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SKLZ Skillz

Filed: 3 Dec 20, 7:00pm
As filed with the United States Securities and Exchange Commission on December 4, 2020
Registration No: 333-     
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FLYING EAGLE ACQUISITION CORP.*
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
6770
(Primary Standard Industrial
Classification Code Number)
84-4478274
(I.R.S. Employer
Identification Number)
2121 Avenue of the Stars, Suite 2300
Los Angeles, CA 90067
Telephone: (310) 209-7280
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Eli Baker
President, Chief Financial Officer and Secretary
Flying Eagle Acquisition Corp.
2121 Avenue of the Stars, Suite 2300
Los Angeles, CA 90067
Telephone: (310) 209-7280
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Joel L. Rubinstein
Jonathan P. Rochwarger
Elliott M. Smith
White & Case LLP
1221 Avenue of the Americas
New York, NY 10020
(212) 819-8200
Christopher M. Zochowski
Steven J. Gavin
David A. Sakowitz
Kyle S. Gann
Winston & Strawn LLP
200 Park Avenue
New York, New York 10166
(212) 294-6700
Andrew Paradise
Skillz Inc.
PO Box 445
San Francisco, California 94104-0445
(415) 762-0511
Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerAccelerated filer
Non-accelerated filerSmaller 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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Securities to be Registered(1)
Amount to be
Registered(2)
Proposed
Maximum
Offering Price
per Share(3)
Proposed
Maximum
Aggregate
Offering Price
Amount of
Registration Fee
Class A common stock, par value $0.0001 per share15,853,052$13.43$212,906,488$23,229
(1)
These securities are being registered solely in connection with the resale of shares of the registrant’s Class A common stock by certain selling stockholders (the “Selling Stockholders”) named in this registration statement. The Selling Stockholders have committed to purchase up to 15,853,052 shares of Class A common stock, par value $0.0001 per share, of Flying Eagle Acquisition Corp. (“FEAC”) immediately prior to the consummation of its business combination with Skillz Inc.
(2)
Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the securities being registered hereunder include such indeterminate number of additional securities as may be issuable to prevent dilution resulting of any stock dividend, stock split, recapitalization or other similar transaction.
(3)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act, based on the average of the high and low prices of the registrant’s ordinary shares as reported on November 27, 2020, which was $13.43 per share.
*
All securities being registered for resale hereunder will be issued by Flying Eagle Acquisition Corp. (“FEAC”) in connection with the business combination with Skillz Inc. Upon the closing of the business combination, FEAC will change its name to Skillz, Inc.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 
EXPLANATORY NOTE
This registration statement registers the resale of up to 15,853,052 shares of Class A common stock (the “PIPE Shares”), par value $0.0001 per share, of Flying Eagle Acquisition Corp., a Delaware corporation (“FEAC”), by the selling stockholders named in this prospectus (or their permitted transferees) (the “Selling Stockholders”) who are expected to be issued the PIPE Shares in private placements immediately prior to the consummation of the proposed business combination (the “Business Combination”) by and among FEAC, FEAC Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of FEAC (“Merger Sub”), Skillz Inc., a Delaware corporation (“Skillz”) and Andrew Paradise, solely in his capacity as representative of the stockholders of Skillz.
The PIPE Shares will not be issued and outstanding at the time of the special meeting of FEAC’s stockholders relating to the Business Combination. Further, the holders of the PIPE Shares will not receive any proceeds from the trust account established in connection with FEAC’s initial public offering in the event FEAC does not consummate an initial business combination by the March 10, 2022 deadline set forth in its current certificate of incorporation. In the event the Business Combination is not approved by FEAC stockholders or the other conditions precedent to the consummation of the Business Combination are not met or waived, the PIPE Shares will not be issued and FEAC will seek to withdraw the registration statement prior to its effectiveness.
 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be issued until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and does not constitute the solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 4, 2020
PRELIMINARY PROSPECTUS
FLYING EAGLE ACQUISITION CORP.
15,853,052 Shares of Class A Common Stock
This prospectus relates to the resale from time to time by the selling stockholders named in this prospectus or their permitted transferees (collectively, the “Selling Stockholders”) of up to 15,853,052 shares of Class A common stock (the “PIPE Shares”), par value $0.0001 per share, of Flying Eagle Acquisition Corp., a Delaware corporation (“FEAC” or the “Company”), which are expected to be issued in private placements immediately prior to the consummation of the proposed business combination (the “Business Combination”) pursuant to the terms of the Subscription Agreements (as defined below) and in connection with the Business Combination. If the Business Combination is not consummated, the PIPE shares registered pursuant to this prospectus will not be issued.
On September 1, 2020, FEAC entered into an agreement and plan of merger with FEAC Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of FEAC (“Merger Sub”), Skillz Inc., a Delaware corporation (“Skillz”) and Andrew Paradise, solely in his capacity as representative of the stockholders of Skillz (as may be amended from time to time, the “Merger Agreement”). In connection with the Business Combination, Skillz will merge with and into Merger Sub, with Skillz surviving the merger as a wholly owned subsidiary of FEAC and FEAC will change its name to “Skillz, Inc.”
In connection with the Business Combination, FEAC entered into subscription agreements, each dated as of September 1, 2020 (the “Subscription Agreements”), with the Selling Stockholders, pursuant to which FEAC agreed to issue and sell to the Selling Stockholders, in private placements to close immediately prior to the consummation of the Business Combination, an aggregate of 15,853,052 PIPE Shares at $10.00 per share, for an aggregate purchase price of $158,530,520.
The Selling Stockholders may offer, sell or distribute all or a portion of the PIPE shares registered hereby publicly or through private transactions at prevailing market prices or at negotiated prices. We will pay certain offering fees and expenses and fees in connection with the registration of the PIPE shares and will not receive proceeds from the sale of the PIPE shares by the Selling Stockholders. Our Class A common stock is currently listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “FEAC.” Upon consummation of the Business Combination, the post-Business Combination company’s Class A common stock is expected trade on the NYSE under the symbol “SKLZ”.
We are an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting requirements.
INVESTING IN OUR SECURITIES INVOLVES RISKS THAT ARE DESCRIBED IN THE “RISK FACTORS” SECTION BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this prospectus or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is December   , 2020.

 
TABLE OF CONTENTS
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F-1
You should rely only on the information contained in this prospectus.   No one has been authorized to provide you with information that is different from that contained in this prospectus. This prospectus is dated as of the date set forth on the cover hereof. You should not assume that the information contained in this prospectus is accurate as of any date other than that date.
For investors outside the United States:   We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
 
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CERTAIN DEFINED TERMS
Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our” and “FEAC” refer to Flying Eagle Acquisition Corp., and the terms “New Skillz,” “combined company” and “post-combination company” refer to Skillz, Inc. and its subsidiaries following the consummation of the Business Combination.
In this document:
Aggregate Cash Consideration Percentage” means the percentage obtained by dividing (a) Cash Consideration by (b) the Equity Value.
Aggregate Cash Election Amount” means (a) the sum of the aggregate number of Dissenting Shares and the aggregate number of Cash Electing Shares, multiplied by (b) the Per Share Merger Consideration Value.
Average Revenue Per Monthly Active User” or “ARPU” means the average revenue in a given month divided by MAUs in that month, averaged over the period.
Bonus Cash” is a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid entry fee contests.
Business Combination” means the transactions contemplated by the Merger Agreement, including the merger of Merger Sub with and into Skillz, pursuant to which (i) Skillz survives the merger as a wholly owned subsidiary of New Skillz and (ii) the Skillz stockholders and holders of Skillz options and warrants exchange their Skillz capital stock and Skillz options and warrants for equity interests in New Skillz, as further described herein.
Cash Consideration” means an amount of cash equal to the lesser of (1) (a) the funds remaining in the Trust Account following the redemption (if any) of shares of FEAC Class A common stock and payment of the transaction expenses, plus (b) the funds received following the consummation of the transactions contemplated by the Subscription Agreements, plus (c) the amount of cash and cash equivalents (including bank account balances and marketable securities) of Skillz, determined in accordance with GAAP as of 11:59 p.m. Pacific Time on the day immediately preceding the Closing Date, minus (d) $250,000,000, and (2) solely to the extent reasonably necessary, based on the written advice of the Company’s nationally recognized tax counsel, to qualify the Business Combination either as a reorganization under Section 368(a) of the Internal Revenue Code of 1986 or a transfer under Section 351(a) of the Internal Revenue Code of 1986, such amount designated by Skillz to FEAC not less than three (3) days prior to the Closing; provided that under no circumstances shall the Cash Consideration be less than $0.
Cash Consideration Excess” means the Cash Consideration minus the Aggregate Cash Election Amount; provided that under no circumstances shall the Cash Consideration Excess be less than $0.
Cash Consideration Percentage” means, with respect to a Skillz stockholder (together with its affiliates), a fraction, the numerator is the portion of the Cash Consideration to be received by such Skillz stockholder (together with its affiliates) in accordance with the Business Combination and the denominator is the product of (a) the Per Share Merger Consideration Value and (b) the number of shares of Skillz common stock held by such Skillz stockholder (together with its affiliates) that is issued and outstanding immediately prior to the Effective Time.
“Cash Fraction” means a fraction, the numerator of which shall be the Cash Consideration and the denominator of which shall be the Aggregate Cash Election Amount.
CCPA” means the California Consumer Privacy Act of 2018.
Closing” means the closing of the Business Combination.
Closing Date” means the closing date of the Business Combination.
Code” means the Internal Revenue Code of 1986, as amended.
 
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“Contribution Margin” means gross profit less all operating expenses (fixed and variable) except for User Acquisition Costs (as defined below).
Current Charter” means FEAC’s second amended and restated certificate of incorporation.
Developer” means a third party mobile game developer who uses Skillz’s platform to enable their game content for multi-player competition.
“Developer Console” means a dashboard that enables developers to rapidly integrate and monitor the performance of their games.
DGCL” means the General Corporation Law of the State of Delaware.
Director Nomination Agreement” means the Director Nomination Agreement.
DTC” means The Depository Trust Company.
Equity Value” means the sum of (i) $3,500,000,000 plus (ii) the amount by which (x) the outstanding liabilities and obligations of FEAC with respect to the Business Combination (including with respect to indebtedness and transaction expenses of FEAC) at the Closing (but prior to repayment thereof at the Closing) exceeds (y) $32,150,000. For the avoidance of doubt, the amount described in sub-clause (ii) of this definition of Equity Value shall not be less than $0 and the Equity Value shall not be less than $3,500,000,000.
ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
Exchange Act” means the Securities Exchange Act of 1934, as amended.
FASB” means the Financial Accounting Standards Board.
FEAC” means Flying Eagle Acquisition Corporation, a Delaware corporation (which, after the Closing will be known as Skillz, Inc.).
FEAC Board” means the board of directors of FEAC.
FEAC Class A common stock” means the shares of Class A common stock, par value $0.0001 per share, of FEAC.
FEAC Class B common stock” means the shares of Class B common stock, par value $0.0001 per share, of FEAC.
FEAC Shares” means, collectively, the FEAC Class A common stock and FEAC Class B common stock.
GAAP” means United States generally accepted accounting principles.
“Game” means a multi-player user experience on the Skillz platform.
“Gaming for Good” or “G4G” means Skillz’s philanthropic initiative.
Gamer”, “player”, “user” or “end-user” means a person who enters into a competition or contest hosted on Skillz’s platform.
GDPR” mean the European Union’s General Data Protection Regulation
GMVor “Gross Marketplace Volume” means the total entry fees paid by users for contests hosted on Skillz’s platform. Total entry fees include entry fees paid by end-users using cash deposits, prior cash winnings from end-users’ accounts that have not been withdrawn, and end-user incentives used to enter paid entry fee contests.
HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Initial Stockholders” means the Sponsor and FEAC’s independent directors.
 
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Investment Company Act” means the Investment Company Act of 1940, as amended.
Investors’ Rights Agreement” means the Eighth Amended and Restated Investors’ Rights Agreement, dated as of September 1, 2020 and effective at (but subject to) the Closing, by and among Skillz, FEAC, certain Skillz stockholders and certain FEAC Stockholders.
IPO” means FEAC’s initial public offering, consummated on March 5, 2020, through the sale of 69,000,000 units at $10.00 per unit.
JOBS Act” means the Jumpstart Our Business Startups Act of 2012.
“LiveOps” means our Live Operations System.
Merger Agreement” means that Agreement and Plan of Merger, dated as of September 1, 2020, by and among FEAC, Merger Sub, Skillz, and solely in his capacity as the representative of the Skillz stockholders, the Stockholder Representative.
Merger Sub” means FEAC Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of FEAC.
“Minimum Proceeds Condition” means the minimum aggregate cash amount that FEAC must have available at Closing from the Trust Account.
Monthly Active Users” or “MAUs” means the number of end-users who entered into a paid or free contest hosted on Skillz’s platform at least once in a month, averaged over each month in the quarter.
Morrow” means Morrow Sodali, proxy solicitor to FEAC.
New Skillz” means Skillz, Inc., a Delaware corporation (which, prior to consummation of the business combination, was known as Flying Eagle Acquisition Corp. (“FEAC” herein)).
New Skillz Board” means the board of directors of New Skillz.
New Skillz Class A common stock” means the shares of Class A common stock, par value $0.0001 per share, of New Skillz, which shares have the same economic terms as the shares of New Skillz Class B common stock, but are only entitled to one (1) vote per share.
New Skillz Class B common stock” means the shares of Class B common stock, par value $0.0001 per share, of New Skillz, which shares have the same economic terms as the shares of New Skillz Class A common stock, but are entitled to twenty (20) votes per share.
New Skillz common stock” means, collectively, the New Skillz Class A common stock and the New Skillz Class B common stock.
New Skillz Management” means the management of New Skillz following the consummation of the Business Combination.
Non-Redemption Agreements” means certain non-redemption agreements with certain holders of FEAC Class A common stock, pursuant to which such holders agree not to exercise their redemption rights in connection with the Business Combination.
NYSE” means The New York Stock Exchange.
Paying Monthly Active Users” or “Paying MAUs” means the number of end-users who entered into a paid contest hosted on Skillz’s platform at least once in a month, averaged over each month in the quarter.
paying user” means, with respect to a given period, a user that pays a cash entry fee for a contest hosted on Skillz’s platform during such period.
“payback period” means the average amount of time it takes for the cumulative gross profit generated by all of the users in a given install period to exceed the dollar amount spent on UAC during the same install period.
 
