167)
Net proceeds from exercise of stock options and issuance of common stock		236		12



Net cash (used in) provided by financing activities		(2,580)		389,662
Net change in cash, cash equivalents and restricted cash		(126,774)		349,850
Cash, cash equivalents and restricted cash – beginning of year		244,252		265,648
Cash, cash equivalents and restricted cash – end of period		$	117,478	$	615,498
Supplemental cash flow data:
Cash paid during the period for:
Interest		$	86	$	15
Noncash investing and financing activities:
Deferred offering costs and issuance costs in accounts payable and accrued liabilities		$	28	$	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.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Description of the Business and Basis of Presentation

Business

Skillz (the “Company” or “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.~~

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

Unaudited Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended December 31, ~~2020,~~2021, as filed with the SEC on ~~May 13, 2021.~~

~~Comprehensive Loss~~

~~Through June 30, 2021, there are no components of comprehensive loss which are not included in net loss; therefore, a separate statement of comprehensive loss has not been presented.~~March 1, 2022.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the 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~~common stock warrants, the fair values of goodwill and ~~Private Common Stock Warrants.~~intangible assets and the useful lives of the Company’s intangible assets. The Company bases these estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.

Revenue Recognition

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

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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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”).

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~~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~~the Company’s larger developer agreements, the developer, if required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition does not extend beyond the contractual notification period. The Company ~~does~~did not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

Games provided by two developer partners, accounted for ~~42%~~41% and ~~40%~~38% of the Company’s revenue in the three months ended ~~June 30, 2021~~March 31, 2022, and ~~61%~~42% and ~~28%~~41% of the Company’s revenue in the three months ended June 30, 2020. Games provided by two developer partners accounted for 42% and 40% of the Company’s revenue in the six months ended June 30, 2021 and 66% and 21% of the Company’s revenue in the six months ended June 30, 2020. ~~In the three and six months ended June 30, 2021 and 2020, the Company generated less than 10% of its revenue from users outside of North America.~~March 31, 2021.

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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

An example of an incentive for which the game developer has a valid expectation is Ticketz, which are a virtual currency earned for every Competition played based on the amount of the entry fee (“Ticketz”). Ticketz can be redeemed for prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). Another example is initial deposit Bonus Cash which is a promotional incentive that can be earned in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future paid entry fee Competitions and cannot be withdrawn by end-users.

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

For the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recognized a reduction of revenue of ~~$18.7~~$16.3 million and ~~$13.6~~$17.6 million, respectively, related to these end-user incentives. ~~For the six months ended June 30, 2021 and 2020, the Company recognized a reduction of revenue of $36.2 million and $23.6 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.~~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.~~competitions.

For the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recognized sales and marketing expense of ~~$42.0~~$37.0 million and ~~$21.5~~$33.3 million, respectively, related to these end-user incentives. ~~For the six months ended June 30, 2021 and 2020, the Company recognized sales and marketing expense of $75.3 million and $37.2 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.

Total marketing promotions accounted for as sales and marketing expense recognized in three months ended March 31, 2022 and 2021 were $42.1 million and $36.0 million, respectively.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash, ~~and~~commercial paper, money market funds and U.S government agency securities with maturities of three months or less when purchased.

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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

A reconciliation of the Company’s cash and cash equivalents in the ~~Condensed Consolidated Balance Sheet~~condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the ~~Condensed Consolidated Statement~~condensed consolidated statement of ~~Cash Flows~~cash flows is as follows:


		June 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
Cash and cash equivalents	Cash and cash equivalents	$	692,778	$	262,728	Cash and cash equivalents	$	114,558	$	241,332
Restricted cash included in other long-term assets		2,920		2,920
Restricted cash						Restricted cash	2,920		2,920
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	695,698	$	265,648	Cash, cash equivalents and restricted cash	$	117,478	$	244,252

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, restricted cash, and marketable securities. Although the Company deposits its cash with multiple well-established financial institutions, the deposits, at times, may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. Marketable securities are primarily consisted of U.S government, corporate debt securities, asset backed securities, commercial paper, and debt instruments issued by foreign governments. The Company limits the amount of credit exposure to any one issuer. Management believes that the institutions are financially stable and, accordingly, minimal credit risk exists.

Accounts Receivable, Net

Accounts receivable, net, is comprised of trade accounts receivable recorded at the invoiced amounts for programmatic media campaigns, net of an allowance for credit losses. The allowance for credit losses is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations and comprehensive loss. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when there are specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. At March 31, 2022, the Company’s allowance for credit losses on accounts receivable was not significant to the condensed consolidated financial statements.

Fair Value Measurement

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

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

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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

~~Investment~~Investments

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

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

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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

recorded through other income (expense), net in the consolidated statement of operations. The Company includes investments in non-marketable equity securities within other long-term assets on the consolidated balance sheets.

Advertising and Promotional Expense

Advertising and promotional expenses are included in sales and marketing expenses within the condensed consolidated statements of operations and comprehensive loss and are expensed when ~~incurred,~~incurred. For the three months ended March 31, 2022 and 2021, advertising expenses, not including marketing promotions related to the Company’s end-user incentive ~~programs. Advertising expenses~~programs, were ~~$47.1~~$59.7 million and ~~$25.6~~$54.5 million, ~~during the three months ended June 30, 2021 and 2020, respectively, and $101.6 million and $52.6 million during the six months ended June 30, 2021 and 2020,~~ respectively.

~~Redeemable Convertible Preferred Stock~~

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

All redeemable convertible preferred stock previously classified outside of permanent equity was retroactively adjusted, converted into common stock, and reclassified to permanent equity as a result of the Business Combination. Additionally, changes to the redemption values of the redeemable convertible preferred stock were eliminated as a result of the retroactive adjustment. The Company recorded changes to the redemption value of its redeemable convertible preferred stock of $409.5 million in the year-to-date period ended June 30, 2020. The changes to the redemption values of the redeemable convertible preferred stock were previously accounted for as adjustments to net loss available to common stockholders for each of the respective periods ended. For further details regarding the accounting for the Business Combination, see Note 3.

Public and Private Common Stock Warrant Liabilities

As part of ~~FEAC’s~~the Company’s initial public offering, ~~FEAC~~it issued to third party investors 69.0 million units, consisting of 1 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~~entitled the holder to purchase 1 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~~Company 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~~ of which 5,016,666 Private ~~Warrants.~~Warrants were subsequently forfeited. Each Private Warrant allows the ~~sponsor~~holder to purchase 1 share of Class A common stock at $11.50 per share. ~~Subsequent to the Business Combination, 7,623,436~~There were zero Public Warrants and ~~5,016,666~~4,535,728 Private Warrants ~~remained~~ outstanding as of ~~June 30, 2021.~~March 31, 2022.

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

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

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

statement of operations and comprehensive loss 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~~are 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 9 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~~

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

•on an accelerated attribution basis over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved, and is not reversed if the market condition is not satisfied. See Note 9 for more information. The Company accounts for forfeitures as they occur. If an employee stock-based award is canceled without the concurrent grant or offer of a replacement award, the cancellation should be treated as a settlement for no consideration and any previously unrecognized compensation cost shall be recognized at the cancellation date. Stock-based awards granted to employees are primarily stock options and restricted stock units.

The ~~Company’s performance~~Company has primarily granted restricted stock units (“RSUs”), which have a service based vesting condition over a four-year period, to its employees and ~~market position relative to competitors, which may change from time to time~~

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

•~~The economic and competitive environment~~

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

•~~The industry outlook~~

•~~The valuation of comparable companies~~

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

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

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

•~~Expected term —~~2021. The ~~Company~~Board of Directors determines the ~~expected term~~fair value of each share of underlying common stock based on the ~~average period the stock options are expected to remain outstanding, generally calculated as the midpoint~~closing price of the Company's common 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~~date of the ~~option.~~grant.

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

For awards with market conditions, the Company determines the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of a qualifying event, ~~and~~ expected capital raise ~~percentage.~~percentage and market capitalization milestones. Given the Company’s 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~~it has estimated the volatility of its common stock on the date of grant of awards with market conditions based on the weighted average historical stock price volatility of comparable publicly-traded companies in its industry group. The Company ~~estimates~~estimated the expected term of its awards with market conditions based on various exercise scenarios, as these awards are not considered “plain vanilla.” The Company utilized a risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company ~~estimates~~estimated the expected date of a qualifying event, ~~and~~ the expected capital raise percentage and the expected achievement date of market capitalization milestones based on management’s expectations at the time of measurement of the award’s value.

Segments

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. During the three months ended March 31, 2022, the Company continued to operate as a single operating and reportable segment as the CODM reviews financial information presented on a consolidated basis for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.

Recently Issued Accounting Pronouncements Not Yet Adopted

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. Effective as of December 31,

In October 2021, the Company is expected to become a large accelerated filer and is expected to cease to be an EGC. As a result, the Company will no longer be able to use the extended transition period for complying with new or revised accounting standards.

~~In January 2020,~~ the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting ~~Standards Update (“ASU”) 2020-01,~~ ~~Investments - Equity Securities (Topic 321), Investments - Equity Method~~for Contract Assets and ~~Joint Ventures (Topic 323),~~Contract Liabilities from Contracts with Customers, which requires entities to recognize and ~~Derivatives~~measure contract assets and ~~Hedging (Topic 815): Clarifying the Interactions between~~contract liabilities acquired in a business combination in accordance with Topic ~~321, Topic 323 and Topic 815. ASU 2020-01 clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method~~606, Revenue from Contracts with Customers, instead of ~~accounting for the purposes of applying the~~ fair value ~~measurement alternative. For public business entities,~~at the acquisition date in accordance with Topic 805. The amendments in ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, ~~2020,~~2022, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.

3. Business Combinations

Acquisition of Aarki, Inc.

On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and ~~interim periods within those fiscal years. For all other entities,~~acquired 100% of the ~~amendments are effective for fiscal~~outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company transferred $162.3 million in consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform is expected to result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~years beginning after December 15,~~The following table summarizes the fair value of the purchase price to acquire Aarki:


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

_______________

(1) The fair value of the Skillz Class A Common Stock issued in the merger was based on 4,401,663 shares issued on the July 16, 2021 ~~and interim periods within those fiscal years. The amendments should be applied prospectively. Under a prospective transition, an entity should apply the amendments~~acquisition date at the ~~beginning of the interim period that includes the adoption date. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.~~

~~In August 2020, the FASB issued ASU No. 2020-06,~~ Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for public companies, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s fiscal year. The Company 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.

~~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

~~TABLE OF CONTENTS~~

~~SKILLZ INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 sharesclosing price of the Company’s common stock ~~as a result~~on such date of $15.23 per share.

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

~~Upon the closing~~


Description	Amount
Cash and cash equivalents	$	11,309
Accounts receivable, net	13,700
Prepaid expenses and other current assets	356
Property, plant and equipment, net	5,075
Intangible assets, net	86,800
Other long-term assets	91
Accounts payable	(445)
Accrued professional fees	(3,145)
Other current liabilities	(16,471)
Deferred tax liabilities	(20,075)
Other long-term liabilities	(1,693)
Identifiable net assets acquired	75,502
Goodwill	86,845
Total purchase price	$	162,347

The following is a summary of identifiable intangible assets acquired and their expected lives as of the ~~Business Combination,~~acquisition closing date:


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

During the ~~Company's certificate~~first quarter of ~~incorporation was amended and restated~~2022, the Company recorded a measurement period adjustment of $0.4 million to ~~among other things,~~ increase the ~~total number~~carrying value of ~~authorized shares~~the identifiable net assets acquired, with a corresponding decrease to goodwill. The adjustment is related to a subsequent adjustment to Aarki’s federal and state tax payable as of ~~all classes~~the acquisition closing date.

The following table presents details of ~~capital stock~~changes 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.the Company’s goodwill balance for the three months ended March 31, 2022:


	Goodwill
Balance at December 31, 2021	$	86,845
Goodwill adjustment	(409)
Balance as of March 31, 2022	$	86,436

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

4. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		June 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
Credit card processing reserve	Credit card processing reserve	$	7,763	$	5,854	Credit card processing reserve	$	10,450	$	9,527
Prepaid expenses	Prepaid expenses	5,932		3,772		Prepaid expenses	10,427		5,681
Other current assets	Other current assets	913		865		Other current assets	1,090		1,496
Prepaid expenses and other current assets	Prepaid expenses and other current assets	$	14,608	$	10,491	Prepaid expenses and other current assets	$	21,967	$	16,704

~~Property and Equipment,~~Intangible Assets, Net

~~Property and equipment~~The components of intangible assets consisted of the following as of ~~June 30,~~March 31, 2022:


	Weighted Average Remaining Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	7.33	$	60,400	$	(5,348)	$	55,052
Customer relationships	2.33	26,200		(6,186)		20,014
Trademark and trade name	0.00	200		(200)		—
Intangible assets, net		$	86,800	$	(11,734)	$	75,066

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


	Three Months Ended March 31,
	2022
Beginning balance at December 31, 2021	$	79,137

Amortization	(4,071)
Ending balance at March 31, 2022	$	75,066

The following table summarizes amortization expense associated with finite-lived intangible assets recognized in the condensed consolidated statements of operations and ~~December~~comprehensive loss for the three months ended March 31, ~~2020:~~2022 as follows:


	Three Months Ended March 31,
	2022
Cost of revenue	$	1,888
Sales and marketing	2,183
General and administrative	—
Total amortization expense	$	4,071

June 30, December 31,
2021 2020
Capitalized internal-use software $ 6,569 $ 6,167
Computer equipment and servers 866 631
Furniture and fixtures 184 184
Leasehold improvements 114 114
Construction in progress 1,908 1,037
Total property and equipment 9,641 8,133
Accumulated depreciation and amortization (3,940) (2,841)
Property and equipment, net $ 5,701 $ 5,292

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~~Depreciation and~~SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table outlines the estimated future amortization expense related to property and equipment was $0.5 million and $0.3 million during the three months ended June 30, 2021 and 2020, respectively, and $1.1 million and $0.6 million during the six months ended June 30, 2021 and 2020, respectively.finite intangible assets as of March 31, 2022:


	Amount
2022	$	12,212
2023	16,283
2024	12,281
2025	7,550
2026	7,550
Thereafter	19,190
Total	$	75,066

Other Current Liabilities

Other current liabilities consisted of the following as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

June 30, December 31,
2021 2020
Accrued sales and marketing expenses $ 14,275 $ 7,204
Accrued compensation 9,496 3,825
End-user liability, net 4,131 2,789
Accrued developer revenue share 1,378 907
Other accrued expenses 6,251 4,893
Other current liabilities $ 35,531 $ 19,618


	March 31,		December 31,
	2022		2021
Accrued sales and marketing expenses	$	13,425	$	28,895
Accrued compensation	10,737		12,108
Accrued publisher fees	7,242		3,912
End-user liability, net	3,562		4,118
Accrued developer revenue share	1,147		1,655
Short-term lease obligations	2,043		2,447
Accrued legal expenses	4,757		5,126
Accrued interest expense	8,773		956
Other accrued expenses	5,921		5,752
Other current liabilities	$	57,607	$	64,969

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

5. Fair Value Measurements

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the recorded values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of the instruments.

Cash and cash equivalents held by the Company as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were ~~$692.8~~$114.6 million and ~~$262.7~~$241.3 million, respectively, and were comprised of cash on hand, money market funds, and highly liquid investments with original contractual maturity dates of three months or less. Cash and money market funds are classified within Level 1 of the fair value hierarchy. Highly liquid investments such as commercial papers and corporate bonds are classified within Level 2 of the fair value hierarchy.

~~Public~~

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:


	As of March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-Sale Investments
Asset backed securities	$	—	$	113,038	$	—	$	113,038
Certificates of deposits	—		6,000		—		6,000
Corporate notes and bonds	—		234,237		—		234,237
Commercial paper	—		129,202		—		129,202
Foreign government securities	—		18,151		—		18,151
US Government Securities	44,974		27,959		—		72,933
Total assets	$	44,974	$	528,588	$	—	$	573,562
Liabilities:


Private Common Stock Warrants	—		—		1,831		1,831
Total liabilities	$	—	$	—	$	1,831	$	1,831


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-Sale Investments
Asset backed securities	$	—	$	111,552	$	—	$	111,552
Certificates of deposits	—		6,002		—		6,002
Corporate notes and bonds	—		206,989		—		206,989
Commercial paper	—		109,391		—		109,391
Foreign government securities	—		8,181		—		8,181
US Government Securities	86,787		—		—		86,787
Total assets	$	86,787	$	442,114	$	—	$	528,902
Liabilities:


Private Common Stock Warrants	—		—		6,293		6,293
Total liabilities	$	—	$	—	$	6,293	$	6,293

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Available-for-Sale Investments

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

Private Common Stock Warrants

Fair Value Measurements as of June 30, 2021
Liabilities included in: Level 1 Level 2 Level 3 Total
Public Common Stock Warrants $ 77,607 $ 0 $ 0 $ 77,607
Private Common Stock Warrants 0 0 60,688 60,688
Total fair value $ 77,607 $ 0 $ 60,688 $ 138,295

Fair Value Measurements as of December 31, 2020
Liabilities included in: Level 1 Level 2 Level 3 Total
Public Common Stock Warrants $ 124,545 $ 0 $ 0 $ 124,545
Private Common Stock Warrants 0 0 53,687 53,687
Total fair value $ 124,545 $ 0 $ 53,687 $ 178,232

~~The Public Warrants was 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

The following is a rollforward of balances for Private Warrants:


	Private Warrants
Balance at December 31, 2021	$	6,293
Fair market value adjustment	(4,462)
Balance as of March 31, 2022	$	1,831

6. Investments

Investment Components

The components of investments were as follows:


	As of March 31, 2022
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset backed securities	$	113,392	$	3	$	(357)	$	113,038	$	—	$	6,364	$	106,674
Certificates of deposits	6,005		—		(5)		6,000		—		6,000		—
Corporate notes and bonds	235,942		2		(1,707)		234,237		—		171,187		63,051
Commercial paper	129,290		4		(93)		129,202		26,282		102,921		—
Money market funds	5,615		—		—		5,615		5,615		—		—
Foreign government securities	18,289		—		(137)		18,151		—		18,151		—
US government and agency securities	72,938		1		(5)		72,934		7,989		64,943		—
Total investments	$	581,471	$	10	$	(2,304)	$	579,177	$	39,886	$	369,566	$	169,725

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	As of December 31, 2021
	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities - Current		Marketable Securities - Non-current
Asset backed securities	$	111,619	$	1	$	(68)	$	111,552	$	—	$	5,372	$	106,180
Certificates of deposits	6,002		—		—		6,002		—		6,002		—
Corporate notes and bonds	207,169		21		(201)		206,990		3,026		132,688		71,276
Commercial paper	109,391		—		—		109,391		24,193		85,198		—
Money market funds	51,768		—		—		51,768		51,768		—		0
Foreign government securities	8,186		—		(5)		8,181		—		3,008		5,173
US government securities	86,783		4		—		86,787		—		86,787		—
Total investments	$	580,918	$	26	$	(274)	$	580,671	$	78,987	$	319,055	$	182,629

Non-marketable equity securities are investments in privately held companies without readily determinable fair values.The carrying value of the Company’s investments without readily determinable fair values was $55.6 million as of March 31, 2022 and December 31, ~~2020,~~2021, and was classified within “Investments in non-marketable equity securities” in the condensed consolidated balance sheets. The Company did not record any adjustments to the carrying value of its non-marketable equity securities accounted for under the measurement alternative, and did not recognize any gains or losses related to the sale of non-marketable equity securities in the three months ended March 31, 2022.