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Per Share Merger Consideration” means (a) with respect to any share of Skillz Class B common stock issued and outstanding immediately prior to the Effective Time, including those issued in connection with the conversion of the Skillz preferred stock into Skillz Class B common stock, a number of shares of New Skillz Class A common stock equal to (i) the Per Share Merger Consideration Value divided by (ii) $10.00 per share and (b) with respect to any share of Skillz Class A common stock issued and outstanding immediately prior to the Effective Time, including those issued in connection with the conversion of the Skillz preferred stock into Skillz Class B common stock, a number of shares of New Skillz Class B common stock equal to (i) the Per Share Merger Consideration Value divided by (ii) $10.00 per share.
Per Share Merger Consideration Value” means (a) the Equity Value divided by (b) the total number of shares of Skillz common stock issued and outstanding as of immediately prior to the Effective Time (including (i) shares of Skillz common stock issued upon the conversion of Skillz preferred stock into Skillz Class B common stock, (ii) any shares of Skillz common stock issued or issuable upon the exercise of all Skillz options and Skillz warrants, in each case, on a net exercise basis, and (iii) the vesting of Skillz’s restricted shares of Skillz common stock and Skillz Series E preferred stock).
“PIPE Investors” means certain institutional investors who are party to the Subscription Agreements.
“Private Placement” means the issuance of an aggregate of 15,853,052 shares of FEAC Class A common stock pursuant to the Subscription Agreements to the PIPE Investors immediately before the Closing, at a purchase price of $10.00 per share.
Private placement warrants” means the 10,033,333 warrants issued to our Sponsor concurrently with our IPO, each of which is exercisable for one share of FEAC Class A common stock.
Proposed Charter” means the proposed third amended and restated certificate of incorporation to be adopted by FEAC pursuant to the Charter Proposal immediately prior to the Closing (and which at and after the Closing will operate as the third amended and restated certificate of incorporation of New Skillz)
Public shares” means shares of FEAC Class A common stock included in the units issued in the IPO.
Public stockholders” means holders of public shares.
Public warrants” means the warrants included in the units issued in the IPO, each of which is exercisable for one share of FEAC Class A common stock, in accordance with its terms.
Skillz” means Skillz Inc., a Delaware corporation.
Skillz capital stock” means the Skillz Class A common stock, the Skillz Class B common stock and each other class or series of capital stock of Skillz (including preferred stock).
Skillz Class A common stock” means the Class A common stock, par value $0.0001 per share, of Skillz.
Skillz Class B common stock” means the Class B common stock, par value $0.0001 per share, of Skillz.
Skillz option” means each option to purchase shares of Skillz common stock.
Skillz platform” means Skillz’s digital assets including the SDK, the Developer Console, the LiveOps system and the data science technologies, which together enable Skillz to provide its monetization services to third-party game developers.
Skillz stockholder” means each holder of Skillz capital stock.
Skillz Warrant” means each warrant to purchase shares of Skillz capital stock.
Software Development Kit” or “SDK” means the set of software development tools that allows for the creation of applications for a certain software framework, hardware platform, or video game console.
Sponsor” means Eagle Equity Partners II, LLC, a Delaware limited liability company.
 
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Sponsor Shares” means the aggregate of 17,190,000 shares of FEAC Class B common stock held by the Sponsor.
Stockholder Representative” means Andrew Paradise solely in his capacity as the stockholder representative pursuant to the Merger Agreement.
“Subscription Agreements” means the subscription agreements, each dated as of September 1, 2020, between FEAC and the PIPE Investors, pursuant to which FEAC has agreed to issue an aggregate of 15,853,052 shares of FEAC Class A common stock to the PIPE Investors immediately before the Closing at a purchase price of $10.00 per share.
“Surviving Company” means the surviving corporation, Skillz, resulting from the merger of the Merger Sub with and into Skillz.
“Take Rate” means a percentage of the entry fees retained by Skillz for 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.
“Termination Date” means December 31, 2020.
Three-Year Lifetime Value” means the cumulative gross profit from a paying user over the thirty-six (36) months following user acquisition.
“Ticketz” means in-game tickets on Skillz’s platform that are earned in every match and can be redeemed within the Skillz loyalty program for prizes or credits to be used towards future paid entry fee tournaments.
Transfer Agent” means Continental Stock Transfer & Trust Company.
Trust Account” means the Trust Account of FEAC that holds the proceeds from FEAC’s IPO and the private placement of the private placement warrants.
Trust Agreement” mean that certain Investment Management Trust Agreement, dated as of March 5, 2020, between FEAC and the Trustee.
Trustee” means Continental Stock Transfer & Trust Company.
Units” means the units of FEAC, each consisting of one share of FEAC Class A common stock and one-fourth (1/4th) of one public warrant of FEAC.
“User Acquisition Cost” or “UAC” means the total cost to acquire a new paying user.
“Z’s” means the free in-game transaction currency on Skillz’s platform.
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial, of FEAC and Skillz. These statements are based on the beliefs and assumptions of the management of FEAC and Skillz. Although FEAC and Skillz believe that their respective plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, neither FEAC nor Skillz can assure you that either will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes”, “estimates”, “expects”, “projects”, “forecasts”, “may”, “will”, “should”, “seeks”, “plans”, “scheduled”, “anticipates” or “intends” or similar expressions. The forward-looking statements are based on projections prepared by, and are the responsibility of, Skillz’s management. Ernst & Young, Skillz’s independent auditor, has not examined, compiled or otherwise applied procedures with respect to the accompanying forward-looking financial information presented herein and, accordingly, expresses no opinion or any other form of assurance on it. The Ernst & Young report included in this prospectus relates to historical financial information of Skillz. It does not extend to the forward-looking information and should not be read as if it does. Forward-looking statements contained in this prospectus include, but are not limited to, statements about the ability of FEAC and Skillz prior to the Business Combination, and New Skillz following the Business Combination, to:

meet the Closing conditions to the Business Combination, including approval by stockholders of FEAC and the availability of at least $550 million of cash from the proceeds received from the Selling Stockholders and in FEAC’s Trust Account, after giving effect to redemptions of public shares, if any,

realize the benefits expected from the Business Combination;

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

the ability to obtain and/or maintain the listing of New Skillz’s Class A common stock on NYSE following the Business Combination;

New Skillz’s ability to raise financing in the future and to comply with restrictive covenants related to long-term indebtedness;

New Skillz’s success in retaining or recruiting, or changes required in, its officers, key employees or directors following the Business Combination;

factors relating to the business, operations and financial performance of Skillz, including:

New Skillz’s ability to effectively compete in the global entertainment and gaming industries;

New Skillz’s ability to attract and retain successful relationships with the third party developers that develop and update all of the games hosted on Skillz’s platform;

New Skillz’s ability to comply with laws and regulations applicable to its business; and

market conditions and global and economic factors beyond New Skillz’s control;

intense competition and competitive pressures from other companies worldwide in the industries in which the combined company will operate;

litigation and the ability to adequately protect New Skillz’s intellectual property rights; and

other factors detailed under the section entitled “Risk Factors.”
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this prospectus are more fully described under the heading “Risk Factors” and elsewhere in this prospectus. The risks described under the heading “Risk Factors” are not exhaustive. Other sections of this prospectus describe additional factors that could adversely affect the business, financial condition or results of operations of FEAC and Skillz prior to the Business Combination, and New Skillz
 
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following the Business Combination. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can FEAC or Skillz assess the impact of all such risk factors on the business of FEAC and Skillz prior to the Business Combination, and New Skillz following the Business Combination, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable to FEAC or Skillz or persons acting on their behalf are expressly qualified in their entirety by the foregoing cautionary statements. FEAC and Skillz prior to the Business Combination, and New Skillz following the Business Combination, undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
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SUMMARY OF THE PROSPECTUS
This summary highlights selected information included in this prospectus and does not contain all of the information that may be important to you in making an investment decision. This summary is qualified in its entirety by the more detailed information included in this prospectus. Before making your investment decision with respect to our securities, you should carefully read this entire prospectus, including the information under “Risk Factors,” “FEAC’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Skillz’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere in this prospectus.
Information About the Parties to the Business Combination
Flying Eagle Acquisition Corp.
2121 Avenue of the Stars, Suite 2300
Los Angeles, CA 90067
(310)209-7280
Flying Eagle Acquisition Corp. is a blank check company whose business purpose is to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.
Skillz Inc.
PO Box 445
San Francisco, CA 94104-0445
(415) 762-0511
Skillz Inc. is a technology company that enables game developers to monetize their content through fun and fair multi-player competition.
FEAC Merger Sub Inc.
c/o Flying Eagle Acquisition Corp.
2121 Avenue of the Stars, Suite 2300
Los Angeles, CA 90067
(310)209-7280
FEAC Merger Sub Inc. is a Delaware corporation and wholly-owned subsidiary of Flying Eagle Acquisition Corp., which was formed for the purpose of effecting a merger with Skillz.
The Business Combination and the Merger Agreement
The terms and conditions of the Business Combination are contained in the Merger Agreement. If the Merger Agreement is approved and adopted and the Business Combination is consummated, Merger Sub will merge with and into Skillz with Skillz surviving the merger as a wholly-owned subsidiary of Skillz Inc.
Structure of the Business Combination
Pursuant to the Merger Agreement, Merger Sub will merge with and into Skillz, with Skillz surviving the Business Combination. Upon consummation of the foregoing transactions, Skillz will be a wholly-owned subsidiary of New Skillz (formerly FEAC). In addition, immediately prior to the consummation of the Business Combination, New Skillz will amend and restate its charter to be the Proposed Charter and adopt the dual class structure, each as described in the section of this prospectus titled “Description of New Skillz Securities.
 
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The following diagrams illustrate in simplified terms the current structure of FEAC and Skillz and the expected structure of New Skillz (formerly FEAC) upon the Closing.
Simplified Pre-Combination Structure
[MISSING IMAGE: tm2030148d1-fc_simplibwlr.jpg]
Simplified Post-Combination Structure
[MISSING IMAGE: tm2030148d1-fc_mergerbwlr.jpg]
The Private Placement
FEAC entered into the Subscription Agreements with the Selling Stockholders, pursuant to which, among other things, FEAC agreed to issue and sell in private placements an aggregate of 15,853,052 shares of FEAC Class A common stock to the Selling Stockholders for $10.00 per share.
The Private Placement is expected to close immediately prior to the consummation of the Business Combination. In connection with the Closing, all of the issued and outstanding shares of FEAC Class A common stock, including the shares of FEAC Class A common stock issued to the Selling Stockholders, will be exchanged, on a one-for-one basis, for shares of New Skillz Class A common stock.
 
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Stock Exchange Listing
FEAC’s units, Class A common stock and public warrants are publicly traded on the New York Stock Exchange (the “NYSE”) under the symbols “FEAC” and “FEAC WS”, respectively. FEAC intends to apply to list the New Skillz Class A common stock and public warrants on the NYSE under the symbols “SKLZ” and “SKLZ WS”, respectively, upon the Closing of the Business Combination.
Summary of Risk Factors
Investing in our securities involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 13 before making a decision to invest in our Class A common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. Some of the risks related Skillz’s business and industry are summarized below. References in the summary below to “we”, “us”, “our” and “the Company” generally refer to Skillz in the present tense or New Skillz from and after the Business Combination.

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

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

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

Our projections are subject to risks, assumptions, estimates and uncertainties.

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

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

We rely on third-party service providers including cloud computing services, payment processors, and infrastructure service providers, and if we cannot manage our relationships or lose access to such third parties, 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 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.

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.

If the Business Combination does not qualify as a tax-free reorganization under Section 368(a) of the Code and/or a transaction governed by Section 351 of the Code, Skillz stockholders may incur a substantially greater U.S. income tax liability as a result of the Business Combination.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that
 
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apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of New Skillz’s financial statements with those of another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the Closing of FEAC’s initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1.00 billion in non-convertible debt securities during the prior three-year period. References herein to “emerging growth company” have the meaning associated with it in the JOBS Act.
 
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THE OFFERING
Issuer
Flying Eagle Acquisition Corp.
In connection with the closing of the Business Combination, FEAC will change its name to Skillz, Inc. If the Business Combination is not consummated, the shares of common stock registered pursuant to this prospectus will not be issued.
Class A common stock offered by the Selling Stockholders
Up to 15,853,052 shares of Class A common stock, which are expected to be issued immediately prior to the consummation of the Business Combination pursuant to the terms of the Subscription Agreements, as part of the consideration for the Business Combination.
Class A common stock outstanding prior to the consummation of the Business Combination
69,000,000
Class A common stock outstanding after the consummation of the Business Combination (assuming no redemptions)(1)
274,672,427
Class A common stock outstanding after the consummation of the Business Combination (assuming maximum redemptions)(2)
274,717,136
Use of proceeds
We will not receive any of the proceeds from the sale of the shares of Class A common stock by the Selling Stockholders.
Market for our shares of Class A common stock
Our Class A common stock is currently listed on the NYSE under the symbol “FEAC.” Upon the Closing, we expect that our Class A common stock will be listed on the NYSE under the symbol “SKLZ.”
Risk factors
Any investment in the securities offered hereby is speculative and involves a high degree of risk. You should carefully consider the information set forth under “Risk Factors” and elsewhere in this prospectus.
(1)
Assumes that no shares of Class A common stock are redeemed.
(2)
Assumes that 29,855,291 shares of Class A common stock are redeemed.
 