Unrealized Losses on Marketable Securities

The Company did not have any marketable securities with unrealized losses for more than 12 months. Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates.

Marketable Securities Maturities


	Adjusted		Estimated
	Cost Basis		Fair Value
March 31, 2022
Due in one year or less	$	370,511	$	369,566
Due after one year through five years	171,074		169,725
Due after five years through ten years	—		—
Total	$	541,585	$	539,291

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

7. Long-Term Debt

Components of long-term debt were as follows as of March 31, 2022 and December 31, 2021:


	March 31,		December 31,
	2022		2021
2021 Senior Secured Notes	$	300,000	$	300,000
Unamortized discount and issuance costs	(20,287)		(21,111)
Net carrying amount	$	279,713	$	278,889
Current portion of long-term debt	$	—	$	—
Non-current portion of long-term debt	$	279,713	$	278,889

2021 Senior Secured Notes

In December 2021, the Company entered into a $300 million 10.25% secured notes in a private placement to certain institutional buyers. The interest is payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. The effective interest rate on the notes is 12.14%. The notes will mature on December 15, 2026 unless repurchased or redeemed earlier. The secured notes contain customary covenants restricting the Company’s ability to incur debt, incur liens, make distributions to stockholders, make certain transactions with our affiliates, as well as certain other financial covenants. The Company was in compliance with all covenants as of March 31, 2022.

In accounting for the senior secured notes, unamortized discount and issuance costs were deducted from the carrying value in the condensed consolidated balance sheet. Issuance costs will be recognized as interest expense over the five-year term of the senior secured notes. The senior secured notes are classified as Level 2 financial instruments, and its fair value is presented for disclosure purposes only. The Company determined the fair value of the ~~Private Warrants liability~~notes is $261 million as of March 31, 2022 based on secondary market quotes.

Interest is paid semi-annually. Accrued interest as of March 31, 2022 was ~~$53.7 million. During~~$8.8 million, and was recorded within other current liabilities in the Company’s condensed consolidated balance sheets. NaN cash has been paid for interest as of March 31, 2022.

The following table outlines maturities of the principle related to the Company’s long-term debt, including the current portion, as of March 31, 2022:


	Amount
2022 (excluding the three months ended March 31, 2022)	$	—
2023	—
2024	—
2025	—
2026	300,000
Total	$	300,000

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

8. Leases

The Company is a party to various non-cancelable operating lease agreements for certain of its offices. The Company is a party to various non-cancelable finance lease agreements for certain network equipment. The leases have original lease periods expiring between 2022 to 2030. Some leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

The Company adopted Accounting Standards Update 2016-02, Leases (“ASC 842”), which supersedes the guidance in Accounting Standards Codification (“ASC”) 840, Leases (“ASC 840”), effective January 1. 2021. As the Company elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Jumpstart Our Business Startups Act of 2012, ASU 842 was not adopted until the fourth quarter of 2021. The comparative information for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 ~~the fair value~~have been adjusted to reflect impact of the ~~Private Warrants liability increased by $10.8~~adoption of ASC 842 as of January 1, 2021. The adoption did not impact the Company’s prior year consolidated statements of operations and comprehensive loss and statements of stockholders’ equity for the three-month period ended March 31, 2021. There was no impact on the Company’s prior year total cash used in operating activities in the Company’s condensed consolidated statement of cash flows; however, the Company has adjusted the operating lease right-of-use assets ($13.5 million decrease), operating lease liabilities ($14.4 million increase) and ~~$7.0~~other accruals and liabilities ($0.9 million ~~respectively.~~ decrease) line items within changes in operating assets and liabilities in our condensed consolidated statement of cash flows for the three months ended March 31, 2021 included herein.

As of ~~June 30, 2021,~~March 31, 2022, the ~~fair value of the Private Warrants liability was $60.7 million.~~Company does not have additional operating and finance leases not yet commenced.

6.9. Commitments and Contingencies

Legal Matters

The Company is a party to certain claims, suits, and proceedings which arise in the ordinary course and conduct of ~~business.~~its business and has certain unresolved claims pending, the outcomes of which are not determinable at this time. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s opinion, resolution of pending matters, other than as disclosed herein, is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s financial position, as of ~~June 30, 2021.~~March 31, 2022. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the results of operations, cash flows, or financial position in a particular period. However, based on the information known by the Company, except as set forth herein, any such amount is either immaterial or it is not possible to provide an estimated range of any such possible loss.

On May 15, 2019, a former employee of the Company filed a suit against the Company in the San Francisco Superior Court in California for claims including breach of contract, retaliation and wrongful termination. The case was tried in August and September 2021. The jury found in favor of the former employee and rendered a verdict against the Company for $11.6 million in compensatory damages, and the Company recorded a loss contingency accrual and corresponding general and administrative expenses in such amount in the third quarter of 2021. In April 2022, the judge in the case determined, in light of the Company’s post-verdict motions, that the instructions given to the jury at trial were defective. Accordingly, the judge ordered a new trial on damages or, alternatively, permitted the plaintiff accept a reduced verdict in the amount of $4.35 million. The plaintiff has until May 25, 2022 to decide whether to accept the reduced verdict, proceed with a new trial on damages, or pursue an appeal.

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

7.10. Common Stock Warrants

As of ~~June 30, 2021,~~March 31, 2022, the Company had ~~7,623,436~~0 Public Warrants and ~~5,016,666~~4,535,728 Private Warrants outstanding. During the ~~six~~three months ended ~~June 30, 2021, 9,626,559 Public~~March 31, 2022, there were 0 Private Warrants ~~were exercised for total proceeds of $110.7 million, of which $1.2 million had not been collected and are recorded as a warrant exercise receivable in the consolidated balance sheet.~~exercised.

As part of FEAC’s initial public offering, 17,250,000 Public Warrants were sold. The Public Warrants ~~entitle~~entitled the holder thereof to purchase 1 share of Class A common stock at a price of $11.50 per share, subject to adjustments. The Public Warrants ~~may be exercised~~were only exercisable for a whole number of shares of Class A common stock. No fractional shares ~~will be~~were issued upon exercise of the warrants. The Public Warrants ~~will expire at~~had an expiration date of 5:00 p.m. New York City time on December 16, 2025, or earlier upon redemption or liquidation. The Public Warrants ~~are~~were listed on the NYSE under the symbol “SKLZ.WS.”

The Company ~~may~~was permitted to call the Public Warrants for redemption starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than 30 days’ prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of Class A common stock ~~equals~~equaled or ~~exceeds~~exceeded $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~~sent the notice of redemption to the warrant holders, provided there iswas an effective registration statement covering the shares of Class A common stock issuable upon exercise of the ~~warrants.~~ warrants at such time.

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

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 FEAC Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 private placement warrants. Each outstanding Private Placement Warrant is exercisable for 1 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,~~the FEAC 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.

8.11. 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 1 vote per share and holders of Class B common stock are entitled to 20 votes per share. Shares of Class B common stock are convertible into an equivalent number of shares of Class A common stock and generally convert into shares of Class A common stock upon transfer. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid on a pro rata basis. On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock and Class B common stock.

As of ~~June 30, 2021,~~March 31, 2022, 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”).

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~~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

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

million. In connection with the public offering, certain stockholders of the Company sold an aggregate of ~~19,800,000~~19.8 million shares, including the full exercise of the underwriters’ option to purchase an additional ~~4,800,000~~4.8 million 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 a general and administrative expense during the ~~quarter.~~three months ended March 31, 2021.

9.12. Stock-Based Compensation

The following table summarizes stock-based compensation expense recognized for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Research and development	Research and development	$	2,215	$	817	$	3,422	$	1,022	Research and development	$	2,354	$	1,207
Sales and marketing	Sales and marketing	2,550		957		4,388		1,073		Sales and marketing	2,879		1,838
General and administrative	General and administrative	11,009		3,772		18,909		3,808		General and administrative	72,692		7,900
Total stock-based compensation expense	Total stock-based compensation expense	$	15,774	$	5,546	$	26,719	$	5,903	Total stock-based compensation expense	$	77,925	$	10,945

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 FEAC Business Combination and succeeds the Company’s legacy equity incentive plans. Under the 2020 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are exercisable over a maximum term of 10 years from the date of grant. 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 FEAC Business Combination, the Company entered into certain option agreements that include vesting conditions contingent upon the attainment of volume weighted average price targets related to the Company’s Class A common stock on the NYSE.

The 2020 Plan permits the Company to deliver up to ~~47,841,859~~86,771,777 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~~56,264,600 shares of Class A common stock and ~~8,172,581~~15,507,177 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.

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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 ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 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
Exercisable at December 31, 2020 35,500,603 38,404,493 $ 5.89 8.27 $ 542,074 341,256 $ 17.68
Options and restricted stock units granted (3,147,553) 0 0 3,147,553 21.82
Options exercised and restricted stock units released — (503,480) 0.22 0 0
Options and restricted stock units canceled 3,260,091 (2,985,501) 1.32 (274,590) 24.50
Balance at June 30, 2021 35,613,141 34,915,512 $ 6.35 7.44 $ 536,745 3,214,219 $ 21.15
Exercisable at December 31, 2020 14,248,234 $ 0.18 6.45 $ 282,364
Exercisable at June 30, 2021 16,096,923 0.21 5.92 346,242
Unvested at December 31, 2020 24,156,259 9.25 9.34 259,710
Unvested at June 30, 2021 18,818,589 11.60 8.74 190,503


		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, 2021	51,437,898	27,727,088	$	7.79	7.04	$	113,110	7,600,097	$	13.17
Additional shares authorized	20,437,691	—	—
Options and restricted stock units granted	(6,062,088)	—	—					6,062,088	2.86
Options exercised and restricted stock units released	—	(774,983)	0.30					(104,953)	18.65
Options and restricted stock units canceled	868,193	(198,648)	1.26					(669,545)	11.94
Balance at March 31, 2022	66,681,694	26,753,457	$	8.06	6.88	$	40,977	12,887,687	$	8.34

Exercisable at December 31, 2021		13,157,036	$	0.15	5.17	$	95,946
Exercisable at March 31, 2022		12,842,842	0.16		5.09	36,610
Unvested at December 31, 2021		14,570,052	14.69		8.72	17,164
Unvested at March 31, 2022		13,910,615	15.36		8.53	4,367

The number of unvested stock options as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 does not include ~~10.0~~7.2 million and ~~13.3~~8.2 million shares of restricted common stock, respectively, previously issued upon the early exercise of grants by certain executives.