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SUMMARY HISTORICAL FINANCIAL INFORMATION OF FEAC
FEAC’s statement of operations data for the period from January 15, 2020 (date of inception) to September 30, 2020 and balance sheet data as of September 30, 2020 is derived from FEAC’s unaudited condensed financial statements included elsewhere in this prospectus.
This information is only a summary and should be read in conjunction with FEAC’s financial statements and related notes and “FEAC’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. The historical results included below and elsewhere in this prospectus are not indicative of the future performance of FEAC.
Statement of Operations Data
For the Period
from
January 15, 2020
(inception) to
September 30, 2020
(in dollars, except for share
and per share numbers)
Revenue$
General and administrative expenses1,108,508
Loss from operations(1,108,508)
Other income – interest earned on Trust Account691,470
Provision for income taxes(65,470)
Net loss$(482,508)
Basic and diluted weighted average shares outstanding of Class A common stock69,000,000
Basic and diluted net income per share, Class A$
Basic and diluted weighted average shares outstanding of Class B common stock17,250,000
Basic and diluted net loss per share, Class B$(0.03)
Balance Sheet DataSeptember 30, 2020
(in dollars, except for
share numbers)
Total assets$690,681,526
Total liabilities24,777,726
Total stockholders’ equity and Class A common stock subject to possible redemptions665,903,800
 
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SUMMARY HISTORICAL FINANCIAL INFORMATION OF SKILLZ
Skillz’s balance sheet data as of September 30, 2020 and statement of operations data for the nine months ended September 30, 2020 and 2019 are derived from Skillz’s unaudited financial statements included elsewhere in this prospectus. Skillz’s balance sheet data and statement of operations data as of and for the year ended December 31, 2019 and 2018, are derived from Skillz’s audited financial statements included elsewhere in this prospectus.
The information is only a summary and should be read in conjunction with Skillz’s financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Skillz” contained elsewhere in this prospectus. Skillz’s historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
Nine Months
Ended
September 30, 2020
Nine Months
Ended
September 30, 2019
Year Ended
December 31, 2019
Year Ended
December 31, 2018
(in thousands, except for number of shares and per share amounts)
Statement of Operations Data:���
Revenue$162,392$85,126$119,872$50,778
Costs and expenses
Cost of revenue8,8063,8355,7132,112
Research and development13,2537,80311,2417,547
Sales and marketing172,38177,942111,37051,689
General and administrative24,33611,99116,37614,975
Total costs and expenses218,776101,571144,70076,323
Loss from operations(56,384)(16,445)(24,828)(25,545)
Interest expense, net(1,297)(2,127)(2,497)(2,190)
Other income (expense), net(20,749)3,6533,720(45)
Loss before income taxes(78,430)(14,919)(23,605)(27,780)
Provision for income taxes100
Net loss$(78,530)$(14,919)$(23,605)$(27,780)
Remeasurement of redeemable convertible preferred stock(865,952)(62,519)(62,519)(18,798)
Deemed dividend related to repurchase of preferred stock(1,153)
Net loss attributable to common stockholders$(945,635)$(77,438)$(86,124)$(46,578)
Net loss per common share
Net loss per share attributable to
common stockholders – basic and
diluted
$(6.64)$(0.58)$(0.64)$(0.36)
Weighted average shares outstanding
Weighted-average common shares outstanding – basic and diluted142,475,767134,316,073135,124,756129,930,282
 
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September 30, 2020December 31, 2019December 31, 2018
(in thousands)
Balance Sheet Data:
Total assets$86,881$38,856$26,029
Total current liabilities40,59710,48110,212
Total liabilities40,65320,19124,953
Working capital26,21624,61114,565
Redeemable convertible preferred stock1,120,724156,33554,056
Total stockholders’ deficit(1,074,496)(137,670)(52,980)
Nine Months
Ended
September 30, 2020
Nine Months
Ended
September 30, 2019
Year Ended
December 31,
2019
Year Ended
December 31,
2018
(in thousands)
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities$(29,744)$(11,321)$(21,937)$(16,948)
Investing activities(3,009)(2,134)(3,223)(867)
Financing activities63,98624,96331,16833,330
 
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following summary unaudited pro forma condensed combined financial data (the “summary pro forma data”) gives effect to the Business Combination and related transactions described in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information”. The Business Combination will be accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, FEAC will be treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization. The net assets of FEAC will be stated at historical cost, with no goodwill or other intangible assets recorded. The summary unaudited pro forma condensed combined balance sheet data as of September 30, 2020 gives pro forma effect to the Business Combination and related transactions as if they had occurred on September 30, 2020. The summary unaudited pro forma condensed combined statement of operations data for the nine months ended September 30, 2020 and year ended December 31, 2019 give pro forma effect to the Business Combination and related transactions as if they had been consummated on January 1, 2019.
The summary pro forma data have been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information of the combined company appearing elsewhere in this prospectus and the accompanying notes. The unaudited pro forma condensed combined financial information is based upon, and should be read in conjunction with, the historical financial statements of FEAC and related notes and the historical financial statements of Skillz and related notes included in this prospectus. The summary pro forma data have been presented for informational purposes only and are not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the Business Combination and related transactions been completed as of the dates indicated. In addition, the summary pro forma data do not purport to project the future financial position or operating results of the combined company.
The following table presents summary pro forma data after giving effect to the Business Combination and related transactions, assuming two redemption scenarios as follows:

Assuming No Redemption — this scenario assumes that no shares of FEAC Common Stock are redeemed; and

Assuming Maximum Redemption — this scenario assumes that 29,855,291 shares of FEAC Class A Common Stock are redeemed for an aggregate payment of approximately $298.6 million (based on the estimated per share redemption price of approximately $10.00 per share) from the Trust Account. The Merger Agreement includes a condition to closing the Business Combination that, at the Closing, FEAC will have a minimum of $550.0 million in cash comprising (i) the cash held in the trust account after giving effect to the FEAC share redemptions and (ii) proceeds from the Private Placement.
 
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Pro Forma Combined
(Assuming No
Redemptions)
Pro Forma Combined
(Assuming Maximum
Redemptions)
(in thousands, except share and per share data)
Summary Unaudited Pro Forma Condensed Combined
Statement of Operations Data for the Nine Months Ended September 30, 2020
Revenue$162,392$162,392
Net loss per share attributable to common stockholders – basic and diluted$(0.23)$(0.23)
Weighted average common shares outstanding – basic and
diluted
342,119,201339,398,036
Statement of Operations Data for the Year Ended December 31, 2019
Revenue$119,872$119,872
Net loss per share attributable to common stockholders – basic and diluted$(0.07)$(0.07)
Weighted average common shares outstanding – basic and
diluted
342,119,201339,398,036
Selected Unaudited Pro Forma Condensed Combined
Balance Sheet Data as of September 30, 2020
Total assets$294,717$267,488
Total liabilities$28,107$28,107
Total stockholders’ equity$266,610$239,381
 
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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA COMBINED PER SHARE FINANCIAL INFORMATION
The following table sets forth selected historical comparative share information for FEAC and Skillz and unaudited pro forma condensed combined per share information of the combined company after giving effect to the Business Combination and related transactions, assuming two redemption scenarios as follows:

Assuming No Redemption — this scenario assumes that no shares of FEAC Common Stock are redeemed; and

Assuming Maximum Redemption — this scenario assumes that 29,855,291 shares of FEAC Class A Common Stock are redeemed for an aggregate payment of approximately $298.6 million (based on the estimated per share redemption price of approximately $10.00 per share) from the Trust Account. The Merger Agreement includes a condition to closing the Business Combination that, at the Closing, FEAC will have a minimum of $550.0 million in cash comprising (i) the cash held in the trust account after giving effect to the FEAC share redemptions and (ii) proceeds from the Private Placement.
The pro forma book value information reflects the Business Combination and related transactions as if they had occurred on September 30, 2020. The weighted average shares outstanding and net loss per share information give pro forma effect to the Business Combination and related transactions as if they had occurred on January 1, 2019.
This information is only a summary and should be read together with the selected historical financial information included elsewhere in this prospectus, and the historical financial statements of FEAC and Skillz and related notes that are included elsewhere in this prospectus. The unaudited pro forma combined per share information of FEAC and Skillz is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus.
The unaudited pro forma combined earnings per share information below does not purport to represent the earnings per share which would have occurred had the companies been combined during the periods presented, nor earnings per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent what the value of FEAC and Skillz would have been had the companies been combined during the periods presented.
Combined Pro Forma
Skillz equivalent pro
forma per share data(2)
FEAC
(Historical)
Skillz
(Historical)
(Assuming
No
Redemption)
(Assuming
Maximum
Redemption)
(Assuming
No
Redemption)
(Assuming
Maximum
Redemption)
As of and for the Nine Months
Ended September 30, 2020(3)
Book value per share(1)
$0.06(7.55)0.780.710.580.53
Weighted average common shares outstanding – basic and diluted86,250,000142,475,767342,119,201339,398,036250,915,949278,050,075
Net loss per share attributable
to common stockholders –
basic and diluted
$0.00(6.64)(0.23)(0.23)(0.17)(0.17)
As of and for the Year Ended December 31, 2019(3)
Book value per share(1)
$N/A(4)(1.02)N/A(5)N/A(5)N/A(5)N/A(5)
Weighted average common shares outstanding – basic and dilutedN/A(4)135,124,756342,119,201339,398,036250,915,949278,050,075
Net loss per share attributable
to common stockholders –
basic and diluted
$N/A(4)(0.64)(0.07)(0.07)(0.05)(0.05)
 
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(1)
Book value per share is equal to total equity excluding redeemable convertible preferred shares/shares of common stock outstanding.
(2)
The equivalent pro forma basic and diluted per share data for Skillz is based on the exchange ratio set forth in the Business Combination Agreement. The weighted average shares outstanding includes Skillz preferred stock, which will be converted into shares of Skillz common stock immediately prior to the effective time of the Business Combination.
(3)
There were no cash dividends declared in the period presented.
(4)
Not applicable as FEAC was incorporated on January 15, 2020.
(5)
Pro forma balance sheet for year ended December 31, 2019 not required and as such, no such calculation included in this table.
 
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RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not known to us or that we consider immaterial as of the date of this prospectus. The trading price of our securities could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Risks Related to Skillz’s Business and Industry
Unless the context otherwise requires, references in this subsection “— Risks Related to Skillz’s Business and Industry” to “we”, “us”, “our”, and “the Company” generally refer to Skillz in the present tense or New Skillz from and after the Business Combination.
The COVID-19 pandemic and containment efforts across the globe have materially altered how individuals interact with each other and have materially affected how we and our business partners are operating. The extent to which this situation will impact our future results of operations and overall financial performance remains uncertain.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. This pandemic and resulting shelter-in-place, quarantine and similar governmental orders put in place around the world have caused widespread disruption in global economies, productivity and financial markets and have materially altered the way in which we conduct our day-to-day business.
As a result of the COVID-19 pandemic, we have implemented travel restrictions for our employees. The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic, including any potential future waves of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the effect on players and their willingness and ability to pay entry fees for the games on our platform; the effect on our third party developers and their willingness and ability to engage with our services and our platform; disruptions or restrictions on our employees’ ability to work and travel; and interruptions related to our cloud networking and platform infrastructure and partners, and developer and user service and support providers. During the COVID-19 crisis, we may not be able to provide the same level of services and support that our developers and players expect from us, which could negatively impact our business and operations. While substantially all of our business operations can be performed remotely, many of our employees are juggling additional work-related and personal challenges, including adjusting communication and work practices to collaborate remotely with work colleagues and business partners, managing technical and communication challenges of working from home on a daily basis, looking after children as a result of remote-learning and school closures, making plans for childcare during the summer and caring for themselves, family members or other dependents who are or may become ill. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, including as may be required by federal, state, local or foreign authorities or that we determine are in the best interests of our employees, players, partners, game developers and stockholders.
The COVID-19 pandemic and resulting shelter-in-place and similar restrictions have also led to increased player engagement with the games on our platform relative to historic trends. These increases in player activity may not be indicative of our financial and operating results in future periods. The long-term effects of the COVID-19 pandemic on society and player behavior are highly uncertain, and there is no assurance that player engagement will not decrease, as the full impacts of the pandemic on society and the global economy become more clear.
 
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In addition to the potential direct impacts to our business, the U.S. economy has been, and is likely to continue to be, significantly weakened as a result of the actions taken in response to COVID-19. A weakened U.S. economy may impact our third-party developers and players and their engagement with our platform, and the ability of our business partners to navigate this complex social health and economic environment, any of which could result in disruption to our business and results of our operations.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the existence of any additional waves of the pandemic, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, third-party developers, players and other business partners. If we are not able to respond to and manage the impact of such events effectively, our business may be harmed.
Competition within the broader entertainment industry is intense and our existing and potential users may be attracted to competing forms of entertainment such as television, movies and sporting events, as well as other entertainment and gaming options on the Internet. If our platform and games available through our platform do not continue to be popular, our business, financial condition, results of operations and prospects would be materially adversely affected.
We operate in the global entertainment and gaming industries within the broader entertainment industry. Our end-users face a vast array of entertainment choices. Other forms of entertainment, such as television, movies, sporting events and casinos, are more well established and may be perceived by the users to offer greater variety, affordability, interactivity and enjoyment. We compete with these other forms of entertainment for the discretionary time and income of the users. If we are unable to sustain sufficient interest in our gaming platform in comparison to other forms of entertainment, including new forms of entertainment, our business model may not continue to be viable.
The specific industries in which we operate are characterized by dynamic customer demand and technological advances, and there is intense competition among online gaming and entertainment providers. A number of established, well-financed companies producing online gaming, and/or interactive entertainment products and services compete with our platform, and other well-capitalized companies may introduce competitive services. Such competitors may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more aggressive pricing or promotional policies, including with third-party developers, or otherwise develop more commercially successful products or services than ours, which could negatively impact our business. Our competitors may also develop products, features or services that are similar to ours or that achieve greater market acceptance. Such competitors may also undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Furthermore, new competitors may enter the gaming industry. There has also been considerable consolidation among competitors in the entertainment and gaming industries and such consolidation and future consolidation could result in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them to offer more competitive products, gain a larger market share, expand offerings and broaden their geographic scope of operations. If we are not able to maintain or improve our market share, or if the offerings on our platform do not continue to be popular, our business could suffer.
We rely on our third-party developer partners to develop and update all of the games featured on our platform. The decision of developers to remove the Skillz Software Development Kit, or “SDKs” from their games or changes in the terms of our commercial relationships with third-party developers could adversely impact our financial condition and results of operations and prospects. In addition, the failure of developers to provide timely and reliable updates could adversely impact our financial condition and results of operations and prospects.
We rely on third-party game developers to develop the games that we host on our platform. Accordingly, our business depends on our ability to promote, enter into and maintain successful commercial relationships with such developers. In general, we rely on standard terms of service for third party developers which govern the distribution, operations and fee sharing arrangements for hosting a game on our platform. In some cases, we rely on negotiated agreements with third party developers that modify our standard terms of service. Quality third-party game developers of games are continually in high demand and there can be no
 
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assurance that the developers that have developed games for our platform will continue to maintain games on our platform or be willing to provide new games for our platform in the future. If we are unable to attract and maintain these third party developer relationships, if the terms and conditions of such commercial relationships become less favorable to Skillz or if a developer decides to remove their games from our platform, our results of operations and prospects would suffer.
In addition, we rely on our developer partners to manage and maintain their games, including updating their games to include the latest version of the Skillz SDK. The failure of our developer partners to provide timely and reliable updates could adversely impact our financial condition and results of operations and prospects.
Our focus on our third-party developers and willingness to focus on the long term benefits of our relationships with such developers may conflict with the short-term interests of our business. We believe our third-party developer partners are essential to our success and establishing mutually successful relationships with such developers serves the best long-term interests of Skillz and our stockholders. Therefore, we have made in the past, and we may make in the future, significant investments or changes to the terms of our relationships with our developer partners that we believe will benefit us in the long term, even if our decision has the potential to negatively impact our operating results in the short term. In addition, our decisions may not result in the long-term benefits that we expect, in which case the success of our platform, business, financial condition or results of operations could be harmed.
A limited number of games historically have accounted for a substantial portion of our revenue. If these games were to become less popular or be removed from our platform and we are unable to identify and market suitable replacements, our business and prospects could suffer.
Historically, a small number of games and related developers have accounted for a substantial portion of our revenue. For the year ended December 31, 2019, Solitaire Cube and 21 Blitz (each developed by Tether Studios, Inc. (“Tether”)) together with Blackout Bingo (developed by Big Run Studios Inc. (“Big Run”)) accounted for 72% of our revenue. During the nine months ended September 30, 2020, Solitaire Cube, 21 Blitz and Blackout Bingo together accounted for 79% of our revenue. Games developed by Tether and Big Run accounted for 83% and 0.1%, respectively, of our revenue for the year ended December 31, 2019 and 63% and 25%, respectively, of our revenue for the nine months ended September 30, 2020. These games, and the related developers, are subject to our standard terms of service, which include, among other things, developer exclusivity, as modified by negotiated agreements. The negotiated agreements provide Skillz with the discretion, but not the obligation, to provide marketing support for specified games and for revenue sharing with the developers that is more favorable to Skillz than our standard terms. These negotiated agreements restrict the removal of the applicable games from our platform for at least 12 months following termination. During the post-termination period, Skillz has the option, but not the obligation, to host paid competitions for such games on the platform. Consistent with our standard terms of service, our agreement with Tether may be terminated by either party on 30 days’ notice. Our agreement with Big Run is subject to termination by either party on an annual basis and by Skillz at any time at its discretion. If these games were to become less popular or be removed from our platform and we are unable to identify and market suitable replacements, our business and prospects could suffer.
Negative events or negative media coverage relating to, or a decline in popularity of, gaming, or other negative coverage may adversely impact our ability to retain or attract third-party developers and users, which could have an adverse effect on our business and prospects.
Public opinion can significantly influence our business. Unfavorable publicity regarding us, the gaming industry, games developed by our third-party partners, the security of our platform and services, litigation, or regulatory activity, or regarding the actions of third parties with whom we have relationships, including third-party developers, or the games (including declining popularity of the games) featured on our platform could seriously harm our reputation. In addition, a negative shift in the perception of skill-based gaming by the public or by politicians, lobbyists or others could affect future legislation of skill-based gaming, which could cause jurisdictions to restrict or ban gaming, thereby limiting the number of jurisdictions in which we can operate without a license. Negative public perception could also lead to new restrictions on or to the prohibition of skill-based gaming in jurisdictions in which we currently operate. Such negative publicity could
 
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also adversely affect the size, demographics, engagement, and loyalty of our developer and user base and result in decreased revenue or slower growth rates, which could seriously harm our business.
Maintaining and enhancing our brand and reputation is critical to our business prospects. Failure to grow our brand and reputation could harm our business, financial condition and results of operations.
We believe that our brand, identity and reputation has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “Skillz” brand and reputation is critical to retaining and growing our third-party developer and user base. Maintaining and enhancing our brand and reputation depends largely on our continued ability to provide, through our platform, high-quality, relevant, reliable, trustworthy and games developed by our third-party partners, which may require substantial investment and may not be successful. We may need to introduce new products or services that require developers or users to agree to new terms of service that they do not like, which may negatively affect our brand and reputation.
Our brand and reputation may also be negatively affected by the actions of users acting under false or unauthentic identities and by the use of our platform for illicit, illegal or objectionable ends. We may also fail to respond expeditiously to the illicit efforts of third parties to gain unfair advantage in games through cheating or other fraudulent activity or to otherwise address developer or user concerns, which could erode confidence in our brand and platform and damage our reputation. We expect that our ability to identify and respond to these concerns in a timely manner may decrease as the number of developers and users that engage with our platform grows, as the amount of content on the platform increases or as we expand our product and service offerings. Any governmental or regulatory inquiry, investigation or action, including based on the appearance of illegal, illicit or objectionable activity or content on our platform, our business practices, or failure to comply with laws and regulations, could damage our brand and reputation, regardless of the outcome.
We have experienced, and expect to continue to experience, media, legislative, governmental, regulatory, investor and other third-party scrutiny of our decisions. Any scrutiny, inquiry investigation or action, including regarding the quality and trustworthiness of the games featured on our platform, data privacy, copyright, employment or other practices, workplace culture, product changes, service quality, litigation or regulatory action or regarding the actions of our employees, may harm our brand and reputation.
Our growth will depend on our ability to attract and retain end-users who participate in paid entry-fee contests, and the loss of such end-users, failure to attract new end-users in a cost-effective manner, or failure to effectively manage our growth could adversely affect our business, financial condition, results of operations and prospects.
Our business depends on maintaining a successful platform for third-party developed games that end‑users will download and pay entry fees to compete for cash or other prizes of real world value with other end‑users. As a result, our business relies on our ability to engage with players by consistently and timely making available through our platform games that are engaging, trustworthy and competitive and encouraging our developer partners to create and enhance games with compelling content, features and events.
The success of the games featured on our platform depends, in part, on unpredictable and volatile factors beyond our control including consumer preferences, competing games, new mobile platforms and the availability of other entertainment experiences. Our end-users have accounts in which they make deposits and hold prior cash winnings that have not been withdrawn. Prior cash winnings that have not been withdrawn represented more than 80% of total paid entry fees for the year ended December 31, 2019 and the nine months ended September 30, 2020. If the games offered on our platform do not meet consumer expectations, if they are not marketed in a timely and effective manner, or if end-users decide to withdraw prior cash winnings rather than apply such winnings as entry fees to enter subsequent paid contests on our platform, our revenue and financial performance will be negatively affected. End-user deposits and prior cash winnings that have not been withdrawn as of December 31, 2019 and September 30, 2020 amounted to $1.4 million and $2.9 million, respectively, and are reflected on our balance sheet within other current liabilities. We may be required to return these funds to end-users if they choose to withdraw them from their accounts.
 
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In addition to the market factors noted above, our ability to successfully attract games for our platform and the ability of such games to achieve commercial success will depend on our ability to:

effectively market such games to existing and new players;

achieve benefits from our player acquisition costs;

achieve viral organic growth and gain user interest in our featured games through free or paid channels;

adapt to changing player preferences;

adapt to new technologies and feature sets for mobile and other devices;

attract, retain and motivate talented and experienced third-party game developers to our platform;

partner with mobile platforms and obtain featuring opportunities;

continue to adapt to an increasingly diverse set of mobile devices, including various operating systems and specifications, limited bandwidth, and varying processing power and screen sizes;

achieve and maintain successful end-user engagement;

maintain a quality, trustworthy and entertaining game experience for players;

host games that can build upon or become franchise games;

compete successfully against a large and growing number of existing market participants;

accurately forecast the timing and expense of our operations, including costs to secure and retain game developers and end-user adoption;

minimize and quickly resolve bugs or outages negatively impacting our platform or games on our platform; and

acquire and successfully integrate high quality mobile game assets, personnel or companies.
These and other uncertainties make it difficult to know whether our platform will succeed in continuing to host successful games and new games and features in accordance with our operating plan. If we do not succeed in doing so, our business, financial condition, results of operations and reputation will suffer.
If users engage in criminal, inappropriate or fraudulent activity that seek to exploit our platform and users, our ability to attract and retain developers and users may be harmed, which could have an adverse impact on our reputation, business, financial condition and operating results.
Unrelated third parties have developed, and may continue to develop, “cheating” programs that enable players to exploit vulnerabilities in the games featured on our platform, play them in an automated way, collude to alter the outcome or obtain unfair advantages. These programs and practices undermine the integrity of our platform and harm the experiences of players who play fairly, and may lead players or third-party developers to stop engaging with our platform. We devote significant resources to discover and disable these cheating programs and activities. If we are unable to do so in a timely and effective manner, our operations may be disrupted and our reputation may be damaged. These cheating programs could result in lost revenue from paying players, disrupt our in-game economies, divert time from our personnel, increase costs of developing technological measures to combat these programs and activities, increase our customer service costs needed to respond to dissatisfied players, and lead to legal claims. This type of activity may subject us to liability and negative publicity, which would increase our operating costs and adversely affect our business, financial condition, operating results, reputation and future prospects.
We primarily rely, and we will rely, on Amazon Web Services (“AWS”) to deliver our offerings to users on our platform and any disruption of or interference with our use of Amazon Web Services could adversely affect our business, financial condition, results of operations and prospects.
Our technology infrastructure is critical to the performance of our platform and to the satisfaction of developers and players, as well as our corporate functions. Our platform and company systems run on a
 
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complex distributed system, or what is commonly known as cloud computing. We own, operate and maintain elements of this system, but significant elements of this system are operated by third parties that we do not control and which would require significant time and expense to replace. We expect this dependence on third parties to continue. We have suffered interruptions in service in the past, including when releasing new software versions or bug fixes, and if any such interruption were significant and/or prolonged it could adversely affect our business, financial condition, future prospects, results of operations or reputation.
In particular, a significant portion of our game traffic, data storage, data processing and other computing services and systems is hosted by AWS. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. The agreement requires AWS to provide us their standard computing and storage capacity and related support in exchange for timely payment by us. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all.
Any failure, disruption or interference with our use of hosted cloud computing services and systems provided by third-parties, like AWS, could adversely impact our business, financial condition or results of operations. In response to the ongoing COVID-19 pandemic, we have engaged with our partners at AWS to understand their operations and have evaluated our business disruption plans. In addition, since many of the technical specialists responsible for managing disruptions to our technology infrastructure are working from home in accordance with shelter-in-place orders issued due to the COVID-19 pandemic, the time required to remedy any interruption may increase. To the extent we do not effectively respond to any such interruptions, upgrade our systems as needed and continually develop our technology and network architecture to accommodate traffic, our business, reputation, financial condition or results of operations could be adversely affected. In addition, we do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. Furthermore, our disaster recovery systems and those of third parties with which we do business may not function as intended or may fail to adequately protect our critical business information in the event of a significant business interruption, which may cause interruption in service of our games, security breaches or the loss of data or functionality, leading to a negative effect on our business, financial condition or results of operations.
Our use of third-party open source software could negatively affect our ability to offer our products and services through our platform and subject us to possible litigation.
We have incorporated, and may in the future incorporate, third-party open source software in our technologies. Open source software is generally licensed by its authors or other third parties under open source licenses. From time to time, companies that use third-party open source software have faced claims challenging the use of such open source software and requesting compliance with the open source software license terms. Accordingly, we may be subject to suits by parties claiming ownership of what we believe to be open source software or claiming non-compliance with the applicable open source licensing terms. Some open source software licenses require end-users who use, distribute or make available across a network software and services that include open source software to offer aspects of the technology that incorporates the open source software for no cost. We may also be required to make publicly available source code (which in some circumstances could include valuable proprietary code) for modifications or derivative works we create based upon incorporating or using the open source software and/or to license such modifications or derivative works under the terms of the particular open source license. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. While we use tools designed to help us monitor and comply with the licenses of third-party open source software and protect our valuable proprietary source code, we may inadvertently use third-party open source software in a manner that exposes us to claims of non-compliance with the terms of their licenses, including claims of intellectual property rights infringement or for breach of contract. Furthermore, there exists today an increasing number of types of open source software licenses, almost none of which have been tested in courts of law to provide guidance of their proper legal interpretations. If we were to receive a claim of non-compliance with the terms of any of these open source licenses, we may be required to publicly
 
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release certain portions of our proprietary source code. We could also be required to expend substantial time and resources to re-engineer some of our software. Any of the foregoing could disrupt and harm our business.
In addition, the use of third-party open source software typically exposes us to greater risks than the use of third-party commercial software because open source licensors generally do not provide warranties or controls on the functionality or origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to determine how to compromise our platform. Any of the foregoing could harm our business, financial condition, results of operations and prospects and could help our competitors develop products and services that are similar to or better than ours.
Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition results of operations and prospects.
Our financial performance is subject to U.S. economic conditions and their impact on levels of spending by users and advertisers. Economic recessions have had, and may continue to have, far-reaching adverse consequences across many industries, including the global entertainment and gaming industries, which may adversely affect, financial condition, results of operations and prospects. In the past decade, the U.S. economy has experienced tepid growth following the financial crisis in 2008 – 2009 and a recession began earlier this year due to the impact of the COVID-19 pandemic as well as international trade and monetary policy and other changes. If the U.S. economy experiences a continued recession or any of the relevant regional or local economies suffers a prolonged downturn, we may experience a material adverse effect on our business, financial condition, results of operations or prospects.
In addition, changes in general market, economic and political conditions in domestic and foreign economies or financial markets, including fluctuation in stock markets resulting from, among other things, trends in the economy as a whole may reduce users’ disposable income. Any one of these changes could have a material adverse effect on our business, financial condition, results of operations or prospects.
Our business model depends upon the continued compatibility between the games featured on our platform and major mobile gaming operating systems and upon third-party platforms for the distribution of such games. If such third parties interfere with the distribution of our products or offerings, our business, financial condition, results of operations and prospects would be adversely affected.
The substantial majority of the users access the games featured on our platform through the direct download on their mobile devices of apps developed by our developer partners. Our business model depends upon the continued compatibility between these apps and the major mobile operating systems. Third parties with whom we do not have any formal relationships control the design of mobile devices and operating systems. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also impact the ability to download apps or access specified content on mobile devices.
In addition, we rely upon third-party platforms, such as the Apple App Store, for distribution of the games featured on our platform. The promotion, distribution and operation of apps are subject to the respective distribution platforms’ standard terms and policies for application developers, which are very broad and subject to frequent changes and interpretation. Furthermore, the distribution platforms may not enforce their standard terms and policies for application developers consistently and uniformly across all applications and with all publishers.
There is no guarantee that popular mobile devices will start or continue to support or feature the games featured on our platform or that mobile device users will continue to engage with such games rather than competing products. We are dependent on the interoperability of our platforms with popular mobile operating systems, technologies, networks and standards that we do not control, such as the Android and iOS operating systems, and any changes, bugs, technical or regulatory issues in such systems, our relationships with mobile manufacturers and carriers, or in their terms of service or policies that degrade our offerings’ functionality, reduce or eliminate our ability to distribute our offerings, give preferential treatment to
 