The number of RSUs granted and outstanding does not include ~~0.1~~2.0 million performance based RSUs which the Company issued ~~in June 2021,~~as of March 31, 2022, as the performance-based RSUs are not deemed granted for accounting purposes. The stock option and RSU activity presented in the table above does not include activity related to the 2021 CEO Performance Award and Founders' Option Agreements, both described below.

As of ~~June 30, 2021,~~March 31, 2022, unrecognized stock-based compensation expense related to unvested stock options, restricted common stock, RSUs, performance-based RSUs and ~~RSUs~~performance stock units was ~~$176.4~~$177.3 million. The weighted-average period over which such compensation expense will be recognized is ~~3.63~~3.24 years.

On May 4, 2021, the Company entered into a transition and release agreement providing for Mr. Henry’s retirement from his position as Chief Financial Officer (“CFO”) of the Company, effective June 20, 2021. As part of the transition and release agreement, certain stock options of the CFO were modified to vest through August 10, 2021, the separation date, based on Mr. Henry’s continuous service to the Company in an executive advisor role from June 21, 2021 through the separation date. This modification will result in $6.4 million of incremental stock-based compensation expense recorded in the condensed consolidated statement of operations through the third quarter of 2021. The Company recognized approximately $3.7 million of this expense for the three months ended June 30, 2021.

The aggregate intrinsic value of options exercised was ~~$4.0~~$2.6 million and ~~$27.2~~$7.9 million during the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and~~respectively.

2021 CEO Performance Award

In September 2021, the Company granted the Company’s Chief Executive Officer (“CEO”), an award of up to 16.1 million performance stock units (the “CEO Performance Award”) under the Company’s 2020 ~~respectively, and $11.8 million and $27.5 million during~~Plan, pursuant to which the ~~six months ended June 30, 2021 and 2020, respectively.~~CEO may earn one share of the Company’s Class A Common Stock for each performance stock unit that vests based on the achievement of certain Market Capitalization Milestones (as defined in the award agreement for the CEO Performance Award).

1922

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The ~~assumptions used~~performance stock units were divided into four tranches, with each tranche corresponding to ~~estimate~~a Market Capitalization Milestone ranging from 2 to 5 times the ~~fair value~~Company’s market capitalization baseline. Each tranche vested if and when the Company’s market capitalization equals or exceeds the corresponding Market Capitalization Milestone at any point during the seven-year performance period following the grant date (the “Performance Period”). For purposes of determining achievement of the Market Capitalization Milestones, the Company’s market capitalization was calculated based on the trailing 60-trading day volume weighted average price per share (“VWAP”) of the Company’s Class A common stock ~~options granted~~ and the ~~resulting fair values for~~average number of outstanding shares during such period. The Company’s market capitalization baseline was calculated using the ~~three and six months ended June 30, 2021 and 2020 were as follows:~~

Three Months Ended June 30, Six Months Ended June 30,
2021(1)
2020
2021(1)
2020
Expected volatility 48.71% 47.99% – 48.79% 48.71% 47.99% – 48.79%
Risk-free interest rate 0.02% 0.34% – 0.59% 0.02% 0.34% – 1.44 %
Expected term (in years) 0.25 5.00 – 6.18 0.25 5.00 – 6.18
Expected dividend yield 0 0 0 0
Weighted average estimated fair value of stock options granted during the period $15.63 $2.58 $15.63 $2.42

~~(1)For the three and six months ended June 30, 2021, the above assumptions were used to estimate the fair value of certain stock options previously granted to the CFO, that were modified as part~~trailing 30-trading day VWAP of the ~~transition and release agreement.~~

~~Employee Stock Purchase Plan~~

In June 2021, the Company commenced its first offering period under the Skillz, Inc. Employee Stock Purchase Plan (the employee Stock Purchase Plan), which assists employees in acquiring a stock ownership interest in the Company and encourages them to remain in the employment of the Company. The Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. The employee Stock Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during specified offering periods. No employee may purchase more than $25,000 worth of stock in any calendar year. The price of shares purchased under the Employee Stock Purchase Plan is equal to 85% of the fair market value of theCompany’s Class A common stock on the ~~first or last day~~grant date and the average number of outstanding shares during such period.

The $70.8 million grant date fair value of the ~~offering~~CEO Performance Award was estimated using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition targets may not be satisfied.

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

Founders’ Option Agreements

In December 2020, the Company entered into option agreements with each of the CEO and 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 Class A common stock to the CRO. The options will vest in 3 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 ~~whichever is lower.~~of underlying Skillz Class A common stock (“VWAP”) equals or exceeds 3.0x the VWAP of the shares as of the Closing Date (as defined in the Options Agreements), (ii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 4.0x the VWAP of the shares as of the Closing Date; and (iii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 5.0x the VWAP of the shares as of the Closing Date. The ~~total Employee Stock Purchase plan expense for~~$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. For the three months ended ~~June 30, 2021~~March 31, 2022, the Company recognized $4.8 million in compensation expense related to these grants. As of March 31, 2022, the unrecognized stock-based compensation cost related to Founders’ Option Agreements was ~~not material.~~$68.4 million.

~~10.~~13. Income Taxes

The Company’s (benefit from) provision for income ~~tax provision~~taxes was ~~$65~~$(213) thousand and ~~$28~~$42 thousand for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. This represents an effective tax rate for the respective periods of ~~(0.08)%~~0.14% and (0.14)%. The Company’s income tax provision was $107 thousand and $53 thousand for the six months ended June 30, 2021 and 2020, respectively. This represents an effective tax rate for the respective periods of (0.08)~~% and (0.15)~~%. The Company has historically been in an overall loss position and is only subject to state and foreign taxes. The Company maintains a full valuation allowance for all of its deferred tax assets. The effective tax rate differs from the federal statutory rate due to the ~~change in need for~~ valuation allowance, as well as due to foreign taxes and state taxes.

~~11.~~14. Related-Party Transactions

The Company did not have any ~~significant~~material related party transactions in the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 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.2021.

2023

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

15. Net Loss Per Share

The Company computes net loss per share of the Class A common stock and Class B common stock using the two-class method required for participating securities. ~~Basic and diluted loss per share 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 effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the treasury stock method.

The following table sets forth the computation of basic and diluted loss per Class A common stock and Class B common stock (in thousands, except for share and per share data):

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Numerator:
Net loss - Basic and Diluted $ (79,595) $ (20,157) $ (133,187) $ (35,679)
Denominator:
Weighted average common shares outstanding – Basic and Diluted 385,945,332 289,823,175 371,519,800 284,054,689
Net loss per share attributable to common stockholders – Basic and Diluted $ (0.21) $ (0.07) $ (0.36) $ (0.13)


	Three Months Ended March 31,
	2022		2021
Numerator:
Net loss – basic	$	(148,113)	$	(53,592)
Denominator:
Weighted average common shares outstanding – basic	401,653,954		356,818,954
Net income (loss) per share attributable to common stockholders – basic	$	(0.37)	$	(0.15)

Numerator:
Net loss – basic	$	(148,113)	$	(53,592)
Decrease in fair value of public and private common stock warrant liabilities	—		(3,799)
Net loss – diluted	$	(148,113)	$	(57,391)
Denominator:
Weighted average common shares outstanding – basic	401,653,954		356,818,954
Incremental common shares from assumed exercise of public and private common stock warrants	—		3,008,695
Weighted average common shares outstanding – diluted	401,653,954		359,827,649
Net loss per share attributable to common stockholders – diluted	$	(0.37)	$	(0.16)

The following outstanding common stock equivalents were considered antidilutive, and therefore, excluded from the computation of diluted net ~~loss~~income (loss) per share attributable to common stockholders for the periods presented (share numbers are not in thousands):.
Number of Securities Outstanding at June 30,
2021 2020
Common and preferred stock warrants 7,623,436 4,865,722
Common stock options 44,929,906 40,075,953
Restricted stock units 3,147,553 0
Total 55,700,895 44,941,675

~~13. Investments in Non-Marketable Equity Securities~~

The Company’s non-marketable equity securities are investments in privately held companies without readily determinable fair values. The carrying value of the Company’s investments without readily determinable fair values was $2.9 million as of June 30, 2021 and is classified within “Other long-term assets” in our consolidated balance sheets. The Company did not have any investments without readily determinable fair value as of December 31, 2020. The Company did not record any adjustments to the carrying value of its non-marketable equity securities accounted for under the measurement alternative, and did not recognize any gains or losses related to the sale of non-marketable equity securities in the three and six months ended June 30, 2021.

~~14. Subsequent Events~~

~~The Aarki Acquisition~~

On June 1, 2021, the Company and Aarki, Inc. (“Aarki”) entered into an Agreement and Plan of Merger under which it would acquire Aarki and Aarki would become a wholly-owned subsidiary of the Company. On July 16, 2021, the Company completed the Aarki acquisition under the terms of the Agreement and Plan of Merger. The Company transferred $157.0 million in consideration comprised of approximately $90.0 million in cash and $67.0 million of Skillz Class A common stock to the existing Aarki shareholders and share-based award holders. The addition of Aarki’s technology-driven marketing platform will broaden the Company’s footprint across the rapidly expanding mobile gaming industry.


	As of March 31
	2022	2021
Common stock warrants	4,535,728	8,157,942
Common stock options	33,999,568	51,121,618

Restricted stock units	6,062,088	1,521,335
Total	44,597,384	60,800,895

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SKILLZ INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As16. Geographical Information

No sales to a country other than the ~~closing~~United States accounted for more than 10% of ~~the Aarki acquisition occurred subsequent to June 30, 2021, the Company’s financial results as of and~~revenue for the three ~~and six~~ months ended ~~June 30, 2021 do not contain~~March 31, 2022 or 2021. Revenue, classified by the ~~results of Aarki.~~major geographic areas where the end users were located when they entered paid competitions, was as follows:

~~The purchase price, including replacement share awards,~~


	Three Months Ended March 31,
	2022		2021
United States	69,177		72,382
Other countries	24,261		11,295
Total	$	93,438	$	83,677

Property and equipment, net and operating lease right-of-use assets by geography is ~~comprised of the net assets acquired, including intangible assets such~~ as developed technology, customer relationships, a trademark, other intangibles, and goodwill. A portion of the goodwill associated with the purchase is expected to be deductible for U.S. income tax purposes. The merger will be accounted for as a business combination pursuant to ASC 805, ~~Business Combinations,~~ whereby the Company is the accounting acquirer of Aarki. Due to the timing of the close of the Aarki acquisition, the Company has not completed its assessment of the accounting and valuation considerations related to the transaction. Additionally, supplemental pro forma information has not been provided for Aarki due to the timing of the closing of the merger.follows:

~~Non-Marketable Equity Investment~~

On July 14, 2021, the Company invested $50.0 million in cash in a privately-held software company. The investment will not require consolidation into the Company’s financial statements because the privately held company is not a variable interest entity and the Company does not hold a majority voting interest as a result of the investment. The Company’s non-controlling interest will be accounted for under ASC 321, ~~Investments - Equity Securities~~.

~~Redemption of Public Common Stock Warrants~~

On July 16, 2021, the Company announced the redemption of all public common stock warrants, held by Eagle Equity Partners II, LLC, a Delaware limited liability company (or its permitted transferees), to purchase shares of the Company's Class A common stock that were issued under the Warrant Agreement, dated as of March 5, 2020 (the “Warrant Agreement”), by and among Flying Eagle Acquisition Corp. and Continental Stock Transfer & Trust Company, as warrant agent and transfer agent, that remain outstanding on August 16, 2021.


	March 31,		December 31,
	2022		2021
United States	$	18,940	$	20,997
Other countries	3,666		3,502
Total	$	22,606	$	24,499

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

Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Skillz Inc. (for purposes of this section, “Skillz,” “we,” “us” and “our”). MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2020,~~2021, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Part II, Item 1A, “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

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

Skillz was founded in 2012 by Andrew Paradise and Casey Chafkin with the vision to make eSports accessible to everyone possible. As of the three months ended ~~June 30, 2021,~~March 31, 2022, the platform had ~~2.4~~3.2 million monthly active users (“MAUs”) and hosts an average of over ~~5.5~~6 million daily tournaments, including ~~1.9~~2 million paid entry daily tournaments, offering over $150 million in prizes each month. As of ~~June 30, 2021,~~March 31, 2022, we had over ~~9,000~~10,000 registered game developers on our platform that have launched a game integration.

For the three months ended June 30, 2021, Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 73% of our revenue. For the three months ended June 30, 2020, Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 80% of our revenue. For the three months ended June 30, 2021, Tether and Big Run accounted for 42% and 40%, respectively, of our revenue. For the three months ended June 30, 2020, Tether and Big Run accounted for 61% and 28%, respectively, of our revenue. out Bingo accounted for 74% of our revenue. For the six months ended June 30, 2020, Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 79% of our revenue. For the six months ended June 30, 2021, Tether and Big Run accounted for 42% and 40%, respectively, of our revenue. For the six months ended June 30, 2020, Tether and Big Run accounted for 66% and 21%, respectively, of our revenue. ~~Our top titles rotate over time as more games generate success on the Skillz platform. In the six months ended~~ ~~June 30, 2021 and 2020,~~ the number of games that generated over $1 million of annualized GMV has grown 29% to 43 from 33. 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.

Historically, our top games and related developers have accounted for a substantial portion of our revenue. For the three months ended ~~June 30,~~March 31, 2022, the game and 2021, the games Solitaire Cube, 21 Blitz (each developed by Tether Studios, LLC (“Tether”)) and ~~2020,~~Blackout Bingo (developed by Big Run Studios Inc. (“Big Run”)) combined accounted for 71% and 76% of our revenue, respectively. For the three months ended March 31, 2022 and 2021 Tether accounted for 38% and 42% of our revenue, respectively. For the three months ended March 31, 2022 and 2021 Big Run accounted for 42% and 41% of our revenue, respectively.

Our top titles rotate over time as more games generate success on the Skillz platform. In the three months ended March 31, 2022, the number of games that generated over $1 million of annualized GMV grew 8% to 43 from 40 in the three months ended March 31, 2021. GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives.

In addition to growing the number of games experiencing success on our platform, we have historically increased the number of users on our platform and improved the rate of conversion of such users to paying users. For the three months ended March 31, 2022 and 2021, we served ~~2.4~~3.2 million and ~~2.6~~2.7 million MAUs, respectively, and had monthly average revenue per user (“ARPU”) of $12.46 and $7.69, respectively. For the six months ended June 30, 2021 and 2020, we served 2.5 million and 2.6 million MAUs, respectively, and had monthly ARPU of ~~$11.44~~$9.65 and ~~$6.65,~~$10.35, respectively. We monitor the conversion of users to paying users based on the ratio of Paying MAU to MAU. For ~~each of~~ the ~~second quarters of~~three months ended March 31, 2022 and 2021, ~~and 2020,~~ our Paying MAU to MAU ratio was ~~19%~~18% and ~~12%~~17%, respectively, ~~and~~ our Paying MAU was ~~0.5~~0.6 million and ~~0.3~~0.5 million, respectively and our monthly ARPPU was ~~$64~~$54.70 and ~~$65,~~$59.80, respectively. ~~For~~

On July 16, 2021, the ~~six months ended 2021~~Company completed the acquisition of Aarki, Inc. (“Aarki”) and ~~2020, our Paying MAU to MAU ratio was 19%~~acquired 100% of the outstanding equity and ~~11%, respectively, our Paying MAU was 0.5~~voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company paid $162.3 million and 0.3 million, respectively, and our ARPPU was $62 and $61, respectively. We see a substantial opportunity for our developers to expand beyond casual content into other genres of interactive entertainment, from first-person shooters to racing games. In the three and six months ended June 30, 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 inc~~rease our brand awareness and achieve improvements~~ in ~~profitability through advertiser sponsored prizes.~~

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consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform will result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers. The financial results of Aarki have been included in the Company’s condensed consolidated financial statements since the date of the acquisition.

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~~higher 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 ~~10% of total entry fees for the three and six months ended June 30, 2021, and~~ 11% of total entry fees for the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2022 and 2021. Prior cash winnings that have not been withdrawn represented approximately 81% and 82% of total entry fees ~~for~~ the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020.~~respectively. End-user incentives represented approximately 8% ~~of total entry fees for the three and six months ended June 30, 2021,~~ and 7% of total entry fees for the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2022 and 2021. Our model has allowed us to grow users, developers and revenue steadily while driving meaningful operating leverage.

The following are key elements of our financial model:

•The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading to ever-improving gaming experiences. ~~On our platform,~~1 ~~we estimated game play paying users spent an average of 63 and 62 minutes per day during the~~ ~~three months ended June 30, 2021 and 2020, respectively, and~~ ~~64 and 62 minutes per day during~~ ~~the six months ended June 30, 2021 and 2020, respectively.~~

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

•Product-first philosophy and data science capabilities — We have built a culture that puts product first, driving our impact with users and developers and then scaling marketing investment. InFor the three ~~and six~~ months ended March 31, 2022~~June 30, 2021, 39% and 40%~~, ~~respectively,~~48% of our salary costs ~~was~~were spent on product development. Our easy-to-integrate SDK contains over ~~220~~200 features in a less than 16-MB package which allows for over-the-air upgrades. Our intuitive Developer Console dashboard enables our developers to rapidly integrate and monitor the performance of their games. Our LiveOps system enables us to manage and optimize the user experience across the thousands of games on our platform.

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

•Our unit economics — Our proprietary and highly scalable software platform produces revenue at a low direct cost, 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

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

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$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.

Key Components of Results of Operations

Revenue

Sk
~~illz~~

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

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

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

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

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

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

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

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

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

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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, (v) amortization of intangible assets which include developed technology, and ~~(v)~~(vi) 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.

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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.~~revenue and amortization of intangible assets which include customer relationships. Sales and marketing also includes allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.

General and Administrative

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

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

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Results of Operations

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

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue $ 89,491 $ 58,878 $ 173,168 $ 102,437
Costs and expenses
Cost of revenue 4,386 2,937 8,642 5,704
Research and development 10,140 4,518 17,422 8,884
Sales and marketing 99,523 52,369 195,846 99,194
General and administrative 25,432 11,642 52,716 16,475
Total costs and expenses 139,481 71,466 274,626 130,257
Loss from operations (49,990) (12,588) (101,458) (27,820)
Interest expense, net (25) (957) (49) (1,273)
Change in fair value of common stock warrant liabilities (29,595) — (31,703) —
Other income (expense), net 80 (6,584) 130 (6,533)
Loss before income taxes (79,530) (20,129) (133,080) (35,626)
Provision for income taxes 65 28 107 53
Net loss $ (79,595) $ (20,157) $ (133,187) $ (35,679)
Net loss per share attributable to common stockholders – basic and diluted $ (0.21) $ (0.07) $ (0.36) $ (0.13)
Weighted average common shares outstanding – basic and diluted 385,945,332 289,823,175 371,519,800 284,054,689

~~Revenue~~

Three Months Ended June 30, % Change Six Months Ended June 30, % Change
(In thousands, except percentages) 2021 2020 2021 2020
Revenue $ 89,491 $ 58,878 52 % $ 173,168 $ 102,437 69 %

~~Three Months Ended~~

Revenue increased by $30.6 million, or 52%, to $89.5 million in the three months ended June 30, 2021 from $58.9 million in the three months ended June 30, 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 62% over the same period.