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competitive products, limit our ability to deliver high quality offerings, or impose fees or other charges related to delivering our offerings, could adversely affect our product usage and monetization on mobile devices.
If the growth of high-bandwidth capabilities, particularly for mobile devices, is slower than we expect, end-user growth, retention, and engagement may be seriously harmed. Additionally, to deliver high-quality content over mobile cellular networks, the games offered through our platform must work well with a range of mobile technologies, systems, networks, regulations, and standards that we do not control. In particular, any future changes to the iOS or Android operating systems may impact the accessibility, speed, functionality, and other performance aspects of our platform, which issues are likely to occur in the future from time to time. In addition, the adoption of any laws or regulations that adversely affect the growth, popularity, or use of the Internet, including laws governing Internet neutrality, could decrease the demand for our platform and increase our cost of doing business. Specifically, any laws that would allow mobile providers in the United States to impede access to content, or otherwise discriminate against our content, such as providing for faster or better access to our competitors, over their data networks, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Furthermore, we may not successfully cultivate relationships with key industry participants or develop product offerings that operate effectively with these technologies, systems, networks, regulations, or standards. If it becomes more difficult for end-users to access and use our platform on their mobile devices, if end-users choose not to access or use the games featured on our platform through their mobile devices, or if end-users choose to use mobile products that do not offer access to the games featured on our platform, end-user growth, retention and engagement could be seriously harmed.
We rely on information technology and other systems and platforms, and any failures, errors, defects or disruptions in our systems or platforms could diminish our brand and reputation, subject us to liability, disrupt our business, affect our ability to scale our technical infrastructure and adversely affect our business, financial condition, operating results and growth prospects. The games offered through our platform, related software applications and systems, and the third-party platforms upon which they are made available could contain undetected errors.
Our technology infrastructure will be critical to the performance of our platform and offerings and to the satisfaction of our developer partners and users. We devote significant resources to network and data security to protect our systems and data. However, our systems may not be adequately designed with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to our business. We cannot assure you that the measures we take to prevent or hinder cyber-attacks and protect our systems, data and user information and to prevent outages, data or information loss, fraud and to prevent or detect security breaches, including a disaster recovery strategy for server and equipment failure and back-office systems and the use of third parties for certain cybersecurity services, will provide absolute security. Skillz has experienced, and we may in the future experience, system disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Such disruptions have not had a material impact, individually or in the aggregate; however, future disruptions from unauthorized access to, fraudulent manipulation of, or tampering with our computer systems and technological infrastructure, or those of third parties, could result in a wide range of negative outcomes, each of which could materially adversely affect our business, financial condition, results of operations, reputation and prospects.
Additionally, the games offered through our platform may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch. If a particular game is unavailable when users attempt to play it or navigation through our platform is slower than they expect, users may be unable to properly engage in the games we host. Furthermore, programming errors, defects and data corruption could disrupt our operations, adversely affect the experience of end-users, harm our reputation, cause end-users to stop utilizing our platforms, divert our resources and delay market acceptance of our offerings, any of which could result in legal liability to us or harm our business, financial condition, results of operations and prospects.
If our developer and the end-user base and engagement continue to grow, and the amount and types of games offered through our platform continue to grow and evolve, we will need an increasing amount of
 
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technical infrastructure, including network capacity and computing power, to continue to satisfy the end-user’s needs. Such infrastructure expansion may be complex, and unanticipated delays in completing these projects or availability of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of our platform. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after we have started to fully use the underlying equipment or software, that could further degrade the user experience or increase our costs. As such, we could fail to continue to effectively scale and grow our technical infrastructure to accommodate increased demands. In addition, our business may be subject to interruptions, delays or failures resulting from adverse weather conditions, other natural disasters, power loss, terrorism, cyber-attacks, public health emergencies (such as COVID-19) or other catastrophic events.
We believe that if our third-party developers or users have a negative experience with our platform or services, or if our brand or reputation is negatively affected, developers and users may be less inclined to continue or to engage with ours. As such, a failure or significant interruption in our service would harm our reputation, business and operating results.
Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business, financial condition, results of operations and growth prospects. Any change in existing regulations or their interpretation, or the regulatory climate applicable to our platform and services, or changes in tax rules and regulations or interpretation thereof related to our platform and services, could adversely impact our ability to operate our business as currently conducted or as we seek to operate in the future, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are subject to a variety of laws in the U.S. and abroad that affect our business, including state and federal laws regarding skill-based gaming, consumer protection, electronic marketing, data protection and privacy, competition, taxation, intellectual property, export and national security, which are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the U.S. There is a risk that existing or future laws may be interpreted in a manner that is not consistent with our current practices, and could have an adverse effect on our business, financial condition, results of operations and growth prospects. It is also likely that as our business grows and evolves, particularly if we expand to other countries, we will become subject to laws and regulations in additional jurisdictions or other jurisdictions may claim that we are required to comply with their laws and regulations.
State and federal laws in the U.S. distinguish between games of skill and games of chance. We only enable games for paid entry-fee contests in states in which skill-based gaming is permitted and not required to be licensed as gambling under applicable state law. As of September 30, 2020, we operated in 41 states and the District of Columbia, covering approximately 90% of the U.S. population. We use proprietary algorithms and data science tools to ensure that the degree of skill involved in affecting the outcome of a contest is sufficient to comply with applicable state laws. The scope and interpretation of the laws that are or may be applicable to the determination as to whether a contest is skill-based, and therefore beyond the scope of a state’s gambling laws and licensing requirements, are subject to interpretation and evolving. There is a risk that existing or future laws in the states in which we operate may be interpreted in a manner that is not consistent with our current practices, and could have an adverse impact on our business and prospects. Additionally, existing and future laws that permit skill-based gaming may be accompanied in the future by restrictions or taxes that make it impractical or less feasible to operate in these jurisdictions.
It is possible that a number of laws and regulations may be adopted or construed to apply to us that could restrict the online and mobile industries, including player privacy, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing of in-app purchases, or regulation of currency, banking institutions, unclaimed property or money transmission may
 
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be interpreted to cover the games featured on our platform and the entry fees paid in respect of such contests. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere regarding these activities may lessen the growth of social game services and impair our business, financial condition, results of operations and prospects.
Governmental authorities could view us as having violated local laws, despite our efforts to comply. There is also a risk that civil and criminal proceedings, including class actions brought by or on behalf of prosecutors or public entities or incumbent monopoly providers, or private individuals, could be initiated against us, Internet service providers, credit card and other payment processors, advertisers and others involved in the skill-based gaming industries. Such potential proceedings could involve substantial litigation expense, penalties, fines, seizure of assets, injunctions or other restrictions being imposed upon us or other business partners, while diverting the attention of key executives. Such proceedings could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as impact our reputation.
There can be no assurance that legally enforceable legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to our business to prohibit, legislate or regulate various aspects of the skill-based gaming industry (or that existing laws in those jurisdictions will not be interpreted negatively). Compliance with any such legislation may have a material adverse effect on our business, financial condition results of operations and prospects, either as a result of our determination that a jurisdiction should be blocked, or because a local license or approval may be costly for us or our business partners to obtain and/or such licenses or approvals may contain other commercially undesirable conditions.
Existing and future laws that permit skill-based gaming may be accompanied in the future by regulatory and/or licensing requirements, which could have a material adverse effect on our business, financial condition, results of operations, growth prospects and reputation.
Existing and future laws that permit skill-based gaming may be accompanied in the future by regulatory and/or licensing requirements, which require us to obtain regulatory approvals of our product offerings. This may be a time-consuming process that may be extremely costly. Any delays in obtaining or difficulty in maintaining regulatory approvals needed for expansion within existing jurisdictions or into new jurisdictions may negatively affect our opportunities for growth, including the growth of our customer base, or delay our ability to recognize revenue from our offerings in any such jurisdictions.
Regulatory authorities may have broad powers with respect to the regulation and licensing of skill-based gaming operations and may revoke, suspend, condition or limit such licenses, impose substantial fines on us or take other actions, any one of which could have a material adverse effect on our business. We will strive to comply with all applicable laws and regulations relating to our business. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules. Non-compliance with any such law or regulations could expose us to claims, proceedings, litigation and investigations by private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business, financial condition, results of operations, growth prospects and reputation.
We may be unable to obtain or maintain all necessary registrations, licenses, permits or approvals, and could incur fines or experience delays related to the licensing process, which could adversely affect our business, financial condition, results of operations, growth prospects and reputation. Our delay or failure to obtain or maintain licenses in any jurisdiction may prevent us from distributing our offerings, increasing our customer base and/or generating revenues.
The success of gaming products depends on a variety of factors and is not completely controlled by us.
Our success also depends in part on our ability to anticipate and satisfy user preferences in a timely manner. As we will operate in a dynamic environment characterized by rapidly changing industry and legal standards, our products will be subject to changing consumer preferences that cannot be predicted with certainty. We will need to continually introduce new offerings and identify future product offerings that
 
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complement our existing platform, respond to end-users’ needs and improve and enhance our existing platform to maintain or increase end-user engagement and growth of our business. We may not be able to compete effectively unless our product selection keeps up with trends in the gaming industry in which we compete, or trends in new gaming products.
We rely on other third-party service providers and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business, financial condition and results of operations could be adversely affected.
Our success depends in part on our relationships with other third-party service providers. If those providers do not perform adequately, end-users may experience issues or interruptions with their experiences. Furthermore, if any of our partners terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate provider, and may not be able to secure similar terms or replace such providers in an acceptable time frame. We also rely on other software and services supplied by third parties, such as game content, and our business may be adversely affected to the extent such game content does not meet our expectations, contain errors or vulnerabilities, are compromised or experience outages. Any of these risks could increase our costs and adversely affect our business, financial condition, results of operations and prospects. Further, any negative publicity related to any of our third-party partners, including any publicity related to regulatory concerns, could adversely affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure.
We incorporate technology from third parties into our platform. We cannot be certain that our licensors are not infringing the intellectual property rights of others or that the suppliers and licensors have sufficient rights to the technology in all jurisdictions in which we may operate. Some of our license agreements may be terminated by our licensors for convenience. If we are unable to obtain or maintain rights to any of this technology because of intellectual property infringement claims brought by third parties against our suppliers and licensors or against us, or if we are unable to continue to obtain the technology or enter into new agreements on commercially reasonable terms, our ability to develop our platform containing that technology could be severely limited and our business could be harmed. Additionally, if we are unable to obtain necessary technology from third parties, we may be forced to acquire or develop alternate technology, which may require significant time and effort and may be of lower quality or performance standards. This would limit and delay our ability to provide new or competitive offerings and increase our costs. If alternate technology cannot be obtained or developed, we may not be able to offer certain functionality as part of our offerings, which could adversely affect our business, financial condition and results of operations and prospects.
We rely on third-party providers to validate the identity and identify the location of end-users, and if such providers fail to perform adequately, provide accurate information or we do not maintain business relationships with them, our business, financial condition, results of operations and prospects could be adversely affected.
There is no guarantee that the third-party geolocation and identity verification systems that we rely on will perform adequately, or be effective. We rely on our geolocation and identity verification systems to ensure we are in compliance with certain laws and regulations, and any service disruption to those systems would prohibit us from operating our platform, and would adversely affect our business, financial condition, results of operations and prospects. Additionally, incorrect or misleading geolocation and identity verification data with respect to current or potential users received from third-party service providers may result in us inadvertently allowing access to our offerings to individuals who should not be permitted to access them, or otherwise inadvertently deny access to individuals who should be able to access our offerings, in each case based on inaccurate identity or geographic location determination. Our third-party geolocation services provider relies on its ability to obtain information necessary to determine geolocation from mobile devices, operating systems, and other sources. Changes, disruptions or temporary or permanent failure to access such sources by our third-party services providers may result in their inability to accurately determine the location of end-users. Moreover, our inability to maintain our existing contracts with third-party services providers, or to replace them with equivalent third parties, may result in our inability to access geolocation and identity verification data necessary for our day-to-day operations. If any of these risks materializes, we may be subject to disciplinary action, fines, lawsuits, and our business, financial condition, results of operations prospects and reputation could be adversely affected.
 
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We rely on third-party payment processors to process deposits and withdrawals made by end-users into the platform, and if we cannot manage our relationships with such third parties and other payment-related risks, our business, financial condition and results of operations could be adversely affected.
We rely on a limited number of third-party payment processors to process deposits and withdrawals made by end-users into our platform. If any of our third-party payment processors terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate payment processor, and may not be able to secure similar terms or replace such payment processor in an acceptable time frame. Further, the software and services provided by our third-party payment processors may not meet our expectations, contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could cause us to lose our ability to accept online payments or other payment transactions or make timely payments to users on our platform, any of which could make our platform less trustworthy and convenient and adversely affect our ability to attract and retain end-users.
Nearly all of our payments are made by credit card, debit card or through other third-party payment services, which subjects us to certain regulations and to the risk of fraud. We may in the future offer new payment options to users that may be subject to additional regulations and risks. We are also subject to a number of other laws and regulations relating to the payments we accept from end-users, including with respect to money laundering, money transfers, privacy and information security. If we fail to comply with applicable rules and regulations, we may be subject to civil or criminal penalties, fines and/or higher transaction fees and may lose our ability to accept online payments or other payment card transactions, which could make our offerings less convenient and attractive to end-users. If any of these events were to occur, our business, financial condition results of operations and prospects could be materially adversely affected.
Additionally, our payment processors require us to comply with payment card network operating rules, which are set and interpreted by the payment card networks. The payment card networks could adopt new operating rules or interpret or reinterpret existing rules in ways that might prohibit us from providing certain offerings to some users, be costly to implement or difficult to follow. We have agreed to reimburse our payment processors for fines they are assessed by payment card networks if we or the users on our platform violate these rules. Any of the foregoing risks could materially adversely affect our business, financial condition, results of operations and prospects.
Our growth prospects and market potential will depend on our ability to operate in a number of jurisdictions and if we fail to do so our business, financial condition, results of operations and prospects could be impaired.
Our ability to grow our business will depend on our ability to offer our product offerings in a large number of jurisdictions or in heavily populated jurisdictions. If we fail to remain in large jurisdictions or in a greater number of mid-market jurisdictions, this may prevent us from expanding the footprint of our product offerings, increasing the end-user base and/or generating revenues. We cannot be certain that we will be able to conduct our skill-based gaming operations in any particular jurisdiction. Any failure could have a material adverse effect on our business, financial condition, results of operations and prospects.
Negative events or negative media coverage relating to, or a declining popularity of, gaming in particular, or other negative coverage may adversely impact our ability to retain or attract users, which could have an adverse impact on our business, financial condition, results of operations and prospects.
Public opinion can significantly influence our business. Unfavorable publicity regarding us, for example, our product changes, product quality, litigation, or regulatory activity, or regarding the actions of third parties with whom we have relationships could seriously harm our reputation. In addition, a negative shift in the perception of skill-based gaming by the public or by politicians, lobbyists or others could affect future legislation, which could cause jurisdictions to restrict or prohibit gaming, thereby limiting the number of jurisdictions in which we can operate. Such negative publicity could also adversely affect the size, demographics, engagement, and loyalty of the end-user base and result in decreased revenue or slower user growth rates, which could seriously harm our business, financial condition, results of operations and prospects.
 