~~Six Months Ended~~

Revenue increased by $70.7 million, or 69%, to $173.2 million in the six months ended June 30, 2021 from $102.4 million in the six months ended June 30, 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 72% over the same period.

~~Cost of Revenue~~


		Three Months Ended June 30,				% Change	Six Months Ended June 30,					% Change			Three Months Ended March 31,
(In thousands, except percentages)		2021		2020					2021		2020
																	2022		2021
Revenue																Revenue	$	93,438	$	83,677
Costs and expenses:																Costs and expenses:
Cost of revenue	Cost of revenue	$	4,386	$	2,937		49	%		8,642		5,704	52	%		Cost of revenue	9,265		4,256
Research and development																Research and development	18,653		7,282
Sales and marketing																Sales and marketing	117,332		96,323
General and administrative																General and administrative	92,792		27,284
Total costs and expenses																Total costs and expenses	238,042		135,145
Loss from operations																Loss from operations	(144,604)		(51,468)
Interest expense, net																Interest expense, net	(8,157)		(24)
Change in fair value of common stock warrant liabilities																Change in fair value of common stock warrant liabilities	4,462		(2,108)
Other (expense) income, net																Other (expense) income, net	(27)		50
Loss before income taxes																Loss before income taxes	(148,326)		(53,550)
(Benefit from) provision for income taxes																(Benefit from) provision for income taxes	(213)		42
Net loss																Net loss	$	(148,113)	$	(53,592)

Net loss per share attributable to common stockholders:																Net loss per share attributable to common stockholders:
Basic																Basic	$	(0.37)	$	(0.15)
Diluted																Diluted	$	(0.37)	$	(0.16)
Weighted average shares outstanding:																Weighted average shares outstanding:
Basic																Basic	401,653,954		356,818,954
Diluted																Diluted	401,653,954		359,827,649

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~~Three Months Ended~~

Revenue


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
Revenue	$	93,438	$	83,677		12	%

Revenue increased by $9.8 million, or 12%, to $93.4 million in the three months ended March 31, 2022 from $83.7 million in the three months ended March 31, 2021. The increase was attributable primarily to revenue from Aarki which was acquired in July of 2021, and an increase in live event tournament revenue, which reflects the Company's strategic focus on increasing the frequency of live events to increase end-user retention and to incentive deposits to continue to participate in such events.

Cost of Revenue


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
Cost of revenue	$	9,265	$	4,256		118	%

Cost of revenue increased by ~~$1.4~~$5.0 million, or ~~49%~~118%, to ~~$4.4~~$9.3 million in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~$2.9~~$4.3 million in the three months ended ~~June 30, 2020, growing in line with revenue.~~March 31, 2021. The increase in cost of revenue was primarily driven by ~~payment processing~~server expense attributed to the acquisition of Aarki and ~~software costs.~~the amortization of acquired developed technology intangible assets. Cost of revenue as a percentage of revenue ~~was~~increased to 10% in the three months ended March 31, 2022 compared to 5% in the three months ended ~~June 30, 2021 and 2020.~~

~~Six Months Ended~~

Cost of revenue increased by $2.9 million, or 52%, to $8.6 million in the six months ended June 30, 2021 from $5.7 million in the six months ended June 30, 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 the six months ended June 30, 2021 compared to 6% in the six months ended June 30, 2020.March 31, 2021.

Research and Development


		Three Months Ended June 30,				% Change	Six Months Ended June 30,					% Change				Three Months Ended March 31,					% Change
(In thousands, except percentages)	(In thousands, except percentages)	2021		2020					2021		2020				(In thousands, except percentages)	2022		2021		% Change

Research and development	Research and development	$	10,140	$	4,518		124	%		17,422		8,884	96	%			Research and development	$	18,653			$	7,282	156	%

~~Three Months Ended~~

Research and development costs increased by ~~$5.6~~$11.4 million, or ~~124%~~156%, to ~~$10.1~~$18.7 million in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~$4.5~~$7.3 million in the three months ended ~~June 30, 2020.~~March 31, 2021. The increase was primarily driven by a ~~$3.9~~$6.5 million increase in research and development headcount costs, of which ~~$1.4~~$5.1 million ~~was~~related to salaries and bonuses due to an increase in headcount from the acquisition of Aarki, and a $2.4 million increase related to stock-based compensation ~~a $0.9 million increase in contractor costs and a $0.6 million increase in server and software costs. Research~~. Research and development expenses accounted for ~~11%~~20% of revenue in the three months ended ~~June 30, 2021~~March 31, 2022 compared to 8%9% in the three months ended ~~June 30, 2020.~~

~~Six Months Ended~~

March 31, 2021.

Research and development costs increased by $8.5 million, or 96%, to $17.4 million in the six months ended June 30, 2021 from $8.9 million in the six months ended June 30, 2020. The increase was primarily driven by a $5.8 million increase in research and development headcount costs, of which $2.4 million was related to stock-based compensation, a $1.4 million increase in contractor costs and a $1.2 million increase in server and software costs. Research and development expenses accounted for 10% of revenue in the six months ended June 30, 2021 compared to 9% in the six months ended June 30, 2020.

Sales and Marketing

Three Months Ended June 30, % Change Six Months Ended June 30, % Change
(In thousands, except percentages) 2021 2020 2021 2020
Sales and marketing $ 99,523 $ 52,369 90 % 195,846 99,194 97 %

~~Three Months Ended~~


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
Sales and marketing	$	117,332	$	96,323		22	%

Sales and marketing costs increased by ~~$47.2~~$21.0 million, or ~~90%~~22%, to ~~$99.5~~$117.3 million in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~$52.4~~$96.3 million in the three months ended ~~June 30, 2020.~~March 31, 2021. The increase was attributable primarily to ~~an 84%~~a 10% increase in spend to acquire new paying users and a ~~92%~~17% increase in engagement marketing spend. User acquisition marketing costs were ~~$47.0~~$59.7 million and ~~$25.6~~$54.2 million in three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Engagement marketing costs were ~~$44.9~~$42.1 million and ~~$23.4~~$36.0 million in the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Engagement marketing as a percentage of revenue increased to ~~50%~~45% in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~40%~~43% in the three months ended ~~June 30, 2020,~~March 31, 2021, respectively. This increase reflects investments in marketing programs that resulted in an increase in our engagement marketing cost per user in the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020.~~March 31, 2021.

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~~Six Months Ended~~

Sales and marketing costs increased by $96.7 million, or 97%, to $195.8 million in the six months ended June 30, 2021 from $99.2 million in the six months ended June 30, 2020. The increase was attributable primarily to a 93% increase in spend to acquire new paying users and a 100% increase in engagement marketing spend. User acquisition marketing costs were $101.3 million and $52.6 million in six months ended June 30, 2021 and 2020, respectively. This increase reflects higher digital advertising costs that resulted in an increase in our acquisition cost per user in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Engagement marketing costs were $80.9 million and $40.5 million in the six months ended June 30, 2021 and 2020, respectively. Engagement marketing as a percentage of revenue increased to 47% in the six months ended June 30, 2021 from 40% in the six months ended June 30, 2020. This increase reflects investments in marketing programs that resulted in an increase in our engagement marketing cost per user in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

General and Administrative

Three Months Ended June 30, % Change Six Months Ended June 30, % Change
(In thousands, except percentages) 2021 2020 2021 2020
General and administrative $ 25,432 $ 11,642 118 % 52,716 16,475 220 %

~~Three Months Ended~~


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
General and administrative	$	92,792	$	27,284		240	%

General and administrative costs increased by ~~$13.8~~$65.5 million, or ~~118%~~240%, to ~~$25.4~~$92.8 million in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~$11.6~~$27.3 million in the three months ended ~~June 30, 2020.~~March 31, 2021. The increase was primarily driven by a ~~$10.9~~$65.5 million increase in ~~headcount costs, of which $7.2 million is related to~~ stock-based compensation expense, ~~and $3.0~~which includes $65.1 million ~~increase in insurance-related and other public company costs.~~related to the cancellation of performance stock units previously granted to the CEO without the concurrent grant or offer of a replacement award. General and administrative expenses accounted for ~~28%~~99% of revenue in the three months ended ~~June 30, 2021~~March 31, 2022 compared to ~~20%~~33% in the three months ended ~~June 30, 2020.~~March 31, 2021.

~~Six Months Ended~~Interest expense, net


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
Interest expense, net	$	(8,157)	$	(24)		NM

~~General and administrative costs~~Interest expense, net increased by ~~$36.3~~$8.1 million ~~or 220%,~~ to ~~$52.7~~$8.2 million in the six months ended June 30, 2021 from $16.5 million in the six months ended June 30, 2020. The increase was primarily driven by a $21.0 million increase in headcount costs, of which $15.1 million is related to stock-based compensation expense, a $7.3 million increase in professional fees related to the Company’s follow-on offering, a $6.8 million increase in public company-related insurance costs and legal fees, and a $1.1 million increase in other public company costs. General and administrative expenses accounted for 30% of revenue in the six months ended June 30, 2021 compared to 16% in the three months ended ~~June 30, 2020.~~

~~Interest expense, net~~

Three Months Ended June 30, % Change Six Months Ended June 30, % Change
(In thousands, except percentages) 2021 2020 2021 2020
Interest expense, net $ (25) $ (957) (97) % (49) (1,273) (96) %

~~Three Months Ended~~

~~Interest expense, net decreased by $0.9 million, or 97%, to $25.0~~March 31, 2022 from $24 thousand in the three months ended ~~June 30, 2021 from $1.0 million~~March 31, 2021. The increase was due to interest expense related to our senior secured notes issued in ~~the three months ended June 30, 2020. The decrease was primarily driven by the repayment of our long-term debt in 2020.~~

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~~Six Months Ended~~

Interest expense, net decreased by $1.2 million, or 96%, to $49.0 thousand in the six months ended June 30, 2021 from $1.3 million in the six months ended June 30, 2020. The decrease was primarily driven by the repayment of our long-term debt in 2020.December 2021.