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We may have difficulty accessing the services of banks, credit card issuers and payment processing services providers, which may make it difficult to sell our products and services.
Although financial institutions and payment processors are permitted to provide services to us and others in our industry, banks, credit card issuers and payment processing service providers may be hesitant to offer banking and payment processing services to gaming businesses. Consequently, those businesses involved in our industry, including Skillz, may encounter difficulties in establishing and maintaining banking and payment processing relationships with a full scope of services and generating market interest rates. If we were unable to maintain Skillz’s bank accounts or end-users were unable to use their credit cards, bank accounts or e-wallets to make deposits and withdrawals from our platforms it would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges which could result in an inability to implement our business plan. A disruption in our ability to process payments could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our results of operations may fluctuate due to seasonality and other factors and, therefore, our periodic operating results will not be guarantees of future performance.
Our financial results and operating metrics have fluctuated in the past and we expect such results to fluctuate in the future. These fluctuations may be due to a variety of factors, some of which are outside of our control and may not fully reflect the underlying performance of our business.
Our financial results and operations in any given period may be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including the impact of seasonality, and the other risks and uncertainties set forth herein. Consumer engagement with our gaming platform may decline or fluctuate as a result of a number of factors, including the popularity of the underlying games, the user’s level of satisfaction with our platform, the ability of our developer partners to improve and innovate games, our ability to adapt our platform, outages and disruptions of online services, the availability of alternative live events or entertainment, the services offered by our competitors, our marketing and advertising efforts or declines in consumer activity generally as a result of economic downturns, among others. Any decline or fluctuation in the recurring portion of our business may have a negative impact on our business, financial condition, results of operations or prospects.
Our projections will be subject to significant risks, assumptions, estimates and uncertainties. As a result, our projected revenue, market share, expenses and profitability may differ materially from our expectations.
We operate in a rapidly changing and competitive industry and our projections will be subject to significant risks, assumptions, estimates and uncertainties. Operating results are difficult to forecast because they generally depend on our assessment of the timing and likelihood of future events which are uncertain, including levels of player engagement and the continued acceptance of new games from our developer partners. Furthermore, if we invest in development initiatives that do not achieve significant commercial success, whether because of competition or otherwise, we may not recover the often substantial upfront costs of such initiatives, or recover the opportunity cost of diverting management and financial resources away from other initiatives.
In particular, it is difficult to predict if, when, or how quickly our revenue may begin to decline. This difficulty may be exacerbated in the short to intermediate term by recent increased levels of player engagement during the COVID-19 pandemic, as there are temporarily fewer non-digital activities competing for players’ leisure time, attention and discretionary spending. These levels of player activity may not sustain over the short term or longer term, and there is no assurance that player behavior will not decrease, including below historic levels, as the full impacts of the pandemic on society and the global economy become more clear.
We may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated with multiple acquisitions.
We intend to evaluate and pursue acquisitions and strategic investments. Each of these acquisitions will require unique approaches to integration due to, among other reasons, the structure of the acquisitions, their
 
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locations and cultural differences among their teams and ours, and has required, and will continue to require, attention from our management team. If we are unable to obtain the anticipated benefits from these acquisitions and strategic investments, or we encounter difficulties in integrating their operations with ours, our business, financial condition, results of operations and prospects could be materially harmed.
Challenges and risks from such investments and acquisitions include:

negative effects on business initiatives and strategies from the changes and potential disruption that may follow the acquisition;

diversion of our management’s attention;

declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future prospects;

the need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise in connection with integration;

the difficulty in determining the appropriate purchase price of acquired companies may lead to the overpayment of certain acquisitions and the potential impairment of intangible assets and goodwill acquired in the acquisitions;

the difficulty in successfully evaluating and utilizing the acquired products, technology or personnel;

the potential incurrence of debt, contingent liabilities, amortization expenses or restructuring charges in connection with any acquisition;

the need to implement controls, procedures and policies appropriate for a larger, U.S.-based public company at companies that prior to acquisition may not have as robust controls, procedures and policies, in particular, with respect to the effectiveness of cyber and information security practices and incident response plans, compliance with privacy and other regulations protecting the rights of developers and users, and compliance with U.S.-based economic policies and sanctions which may not have previously been applicable to the acquired company’s operations;

the difficulty in accurately forecasting and accounting for the financial impact of an acquisition transaction, including accounting charges and integrating and reporting results for acquired companies that have not historically followed U.S. GAAP;

the fact that we may be required to pay contingent consideration in excess of the initial fair value, and contingent consideration may become payable at a time when we do not have sufficient cash available to pay such consideration;

under purchase accounting, we may be required to write off deferred revenue which may impair our ability to recognize revenue that would have otherwise been recognizable which may impact our financial performance or that of the acquired company;

risks associated with our expansion into new international markets and doing business internationally, including those described under the risk factor caption “Our strategy to expand internationally will be subject to increased challenges and risks”;

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

the need to transition operations, third-party developers and players onto our existing or new platforms and the potential loss of, or harm to, our relationships with employees, third-party developers, players and other suppliers as a result of integration of new businesses;

the implications of our management team balancing levels of oversight over acquired businesses which continue their operations under contingent consideration provisions in acquisition agreements;
 
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our dependence on the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, when conducting due diligence and evaluating the results of such due diligence; and

liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, cyber and information security vulnerabilities, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.
The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits, which could adversely affect our business, financial condition, results of operations, prospects or reputation. Our ability to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. In addition, depending upon the duration and extent of shelter-in-place, travel and other business restrictions adopted by us and imposed by various governments in response to the COVID-19 pandemic, we have and will continue to encounter new challenges in evaluating future acquisitions and integrating personnel, business practices and company cultures. Acquisitions could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities or amortization expenses related to intangible assets or write-offs of goodwill and/or intangible assets, which could adversely affect our financial condition and results of operations and dilute the economic and voting rights of our stockholders.
If we fail to detect fraud or theft, including by end-users and employees, our reputation may suffer, which could harm our brand and reputation and negatively impact our business, financial condition and results of operations and can subject us to investigations and litigation.
We have in the past incurred, and may in the future incur, losses from various types of financial fraud, including use of stolen or fraudulent credit card data, claims of unauthorized payments by a user and attempted payments by users with insufficient funds. Bad actors use increasingly sophisticated methods to engage in illegal activities involving personal information, such as unauthorized use of another person’s identity, account information or payment information and unauthorized acquisition or use of credit or debit card details, bank account information and mobile phone numbers and accounts. Under current credit card practices, we may be liable for use of funds on our platform with fraudulent credit card data, even if the associated financial institution approved the credit card transaction.
Acts of fraud may involve various tactics, including collusion. Successful exploitation of our systems could have negative effects on our product offerings, services and user experience and could harm our reputation. Failure to discover such acts or schemes in a timely manner could result in harm to our operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse effect on our business, financial condition, results of operations and prospects. In the event of the occurrence of any such issues with our existing platform or product offerings, substantial engineering and marketing resources and management attention, may be diverted from other projects to correct these issues, which may delay other projects and the achievement of our strategic objectives. Our failure to adequately detect or prevent fraudulent transactions could harm our reputation or brand, result in litigation or regulatory action and lead to expenses that could adversely affect our business, financial condition, results of operations and prospects.
Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disruption of our operations and the services we provide to users, damage to our reputation, and a loss of confidence in our products and services, which could adversely affect our business, financial condition, results of operations, prospects or reputation.
Cybersecurity attacks, including breaches, computer malware, computer hacking and insider threats have become more prevalent in our industry, and experts have warned that the global disruption related to
 
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the COVID-19 pandemic and remote working conditions may result in increased threats and malicious activity. Any cybersecurity breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions, loss or corruption of data, software, hardware or other computer equipment, or the inadvertent transmission of computer viruses could adversely affect our business, financial condition, results of operations or reputation. We have experienced and will continue to experience hacking attacks of varying degrees from time to time. Because of our prominence in the gaming industry, we believe we are a particularly attractive target for hackers. Additionally, rapidly evolving technology and capabilities, evolving changes in the sources, capabilities and targets for cybersecurity attacks, as well as the increasing sophistication of cyber criminals increase the risk of material data compromise or business disruption.
In addition, we store sensitive information, including personal information about our employees, and our games involve the storage and transmission of players’ personal information on equipment, networks and corporate systems run by us or managed by third-parties including Amazon, Apple, Facebook, Google and Microsoft. We are subject to a number of laws, rules and regulations requiring us to provide notification to players, investors, regulators and other affected parties in the event of a security breach of certain personal data, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws, including the European Union’s General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 (“CCPA”), have increased and may increase in the future. Our corporate systems, third-party systems and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to, or compromise the integrity of, our data, our employees’ data, our players’ data or any third-party data we may possess. Any such security breach could require us to comply with various breach notification laws, may affect our ability to operate and may expose us to litigation, remediation and investigation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability, each of which could be material.
We are subject to laws and regulations concerning privacy, information security, data protection, consumer protection and protection of minors, and these laws and regulations are continually evolving. Our actual or perceived failure to comply with these laws and regulations could harm our business, financial condition, results of operations, reputation or prospects.
We receive, store and process personal information and other player data, and we enable our players to share their personal information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules.
Various government and consumer agencies have called for new regulation and changes in industry practices and are continuing to review the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. For example, the State of California’s passage of the CCPA, which went into effect on January 1, 2020 and created new privacy rights for consumers residing in the state. There is also increased attention being given to the collection of data from minors. For instance, the Children’s Online Privacy Protection Act (“COPPA”) requires companies to obtain parental consent before collecting personal information from children under the age of 13. Compliance with GDPR, CCPA, COPPA and similar legal requirements has required us to devote significant operational resources and incur significant expenses.
We strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It is also possible that new laws, policies, legal obligations or industry codes of conduct may be passed, or existing laws, policies, legal obligations or industry codes of conduct may be interpreted in such a way that could prevent us from being able to offer services to citizens of a certain jurisdiction or may make it costlier or more difficult for us to do so. Any failure or
 
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perceived failure by us to comply with our privacy policy and terms of service, our privacy-related obligations to players or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business, financial condition, results of operations, reputation or prospects. Additionally, if third parties we work with, such as players, vendors or developers violate applicable laws or our policies, such violations may also put our players’ information at risk and could in turn have an adverse effect on our business, financial condition, results of operations, reputation or prospects.
Failure to protect or enforce our intellectual property rights could harm our business, results of operations, financial condition and prospects.
Our success is dependent in part on protecting our intellectual property rights and technology (such as source code, information, data, processes and other forms of information, knowhow and technology). We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our intellectual property. However, there are steps that we have not yet taken to protect our intellectual property on a global basis. Additionally, the steps that we have already taken to protect our intellectual property may not be sufficient or effective. Even if we do detect violations, we may need to engage in litigation to enforce our rights.
While we take precautions designed to protect our intellectual property, it may still be possible for competitors and other unauthorized third parties to copy our technology and use our proprietary brand, content and information to create or enhance competing solutions and services, which could adversely affect our competitive position in our rapidly evolving and highly competitive industry. Some license provisions that protect against unauthorized use, copying, transfer and disclosure of our technology may be unenforceable under the laws of certain jurisdictions and foreign countries. We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with our third-party providers and strategic partners. We cannot assure you that these agreements will be effective in controlling access to, and use and distribution of, our platform and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our offerings. Such arrangements may limit our ability to protect, maintain, enforce or commercialize such intellectual property rights, including requiring agreement with or payment to our joint development partners before protecting, maintaining, licensing or initiating enforcement of such intellectual property rights, and may allow such joint development partners to register, maintain, enforce or license such intellectual property rights in a manner that may affect the value of the jointly-owned intellectual property or our ability to compete in the market.
We have filed, and may continue in the future to file, applications to protect certain of our innovations and intellectual property. We do not know whether any of our applications will result in the issuance of a patent, trademark or copyright, as applicable, or whether the examination process will require us to narrow our claims. In addition, we may not receive competitive advantages from the rights granted under our intellectual property. Our existing intellectual property, and any intellectual property granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing our rights to our intellectual property. Therefore, the exact effect of the protection of this intellectual property cannot be predicted with certainty. In addition, given the costs, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to adversely impact our business, results of operations, financial condition or prospects.
We currently hold various domain names relating to our brand, including Skillz and Skillz.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our website and our online app. We may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
 
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We may be required to spend significant resources in order to monitor and protect our intellectual property rights, and some violations may be difficult or impossible to detect. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could impair the functionality of our platform, delay introductions of enhancements to our platform, result in our substituting inferior or costlier technologies into our platform or harm our reputation or brand and business, financial condition and results of operations. In addition, we may be required to license additional technology from third parties to develop and market new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect our ability to compete.
Although we take measures to protect our intellectual property, if we are unable to prevent the unauthorized use or exploitation of our intellectual property, the value of our brand, content, and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to our third party developer partners, potential developer partners and end game users may become confused, and our ability to attract new developers and users may be adversely affected. Any inability or failure to protect our intellectual property could adversely impact our business, results of operations, financial condition, reputation and prospects.
We have incurred losses since inception. We may not achieve profitability in the near future, depending on company strategic priorities.
The industry in which we operate is highly competitive and rapidly changing, and relies heavily on continually introducing compelling content, products and services. As such, if we, in combination with our third-party developers, fail to deliver such content, products and services, do not execute our strategy successfully or if our new content launches are delayed, our revenue and user metrics may decline, and our operating results will suffer.
In addition, our operating margin may experience downward pressure as a result of increasing competition and the other risks discussed in this prospectus. We expect to continue to expend substantial financial and other resources on expanding our developer and consumer base, our technology, the expansion of our platform, and marketing. Our operating costs will increase and our operating margins may decline if we do not effectively manage costs, launch new products on schedule that monetize successfully and enhance the games featured on our platform. For example, we rely primarily on digital advertising networks to acquire new users to the platform. Increases in digital advertising costs could have a material adverse effect on our business, financial condition and results of operations. In addition, weak economic conditions or other factors could cause our business to further contract, requiring us to implement significant additional cost cutting measures, including a decrease in research and development and sales and marketing, which could harm our long-term prospects.
If our revenue does not increase to offset any additional expenses, if we fail to manage or experience unexpected increases in operating expenses or if we are required to take additional charges related to impairments or restructurings, our business, financial condition, results of operations and prospects may be materially adversely affected.
We rely on assumptions and estimates to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Certain of our key metrics, including Monthly Active Users or “MAUs”, Paying Monthly Active Users or “Paying MAUs”, and Average Revenue Per Monthly Active User or “ARPU”, are calculated using data tracked by our internal analytics systems based on tracking activity of user accounts. The analytics systems and the resulting data have not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across the end-user base and our recently acquired operations, and factors relating to user activity and systems may impact these numbers. The calculation of our key metrics
 