Change in fair value common stock of warrant liabilities


		Three Months Ended June 30,		% Change	Six Months Ended June 30,		% Change		Three Months Ended March 31,		% Change
(In thousands, except percentages)	(In thousands, except percentages)	2021	2020		2021	2020		(In thousands, except percentages)	2021	2020

Change in fair value of common stock warrant liabilities	Change in fair value of common stock warrant liabilities	(29,595)	—	NM	(31,703)	—	NM	Change in fair value of common stock warrant liabilities	4,462	(2,108)	NM

The change in fair value of warrant liabilities was due to the ~~increase~~decrease in the estimated fair value of the ~~Public and~~ Private Common Stock Warrants.

Other (expense) income, ~~(expense),~~ net

Three Months Ended June 30, % Change Six Months Ended June 30, % Change
(In thousands, except percentages) 2021 2020 2021 2020
Other income (expense), net $ 80 $ (6,584) (101) % 130 (6,533) (102) %

~~Three Months Ended~~


	Three Months Ended March 31,				% Change
(In thousands, except percentages)	2022		2021
Other (expense) income, net	$	(27)	$	50	NM

Other income, ~~(expense),~~ net decreased by ~~6.7 million, or 101%,~~$77 thousand, to ~~income of $80~~$27 thousand in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~expense of $6.6~~$0.1 million in the three months ended ~~June 30, 2020.~~March 31, 2021. The decrease was primarily driven by expense related the ~~fair value adjustment to the Redeemable convertible Series E preferred stock forward contract liability~~realized losses in foreign currency transactions in three months ended ~~June 30, 2020.~~March 31, 2021.

~~Six Months Ended~~

Other income (expense), net decreased by 6.7 million, or 102%, to income of 0.1 million in the six months ended June 30, 2021 from expense of $6.5 million in the six months ended June 30, 2020. The decrease was primarily driven by expense related to the fair value adjustment to the Redeemable convertible Series E preferred stock forward contract liability in six months ended June 30, 2020.

~~Provision~~(Benefit from) provision for income taxes


		Three Months Ended June 30,				% Change	Six Months Ended June 30,					% Change				Three Months Ended March 31,						% Change
(In thousands, except percentages)	(In thousands, except percentages)	2021		2020					2021		2020				(In thousands, except percentages)	2022		2021		% Change

Provision for income taxes		$	65	$	28		132	%		107		53	102	%
(Benefit from) provision for income taxes																	(Benefit from) provision for income taxes	$	(213)	$	42		NM

~~Three Months Ended~~

~~Provision~~(Benefit from) provision for income taxes increased by ~~$37.0~~$255 thousand ~~or 132%,~~ to ~~$65~~a (benefit from) income taxes of $213 thousand in the three months ended ~~June 30, 2021~~March 31, 2022 from ~~$28~~a provision for income taxes of $42 thousand in the three months ended ~~June 30, 2020.~~March 31, 2021. The increase was primarily driven by ~~accrued state~~the reversal of net deferred tax ~~liabilities.~~liabilities related to the acquisition of Aarki.

~~Six Months Ended~~

Provision for income taxes increased by $54.0 thousand, or 102%, to $0.1 million in the six months ended June 30, 2021 from $53 thousand in the six months ended June 30, 2020. The increase was primarily driven by accrued state tax liabilities.

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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 (expense) income, ~~(expense),~~ net; (benefit from) provision for income ~~tax provision;~~tax; 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~~acquisition related expenses for ~~certain financial liabilities (including derivatives) associated with debt~~transaction costs and ~~equity transactions, and impairment charges~~loss contingency accruals, as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating Adjusted EBITDA we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

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

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Net loss	Net loss	$	(79,595)	$	(20,157)	$	(133,187)	$	(35,679)	Net loss	$	(148,113)	$	(53,592)
Interest expense, net	Interest expense, net	25		957		49		1,273		Interest expense, net	8,157		24
Stock-based compensation(3)	Stock-based compensation(3)	15,774		5,546		26,719		5,903		Stock-based compensation(3)	77,925		10,945
Change in fair value of common stock warrant liabilities	Change in fair value of common stock warrant liabilities	29,595		—		31,703		—		Change in fair value of common stock warrant liabilities	(4,462)		2,108
Provision for income taxes		65		28		107		53
(Benefit from) provision for income taxes										(Benefit from) provision for income taxes	(213)		42
Depreciation and amortization	Depreciation and amortization	547		327		1,102		635		Depreciation and amortization	5,539		555
Impairment charge (2)		—		3,395		—		3,395
Other (income) expense, net		(80)		6,584		(130)		6,533
One-time nonrecurring expenses (1)		2,090		—		10,929		—

Other expense (income), net										Other expense (income), net	27		(50)

One-time nonrecurring expenses (1) (2)										One-time nonrecurring expenses (1) (2)	119		8,839
Adjusted EBITDA	Adjusted EBITDA	$	(31,579)	$	(3,320)	$	(62,708)	$	(17,887)	Adjusted EBITDA	$	(61,021)	$	(31,129)

(1)For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, amounts represent one-time nonrecurring expenses related to ~~the follow-on offering, Aarki acquisition, and executive severance expense.~~IPO bonuses for certain employees.

(2)For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, amounts represent ~~an impairment charge of a lease deposit and prepayment in connection with a lease agreement~~transaction expenses related to ~~our facilities in San Francisco.~~the follow-on offering.

(3)For the three months ended March 31, 2022, amount includes stock-based compensation recognized for the cancellation of the Chief Executive Officer’s award of 16,119,540 performance share units granted on September 14, 2021 (the “CEO Performance Stock Units”). Please refer to Note 12, Stock-Based Compensations for more details.

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Liquidity and Capital Resources

Since inception, we have financed our operations primarily from the sales of capital stock. As of ~~June 30, 2021,~~March 31, 2022, our principal sources of liquidity were our cash and cash equivalents in the amount of ~~$692.8~~$114.6 million, which are primarily invested in money market ~~funds.~~funds and marketable securities with maturities of less than three months, and marketable securities in the amount of $539.3 million.

As of ~~June 30,~~March 31, 2022, the Company had 4,535,728 Private Warrants outstanding. During the three months ended March 31, 2022, there was no exercise of any Private Warrants.

In December 2021, the Company ~~had 7,623,436 FEAC Public Warrants and 5,016,666 FEAC Private Warrants outstanding that entitle the holder~~offered $300 million in aggregate principal senior secured notes due 2026 in a private offering. The notes were sold in a private placement to ~~purchase one share of Class A Common Stock~~qualified institutional buyers. Annual interest started to accrue from December 20, 2021 at a ~~price~~stated rate of ~~$11.50 per share, subject~~10.25%, and will be payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. The notes will mature on December 15, 2026. We intend to ~~adjustments. During~~use the ~~six months ended June 30, 2021, 9,626,559~~net proceeds from the offering for general corporate purposes, which may include potential investments in or acquisitions of ~~Public Warrants were exercised for total proceeds of $110.7 million, of which $1.2 million had not been collected and were recorded in warrant exercise receivable~~other companies, products, or technologies that we may identify in the ~~consolidated balance sheet.~~future. The notes contain customary covenants restricting our and certain of our subsidiaries’ ability to incur debt, incur liens, make distributions to holders of our stock, make certain transactions with our affiliates, as well as certain financial covenants specified in the indentures. We were in compliance with all covenants applicable to the notes as of March 31, 2022.

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. Our future cash requirements will depend on many factors, including our rate of revenue growth and the expansion of our sales and marketing activities. We also may invest in or acquire complementary businesses, applications or technologies.

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


		Six Months Ended June 30,					Three Months Ended March 31,
			2021		2020				2022		2021
Net cash used in operating activities	Net cash used in operating activities		$	(64,990)	$	(9,316)		Net cash used in operating activities	$	(83,450)	$	(39,153)
Net cash used in investing activities	Net cash used in investing activities		$	(3,508)	$	(1,875)		Net cash used in investing activities	$	(40,744)	$	(659)
Net cash provided by financing activities			$	498,548	$	54,504
Net cash provided by (used in) financing activities								Net cash provided by (used in) financing activities	$	(2,580)	$	389,662

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 ~~$65.0~~$83.5 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The most significant component of our cash used during this period was a net loss of ~~$133.2~~$148.1 million , which included non-cash expenses of ~~$31.7~~$77.9 million related to stock-based compensation, including $65.1 million related to the cancellation of performance stock units granted to our CEO, non-cash income of $4.5 million for the change in fair value related to ~~Public and~~ Private Common Stock Warrants, ~~$26.7 million related to stock-based compensation, $1.1~~$5.5 million related to depreciation and amortization, ~~accretion of unamortized discounts and amortization of issuance costs,~~ and net cash ~~inflows~~outflows of ~~$8.7~~$15.8 million from changes in operating assets and liabilities. The net cash ~~inflows~~outflows from changes of operating assets and liabilities were primarily the result of an increase in prepaid expense and other ~~liabilities~~assets of ~~$15.9~~$5.7 million, ~~primarily related to an increase~~a decrease in ~~accrued sales~~accounts payable of $5.6 million, and ~~marketing costs.~~

~~Net cash used in operating activities was $9.3 million for the six months ended June 30, 2020. The most significant component of our cash used during this period was~~ a net loss of $35.7 million, which included non-cash expenses of $6.6 million for the change in fair value related to Series E preferred stock forward contract liability, $5.9 million related to stock-based compensation, $3.4 million related to impairment charges, $1.2 million related to depreciation, amortization, and net cash inflows of $9.3 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of an increasedecrease in other liabilities of ~~$8.6 million, primarily related to an increase in accrued sales and marketing costs.~~$4.9 million.