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and examples of how user activity and our systems may impact the calculation of these metrics is described in detail under the heading titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Skillz.”
Our third-party developers and investors rely on our key metrics as a representation of our performance. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. If we determine that we can no longer calculate any of our key metrics with a sufficient degree of accuracy, and we cannot find an adequate replacement for the metric, our business, financial condition or results of operations may be harmed. In addition, if advertisers, platform partners or investors do not perceive end-user metrics to be accurate representations of the end-user base or end-user engagement, or if we discover material inaccuracies in end-user metrics, our reputation may be harmed and advertisers and platform partners may be less willing to allocate their budgets or resources to our products and services, which could negatively affect our business, financial condition, results of operations, reputation and prospects.
Our workforce and operations have grown substantially since our inception and we expect that they will continue to do so. If we are unable to effectively manage that growth, our financial performance and future prospects will be adversely affected.
Since our inception, we have experienced rapid growth in the United States and internationally. This expansion increases the complexity of our business and has placed, and will continue to place, significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage our growth effectively, which could damage our reputation and negatively affect our operating results.
Properly managing our growth will require us to continue to hire, train, and manage qualified employees and staff, including engineers, operations personnel, financial and accounting staff, and sales and marketing staff, and to improve and maintain our technology. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing, and integrating these new employees and staff, or if we are not successful in retaining our existing employees and staff, our business may be harmed. Moreover, in order to optimize our organizational structure, we have implemented reductions in force, including in response to the COVID-19 pandemic and its impact on our business, and may in the future implement other reductions in force. Any reduction in force may yield unintended consequences and costs, such as attrition beyond the intended reduction in force, the distraction of employees, reduced employee morale and could adversely affect our reputation as an employer, which could make it more difficult for us to hire new employees in the future and increase the risk that we may not achieve the anticipated benefits from the reduction in force. Properly managing our growth will require us to establish consistent policies across regions and functions, and a failure to do so could likewise harm our business.
Our failure to upgrade our technology or network infrastructure effectively to support our growth could result in unanticipated disruptions. To manage the growth of our operations and personnel and improve the technology that supports our business operations, as well as our financial and management systems, disclosure controls and procedures, and internal controls over financial reporting, we will be required to commit substantial financial, operational, and technical resources.
Our current and planned personnel, systems, procedures, and controls may not be adequate to support our future operations. If we are unable to expand our operations and hire additional qualified personnel in an efficient manner, or if our operational technology is insufficient to reliably service our platform, we could potentially face difficulties in retaining users, which would adversely affect our business, financial condition, operating results and prospects.
Our organizational structure is complex and will continue to grow as we add additional employees. We will need to improve our operational, financial, and management controls as well as our reporting systems and procedures to support the growth of our organizational structure. We will require capital and management resources to grow and mature in these areas. If we are unable to effectively manage the growth of our business, the quality of our platform may suffer, and we may be unable to address competitive challenges, which would adversely affect our overall business, operations, financial condition and prospects.
 
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Continued growth and success will depend on the performance of the current and future employees of Skillz, including certain key employees. Recruitment and retention of these individuals is vital to growing our business and meeting our business plans. The loss of any of our key executives or other key employees could harm our business.
Our ability to compete and grow depends in large part on the efforts and talents of our employees and executives. Our success depends in a large part upon the continued service of our senior management team, including Andrew Paradise, our Founder and Chief Executive Officer. Paradise is critical to our vision, strategic direction, culture, products and technology, and the continued retention of our entire senior management team is important to the success of our operating plan. We do not have employment agreements, other than offer letters, with our senior management team, and we do not maintain key-man insurance for members of our senior management team. The loss of any member of our senior management team could cause disruption and harm our business, financial condition, results of operations, reputation and prospects.
In addition, our ability to execute our strategy depends on our continued ability to identify, hire, develop, motivate and retain highly skilled employees, particularly in the competitive fields of game design, product management, engineering and data science. These employees are in high demand, and we devote significant resources to identifying, recruiting, hiring, training, successfully integrating and retaining them. Interviewing, hiring and integrating new employees has and will continue to be particularly challenging during the COVID-19 pandemic. We have continued to experience significant turnover in our headcount, which has placed and will continue to place significant demands on our management and our operational, financial and technological infrastructure. As part of our global remote working plans, throughout the duration of the COVID-19 pandemic, we will devote increased efforts to maintaining the collaborative culture of Skillz, including through the use of videoconferencing and other online communication and sharing tools, and each of our global studios and to monitoring the health, safety, morale and productivity of our employees, including new employees, as we evaluate the impacts of this changing situation on our business and employees.
We believe that two critical components of our success and our ability to retain our best people are our culture and our competitive compensation practices. Any volatility in our operating results and the trading price of our Class A common stock may cause our employee base to be more vulnerable to be targeted for recruitment by competitors. While we believe we compete favorably, competition for highly skilled employees is intense, particularly in the San Francisco Bay Area, where our operations are based. If we are unable to identify, hire and retain our senior management team and our key employees, our business, financial condition or results of operations could be harmed. Moreover, if our team fails to work together effectively to execute our plans and strategies on a timely basis, our business, financial condition, results of operations and prospects could be materially adversely affected.
If the use of mobile devices as game platforms and the proliferation of mobile devices generally do not increase, our business could be adversely affected.
The number of people using mobile Internet-enabled devices has increased dramatically over time and we expect that this trend will continue. However, the mobile market, particularly the market for mobile games, may not grow in the way we anticipate. Our future success is substantially dependent upon the continued growth of the market for mobile games. In addition, we do not currently offer our games on all mobile devices. If the mobile devices on which our games are available decline in popularity or become obsolete faster than anticipated, we could experience a decline in revenue and bookings and may not achieve the anticipated return on our development efforts. Any such declines in the growth of the mobile market or in the use of mobile devices for games could harm our business, financial condition, results of operations and prospects.
We are a party to pending litigation with various plaintiffs and we may be subject to future litigation in the operation of our business. An adverse outcome in one or more proceedings could adversely affect our business.
We may be involved in claims, suits, government investigations, and proceedings arising in the ordinary course of our business, including actions with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, commercial and acquisition-related claims and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of their outcomes, such legal
 
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proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. It is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, financial condition, results of operations, reputation and prospects.
In addition, we use open source software in our game development and expect to continue to use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our games, any of which would have a negative effect on our business, financial condition or results of operations.
Our insurance may not provide adequate levels of coverage against claims
We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. We do not maintain “Key man” insurance policies on any of our officers or employees. Moreover, any loss incurred could exceed policy limits and policy payments made to us may not be made on a timely basis. Such losses could adversely affect our business prospects, results of operations and financial condition.
Our strategy to expand internationally will be subject to increased challenges and risks.
One of our growth strategies is to expand our business outside the U.S. An important part of targeting international markets is developing offerings that are localized and customized for the players in those markets. Our ability to expand our business and to attract talented employees and players in international markets will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. Expanding our international focus may subject us to risks that we have not faced before or increase risks that we currently face, including risks associated with:

inability to host certain games in certain foreign countries;

recruiting and retaining talented and capable management and employees in foreign countries;

challenges caused by distance, language and cultural differences;

developing and customizing games and other offerings that appeal to the tastes and preferences of players in international markets;

competition from local game makers with intellectual property rights and significant market share in those markets and with a better understanding of player preferences;

utilizing, protecting, defending and enforcing our intellectual property rights;

negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights;

the inability to extend proprietary rights in our brand, content or technology into new jurisdictions;

implementing alternative payment methods for virtual items in a manner that complies with local laws and practices and protects us from fraud;

compliance with applicable foreign laws and regulations, including privacy laws and laws relating to content and consumer protection (for example, the United Kingdom’s Office of Fair Trading’s 2014 principles relating to in-app purchases in free-to-play games that are directed toward children 16 and under);
 
33

 

compliance with anti-bribery laws, including the Foreign Corrupt Practices Act;

credit risk and higher levels of payment fraud;

currency exchange rate fluctuations;

protectionist laws and business practices that favor local businesses in some countries;

double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the U.S. or the foreign jurisdictions in which we operate;

political, economic and social instability;

public health crises, such as the COVID-19 pandemic, which can result in varying impacts to our employees, players, vendors and commercial partners internationally;

higher costs associated with doing business internationally;

export or import regulations; and

trade and tariff restrictions.
If we are unable to manage the complexity of our global operations successfully, our business, financial condition and operating results could be adversely affected. Additionally, our ability to successfully gain market acceptance in any particular market is uncertain, and the distraction of our senior management team could harm our business, financial condition, results of operations and prospects.
Companies and governmental agencies may restrict access to platforms, our website, mobile applications or the Internet generally, which could lead to the loss or slower growth of our player base.
Our players generally need to access the Internet and in particular platforms or our website to play our games. Companies and governmental agencies could block access to any platform, our website, mobile applications or the Internet generally for a number of reasons such as security or confidentiality concerns or regulatory reasons, or they may adopt policies that prohibit employees from accessing Apple or Google and our website or any social platform. If companies or governmental entities block or limit such or otherwise adopt policies restricting players from playing our games, our business could be negatively impacted and could lead to the loss or slower growth of our player base.
The requirements of being a public company may strain our resources and divert management’s attention, and the increases in legal, accounting and compliance expenses may be greater than we anticipate.
We will be a public company following the Closing of the Business Combination, and as such (and particularly after we are no longer an “emerging growth company”), will incur significant legal, accounting and other expenses that Skillz did not incur as a private company. We will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the rules and regulations subsequently implemented by the SEC and the listing standards of The New York Stock Exchange, including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial controls. Compliance with these rules and regulations can be burdensome. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our historical legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to attract and retain qualified members of our Board as compared to Skillz as a private company. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an “emerging growth company.” We will need to hire additional accounting and financial staff, and engage outside consultants, all with appropriate public company experience and technical accounting knowledge and maintain an internal audit function, which will increase our operating expenses. Moreover, we could incur additional compensation costs in the event that we decide to pay cash compensation closer to that of other publicly-listed companies, which would increase our general and administrative expenses and could materially
 
34

 
and adversely affect our business, financial condition, results of operations and prospects. We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
As a private company, Skillz was not required to document and test its internal controls over financial reporting nor was its management required to certify the effectiveness of its internal controls and its auditors were not required to opine on the effectiveness of Skillz’s internal control over financial reporting. Failure to maintain adequate financial, information technology and management processes and controls could result in material weaknesses which could lead to errors in our financial reporting, which could adversely affect our business, financial condition, results of operations and prospects once we are a public company.
Skillz was not required to document and test its internal controls over financial reporting nor was its management required to certify the effectiveness of their internal controls and its auditors were not required to opine on the effectiveness of their internal control over financial reporting. Similarly, as an “emerging growth company,” FEAC was exempt from the SEC’s internal control reporting requirements. We may lose our emerging growth company status and become subject to the SEC’s internal control over financial reporting management and auditor attestation requirements in the year in which we are deemed to be a large accelerated filer, which would occur once we are subject to Exchange Act reporting requirements for 12 months, have filed at least one SEC annual report and the market value of our common equity held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter. We anticipate that we will be subject to the SEC’s internal control reporting and attestation requirements with respect to our annual report on Form 10-K for the year ending December 31, 2021. Additionally, we anticipate that our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal controls over financial reporting commencing with our second annual report on Form 10-K (i.e. for the year ending December 31, 2021). We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. In addition, our current controls and any new controls that we develop may become inadequate because of poor design and changes in our business, including increased complexity resulting from any international expansion. Any failure to implement and maintain effective internal controls over financial reporting could adversely affect the results of assessments by our independent registered public accounting firm and their attestation reports.
If we are unable to certify the effectiveness of our internal controls, or if our internal controls have a material weakness, we may not detect errors timely, our financial statements could be misstated, we could be subject to regulatory scrutiny and a loss of confidence by stakeholders, which could harm our business, financial condition and results of operations and adversely affect the market price of our common stock
Changes in tax laws or tax rulings could materially affect our effective tax rates, financial position and results of operations.
The tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws (including in response to the COVID-19 pandemic) or tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income-based taxes and non-income taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which in turn could materially affect our financial position and results of operations. For example, in December 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Act”). The 2017 Tax Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate, implementing a partially territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings.
Another example is the June 7, 2019 opinion issued in Altera Corp v. Commissioner by a three judge panel from the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”), reversing a 2015 U.S. Tax Court decision. The Ninth Circuit ruled in favor of the Commissioner, validating U.S. Treasury regulations that require parties to a qualified cost-sharing arrangement to include stock-based compensation in the cost pool. The taxpayer subsequently petitioned the Ninth Circuit for a rehearing en banc, and, on November 12, 2019, the Ninth Circuit denied such petition. On February 10, 2020, the taxpayer requested the U.S. Supreme Court to review the Ninth Circuit’s decision and, on June 22, 2020, the U.S. Supreme Court denied such request. As a result, our ability to offset 2019 taxable income with net operating losses may be reduced. In
 