Cash Flows from Investing Activities

Net cash used in investing activities was ~~$3.5~~$40.7 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The net cash used in investing activities included ~~a $2.0~~$149.5 million ~~investment~~for purchases of marketable securities, partially offset by $25.6 million in ~~non-marketable equity~~proceeds from sales of marketable securities and ~~$1.5~~$83.3 million in ~~purchases~~proceeds from maturities of ~~property and equipment, including internal-use software.~~

Net cash used in investing activities was $1.9 million for the six months ended June 30, 2020. The net cash used in investing activities related to purchases of property and equipment, including internal-use software.

marketable securities.

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Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$498.5~~$2.6 million for ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, which was primarily due to $402.1 million in net proceeds from the issuance of common stock in connection with the Company’s follow-on offering and $109.5 million of proceeds from the exercise of common stock warrants, partially offset by $13.2$2.0 million in payments ~~made towards offering~~for debt issuance costs.

Net cash provided by financing activities was $54.5 million for the six months ended June 30, 2020, which was primarily due to $64.9 million in net proceeds from the issuance of redeemable convertible Series E preferred stock, net of payments from borrowings of $10.0 million under our debt facilities, and $0.5 million in stock repurchases.

Contractual Obligations and Commitments

~~The~~Our material cash requirements include the following ~~table summarizes our~~ contractual ~~obligations~~ and other ~~commitments as~~obligations.

Leases

We have operating lease arrangements for office space, and finance lease agreements for certain network equipment. As of ~~June 30, 2021,~~March 31, 2022, we had lease payment obligations of $26.1 million, of which $5.7 million payable within 12 months.

Secured Notes and ~~the years~~Term Loan

Refer to “Liquidity and Capital Resources” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in ~~which these obligations are due:~~
Total
Less than
1 Year
1 – 3 Years 3 – 5 Years
More than
5 Years
Operating lease obligations $ 22,862 $ 1,249 $ 4,867 $ 4,952 $ 11,794
this Form 10-Q for more information.

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~~10-K filed ~~May 13, 2021~~March 1, 2022 as there have been no material changes.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of ~~June 30, 2021,~~March 31, 2022, we had cash and cash equivalents of ~~$692.8~~$114.6 million, which ~~primarily~~ consisted of money market fund accounts and commercial papers for which the fair market value would be affected by changes in the general level of U.S. interest rates. As of March 31, 2022, we had marketable securities of $539.3 million, which primarily consisted of U.S government, corporate debt securities, asset backed securities, commercial paper, and debt instruments issued by foreign governments, for which the fair market value would be affected by changes in the general level of interest rates. We limit the amount of credit exposure to any one issuer. Our investments carry a degree of interest rate risk. However, due to the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash ~~equivalents.~~equivalents and marketable securities.

Foreign Currency Risk

There was no material foreign currency risk for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

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ITEM 4. CONTROLS AND PROCEDURES

~~We maintain a system~~

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, ~~(the "Exchange Act")) designed to ensure that the information required to be disclosed by us in the reports that we file~~as amended, 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)Act), 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 June 30, 2021,~~March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our ~~Chief Executive Officer~~principal executive officer and ~~our Chief Financial Officer~~principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective atas a result of previously disclosed material weaknesses in our internal control over financial reporting as described below.

Notwithstanding the ~~reasonable assurance level.~~

On April 12, 2021, the staff of the SEC issued an SEC Staff Statement (“the SEC Staff Statement”) in which the SEC Staff clarified its interpretations of certain generally accepted accounting principles related to warrants issued by Special Purpose Acquisition Companies (“SPACs”). Prior to the SEC Staff Statement, we believedmaterial weaknesses, management has concluded that our ~~warrant accounting was consistent~~condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Form 10-Q, in conformity with 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 discussedGAAP.

Material Weaknesses

As previously disclosed in our ~~Annual Report~~management’s report on internal control over financial reporting within the Form ~~10-K/A~~10-K for the year ended December 31, ~~2020,~~2021, we identified material weaknesses in our internal control over financial reporting with respect to the following:

•Information technology general controls (ITGCs) in the areas of access and program change over information technology (IT) systems that support the Company’s financial reporting processes were not designed and operating effectively. Specifically, the Company did not maintain sufficient: user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that IT program and data changes affecting financial information technology applications and underlying records are identified, tested, authorized, and implemented appropriately. As a result, the ~~Chief Executive Officer~~Company’s related IT dependent manual and ~~Chief Financial Officer concluded as of December 31, 2020, there was a material weakness in~~application controls ~~related~~that rely upon the affected ITGCs, or information coming from IT systems with affected ITGCs were also deemed ineffective.

•Controls designed to ~~the classification and~~properly evaluate certain accounting ~~for warrants issued by a SPAC, which~~processes, including where management review is involved, did not operate effectively due to ~~appropriately apply~~lack of sufficient documentation or evidence retained to demonstrate management’s review.

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 the ~~provisions of ASC 815.~~Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Remediation of Material ~~Weakness~~Weaknesses

During the three months ended March 31, 2022, we continued to design and implement internal control measures to improve our internal control over financial reporting and remediate the material ~~weakness,~~weaknesses. Our efforts included a number of actions:

•ITGC: We are continuing to design and implement improved processes and controls for requesting, authorizing, and reviewing user access to key information systems which impact our financial reporting. This includes the ~~Company studied and clarified its understanding~~addition of the accounting of contracts that may be settled in the Company’s own stock, such as warrants, as equity of the entity or as an asset or liability as highlighted in the SEC Staff Statement, and implemented additional review procedures and enhanced its accounting policy related to the accounting for such contracts to determine proper accounting in accordancenew control activities associated with ~~GAAP as clarified by the SEC Staff Statement. Based on actions taken,~~user access provisioning within our key applications, as well as ~~the~~certain controls which review user access and activity logs. Additionally, we are redesigning our permissions associated with role-based access to our general ledger as well as designing and implementing compensating controls.We also are designing and implementing improved processes and controls over program changes within our key information systems which impact our financial reporting.

•Management Review Controls: We continue to reinforce management review control training for our accounting department to strengthen documentation and retention of evidence to be commensurate with risks associated with accounting processes involving complexity, subjectivity, and estimation uncertainties for specific transactions.

While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we

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believe that these ~~new controls, management believes that~~remediation actions, when fully implemented, will remediate the material ~~weakness has been remediated, subject to the ongoing evaluation of the design~~weaknesses we have identified and ~~operating effectiveness of these controls in connection with its annual assessment of~~strengthen our internal control over financial reporting. We are committed to the continuous improvement of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or in appropriate circumstances not complete, certain of the remediation work described above..

Changes in Internal Control over Financial Reporting

~~There~~

Other than the significant changes noted above associated with the material weaknesses and corresponding remediation procedures as described above, there was no change in our internal control over financial reporting ~~(as defined~~identified in management’s evaluation pursuant to Rules ~~13a-15(f) and 15d-15(f) under~~13a-15(d) or 15b-15(d) of the Exchange ~~Act) that occurred~~Act during the ~~fiscal~~first quarter ~~ended June 30, 2021~~of 2022 that ~~has~~ materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting ~~other than~~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 ~~described above related~~in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to ~~the material weakness related~~inherent limitations in a cost-effective control system, misstatements due to ~~the accounting for the warrants issued by SPACs.~~error or fraud may occur and not be detected.

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PART II

ITEM 1. LEGAL PROCEEDINGS

~~We are engaged~~Refer to note 9, “Contingencies and Commitments,” 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.Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in ~~Amendment No. 1 on Form 10-K/A to~~ our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

Exhibit Description

Form

Exhibit

Filing Date

10.1

~~Offer Letter, signed by Skillz Inc. and Ian Lee, dated May 1, 2021~~Form of Performance-Based Restricted Stock Unit Award Agreement

10.2

~~Form of Restricted Stock Unit Award~~Transition and Release Agreement dated May 4, 2021, between the Company and Scott Henry

31.1*

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

31.2*

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

32.1*

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

32.2*

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

101.INS

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

101.SCH**

Inline XBRL Taxonomy Extension Schema Document

101.CAL**

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

Inline XBRL Definition Linkbase Document

101.LAB**

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

*Filed herewith.

**Submitted electronically with the report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the ~~ninth~~sixth day of ~~August, 2021.~~May, 2022.


			SKILLZ INC.

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

3638


	Fair Value Measurements as of June 30, 2021
Liabilities included in:	Level 1		Level 2		Level 3		Total
Public Common Stock Warrants	$	77,607	$	0	$	0	$	77,607
Private Common Stock Warrants	0		0		60,688		60,688
Total fair value	$	77,607	$	0	$	60,688	$	138,295


	Three Months Ended June 30,		Six Months Ended June 30,
	2021(1)	2020	2021(1)	2020
Expected volatility	48.71%	47.99% – 48.79%	48.71%	47.99% – 48.79%
Risk-free interest rate	0.02%	0.34% – 0.59%	0.02%	0.34% – 1.44 %
Expected term (in years)	0.25	5.00 – 6.18	0.25	5.00 – 6.18
Expected dividend yield	0	0	0	0
Weighted average estimated fair value of stock options granted during the period	$15.63	$2.58	$15.63	$2.42


	Number of Securities Outstanding at June 30,
	2021	2020
Common and preferred stock warrants	7,623,436	4,865,722
Common stock options	44,929,906	40,075,953
Restricted stock units	3,147,553	0
Total	55,700,895	44,941,675


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

Operating lease obligations	$	22,862	$	1,249	$	4,867	$	4,952	$	11,794