35

 
addition, many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations. Any significant changes to our future effective tax rate may result in a material adverse effect on our business, financial condition and results of operations.
If the Business Combination does not qualify as a tax-free reorganization under Section 368(a) of the Code and/or a transaction governed by Section 351 of the Code, Skillz stockholders may incur a substantially greater U.S. income tax liability as a result of the Business Combination.
The parties intend for the merger contemplated by the Merger Agreement to be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and/or a transaction governed by Section 351 of the Code. If the merger qualifies for such treatment, Skillz stockholders generally will not recognize gain or loss upon their exchange of Skillz common stock for New Skillz Class A common stock, except to the extent of any gain that must be recognized as a result of their receipt of cash consideration (which gain may be treated as a dividend in certain circumstances). However, the obligations of Skillz, FEAC and the Merger Sub to complete the merger are not conditioned on the receipt of opinions from Winston & Strawn LLP or White & Case LLP to the effect that the merger will qualify for such treatment, and the merger will occur even if it does not so qualify. Neither Skillz nor FEAC has requested, or intends to request, a ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to the U.S. federal income tax consequences of the merger. Consequently, no assurance can be given that the IRS will not assert, or that a court would not sustain, a position to the contrary. Accordingly, if the IRS or a court determines that the merger neither qualifies as a reorganization under Section 368(a) of the Code nor as a transaction governed by Section 351 of the Code and is therefore a fully taxable transaction for U.S. federal income tax purposes, Skillz stockholders generally would recognize taxable gain or loss on the total merger consideration (rather than only the cash component) they receive in connection with the merger. For a more complete discussion of U.S. federal income tax consequences of the Business Combination, see the section titled “Material U.S. Federal Income Tax Considerations.”
Our reported financial results may be affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles (“GAAP”) in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.
We may require additional capital to support our growth plans, and such capital may not be available on terms acceptable to us, if at all. This could hamper our growth and adversely affect our business, financial condition, results of operations and prospects.
We intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the future could involve offering additional security interests and undertaking restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, the COVID-19 pandemic has disrupted capital markets, and if we seek to access additional capital or increase our borrowing, there can be no assurance that financing and credit may be available on favorable terms, if at all. If we are unable to obtain adequate financing or
 
36

 
financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business, financial condition or results of operations may be harmed.
Our investment portfolio may become impaired by deterioration of the financial markets.
Our cash equivalent and investment portfolio is invested with a goal of preserving our access to capital, and generally consists of money market funds, corporate debt securities, U.S. government and government agency debt securities, mutual funds, certificates of deposit and time deposits. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards, permissible allocations of certain sectors and limits our exposure to specific investment types. Volatility in the global financial markets can negatively impact the value of our investments, and recent depressed performance in U.S. and global financial markets due to the COVID-19 pandemic has negatively impacted the carrying value of our investment portfolio. If financial markets experience further volatility, including due to depressed economic production and performance across the U.S. and global economies due to impacts of the COVID-19 pandemic, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any disruption of the capital markets could cause our other income and expenses to vary from expectations. Although we believe our current investment portfolio has a low risk of material impairment, we cannot predict future market conditions, market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
The occurrence of an earthquake, other natural disaster or other significant business interruption at or near any of our facilities could cause damage to our facilities and equipment and interfere with our operations.
Our principal business operations are located in the San Francisco Bay Area, an area known for earthquakes, and are thus vulnerable to damage. All of our facilities are also vulnerable to damage from natural or manmade disasters, including power loss, fire, explosions, floods, communications failures, terrorist attacks, contagious disease outbreak (such as the COVID-19 pandemic) and similar events. If any disaster were to occur, our ability to operate our business at our facilities could be impaired and we could incur significant losses, recovery from which may require substantial time and expense.
Business Combination Litigation
On September 30, 2020, a purported shareholder of FEAC (the “Plaintiff”) commenced a putative class action against FEAC and its board of directors in the Supreme Court of the State of New York, New York County. The Plaintiff alleges that the board members, aided and abetted by FEAC, breached their fiduciary duties by entering into the Merger Agreement with Skillz and the other parties thereto. The Plaintiff alleges that the Merger Agreement undervalues FEAC, was the result of an improper process and that FEAC’s disclosure concerning the proposed merger is inadequate. As a result of these alleged breaches of fiduciary duty, the Plaintiff seeks, among other things, to enjoin the merger or, in the event it is consummated, an award of rescissory damages. FEAC believes the claim is without merit and intends to defend itself vigorously. Skillz is not party to this litigation.
 
37

 
USE OF PROCEEDS
All of the shares of Class A common stock offered by the Selling Stockholders pursuant to this prospectus will be sold by the Selling Stockholders for their respective amounts. We will not receive any of the proceeds from these sales.
 
38

 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms included below have the same meaning as terms defined and included elsewhere in this prospectus.
The following unaudited pro forma condensed combined financial information present the combination of the financial information of FEAC and Skillz adjusted to give effect to the Business Combination and related transactions. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X.
The unaudited pro forma condensed combined balance sheet as of September 30, 2020 combines the historical balance sheet of FEAC and the historical balance sheet of Skillz on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on September 30, 2020. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 combine the historical statements of operations of FEAC and historical statements of operations of Skillz for such periods on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on January 1, 2019, the beginning of the earliest period presented:

the merger of Skillz with and into Merger Sub, a wholly owned subsidiary of FEAC, with Skillz surviving the merger as a wholly-owned subsidiary of FEAC; and

the issuance and sale of 15,853,052 shares of FEAC Class A common stock for a purchase price of $10.00 per share and an aggregate purchase price of $158.5 million in the Private Placement pursuant to the Subscription Agreements.
The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give pro forma effect to events that are: (i) directly attributable to the Business Combination; (ii) factually supportable; and (iii) with respect to the statements of operations, expected to have a continuing impact on FEAC’s results following the completion of the Business Combination.
The unaudited pro forma condensed combined financial statements have been developed from and should be read in conjunction with:

the accompanying notes to the unaudited pro forma condensed combined financial statements;

the historical unaudited financial statements of FEAC as of September 30, 2020 and for period from January 15, 2020 (inception) through September 30, 2020 and the related notes included elsewhere in this prospectus;

the historical audited financial statements of Skillz as of and for the year ended December 31, 2019 and the related notes included elsewhere in this prospectus;

the historical unaudited financial statements of Skillz as of and for the nine months ended September 30, 2020 and the related notes included elsewhere in this prospectus; and

other information relating to FEAC and Skillz contained in this prospectus, including the Business Combination Agreement and the description of certain terms thereof set forth in the section entitled “The Business Combination.”
Pursuant to FEAC’s Current Charter, public stockholders are being offered the opportunity to redeem, upon the closing of the Business Combination, shares of FEAC Common Stock then held by them for cash equal to their pro rata share of the aggregate amount on deposit (as of two business days prior to the Closing) in the Trust Account. For illustrative purposes, based on the fair value of marketable securities held in the Trust Account as of September 30, 2020 of approximately $690.0 million, the estimated per share redemption price would have been approximately $10.00 per share.
 
39

 
The unaudited pro forma condensed combined financial statements present two redemption scenarios as follows:

Assuming No Redemption — this scenario assumes that no shares of FEAC Common Stock are redeemed; and

Assuming Maximum Redemption — this scenario assumes that 29,855,291 shares of FEAC Class A Common Stock are redeemed for an aggregate payment of approximately $298.6 million (based on the estimated per share redemption price of approximately $10.00 per share) from the Trust Account. The Merger Agreement includes a condition to closing the Business Combination that, at the Closing, FEAC will have a minimum of $550.0 million in cash comprising (i) the cash held in the trust account after giving effect to the FEAC share redemptions and (ii) proceeds from the Private Placement.
Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, FEAC is treated as the acquired company and Skillz is treated as the acquirer for financial statement reporting purposes. Skillz has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

Skillz’s existing stockholders will have the greatest voting interest in the combined entity under the no and maximum redemption scenarios with over 95% of the voting interest in each scenario;

The largest individual minority stockholder of the combined entity is an existing stockholder of Skillz;

Skillz’s directors will represent the majority of the new board of directors of the combined company;

Skillz’s senior management will be the senior management of the combined company; and

Skillz is the larger entity based on historical revenue and has the larger employee base.
Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma condensed combined financial statements are described in the accompanying notes. The unaudited pro forma condensed combined financial statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the Business Combination occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial statements do not purport to project the future operating results or financial position of FEAC following the completion of the Business Combination. The unaudited pro forma adjustments represent FEAC’s management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed.
 
40

 
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2020
(in thousands)
As of
September 30, 2020
Additional
Pro Forma
Adjustments
(Assuming
Maximum
Redemptions)
As of
September 30, 2020
As of September 30, 2020
Pro Forma
Adjustments
(Assuming
No
Redemptions)
Pro Forma
Combined
(Assuming
No
Redemptions)
Pro Forma
Combined
(Assuming
Maximum
Redemptions)
FEAC
(Historical)
SKILLZ
(Historical)
Assets
Cash and cash equivalents$256$56,861690,039(a)$277,818$271,341(g)$250,589
(24,150)(b)(298,570)(o)
(25,660)(c)
(10,000)(d)
158,531(e)
(230)(f)
(567,739)(g)
(90)(h)
Prepaid expenses and other current assets3869,95210,33810,338
Total current assets64266,813220,701288,156(27,229)260,927
Cash and investments held in Trust Account690,039(690,039)(a)
Property and equipment, net5,5695,5695,569
Deferred offering Costs13,507(13,507)(c)
Other long-term assets992992992
Total assets690,68286,881(482,845)294,717(27,229)267,488
Liabilities
Accounts payable and accrued expenses3985,369(655)(c)5,0225,022
(90)(h)
Loan payable, Advance from Sponsor230(230)(f)
Accrued professional fees related to deferred offering costs12,199(12,199)(c)
Other current liabilities23,02923,02923,029
Total current liabilities62840,597(13,174)28,05128,051
Deferred underwriting compensation24,150(24,150)(b)
Other long-term liabilities565656
Total liabilities24,77840,653(37,324)28,10728,107
Commitments and contingencies
Class A common shares subject to possible redemption660,904(660,903)(j)
Redeemable convertible preferred stock1,120,724(1,120,724)(k)
Stockholders’ equity (deficit)
Preferred Stock25,354(25,354)(k)
Class A common Stock1(e)27(3)(o)27
6(j)3(m)
2(l)
18(m)
Class B common Stock2(2)(l)88
8(m)
Common Stock17���(8)(g)4(g)
26(k)(4)(m)
(35)(m)
Additional paid in capital5,481(26,313)(c)1,950,5191(m)1,651,953
158,530(e)(298,567)(o)
660,897(j)
1,146,052(k)
9(m)
(483)(n)
���6,346(i)
Retained earnings (accumulated deficit)(483)(1,099,867)(10,000)(d)(1,683,944)271,337(g)(1,412,607)
(567,731)(g)
483(n)
(6,346)(i)
Total stockholders’ equity (deficit)5,000(1,074,496)1,336,106266,610(27,229)239,381
Total liabilities and stockholders’ equity$690,682$86,881$(482,845)$294,717$(27,229)$267,488
 
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(in thousands, except share and per share data)
For the
period from
January 15,
2020
(inception)
through
September 30, 2020
Nine Months
Ended
September 30, 2020
Nine Months
Ended
September 30, 2020
Additional
Pro Forma
Adjustments
(Assuming
Maximum
Redemptions)
Nine Months
Ended
September 30, 2020
Pro Forma
Combined
(Assuming
No
Redemptions)
Pro Forma
Combined
(Assuming
No
Redemptions)
Pro Forma
Adjustments
(Assuming
Maximum
Redemptions)
FEAC
(Historical)
SKILLZ
(Historical)
Revenue$$162,392$$162,392$$162,392
Operating expenses:
Cost of revenue8,8068,8068,806
Research and development13,25313,25313,253
Sales and marketing172,381��172,381172,381
General and administrative1,10924,336(90)(aa)25,35525,355
Total operating expenses1,109218,776(90)219,795219,795
Loss from operations(1,109)(56,384)90(57,403)(57,403)
Other income (expense)
Interest expense, net(1,297)(1,297)(1,297)
Other income (expense), net(20,749)(20,749)(20,749)
Other income — interest on Trust
Account
691(691)(bb)
Total other income (expense)691(22,046)(691)(22,046)(22,046)
Loss before income taxes(417)(78,430)(601)(79,449)(79,449)
Provision for income taxes(65)(100)126(cc)(39)(39)
Net income (loss)(483)(78,530)(475)(79,488)(79,488)
Remeasurement of redeemable convertible preferred stock(865,952)865,952(dd)
Deemed dividend related to repurchase of preferred
stock
(1,153)1,152(ee)
Net income (loss) attributable to common stockholders$(483)$(945,635)$866,629$(79,488)$$(79,488)
Basic and diluted weighted average
shares outstanding — Class A
and Class B
342,119,201339,398,036
Basic and diluted net loss per share — Class A and Class B$(0.23)$(0.23)
 
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
(in thousands, except share and per share data)
Year Ended
December 31,
2019
Additional
Pro Forma
Adjustments
(Assuming
Maximum
Redemptions)
Year Ended
December 31,
2019
Year Ended
December 31, 2019
Pro Forma
Adjustments
(Assuming
No
Redemptions)
Pro Forma
Combined
(Assuming
No
Redemptions)
Pro Forma
Combined
(Assuming
Maximum
Redemptions)
FEAC
(Historical)
SKILLZ
(Historical)
Revenue$   —$119,872$$119,872$   —$119,872
Costs and expenses:
Cost of revenue5,7135,7135,713
Research and development11,24111,24111,241
Sales and marketing111,370111,370111,370
General and administrative16,37616,37616,376
Total costs and expenses144,700144,700144,700
Loss from operations(24,828)(24,828)(24,828)
Other income (expense)
Interest expense, net(2,497)(2,497)(2,497)
Other income (expense), net3,7203,7203,720
Total other income (expense)1,2231,2231,223
Loss before income taxes(23,605)(23,605)(23,605)
Provision for income taxes
Net income (loss)(23,605)(23,605)(23,605)
Remeasurement of redeemable convertible preferred stock(62,519)62,519(dd)
Net income (loss) attributable to common stockholders$$(86,124)$62,519$(23,605)$$(23,605)
Weighted average common shares outstanding – basic and diluted342,119,201339,398,036
Net loss per share attributable to common stockholders – basic and diluted$(0.07)$(0.07)
 
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The Business Combination will be accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, FEAC will be treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Skillz issuing stock for the net assets of FEAC, accompanied by a recapitalization.
The net assets of FEAC will be stated at historical cost, with no goodwill or other intangible assets recorded.
The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives pro forma effect to the Business Combination and related transactions as if they had been consummated on September 30, 2020. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 give pro forma effect to the Business Combination and related transactions as if they had been consummated on January 1, 2019.
The unaudited pro forma condensed combined balance sheet as of September 30, 2020 has been prepared using, and should be read in conjunction with, the following:

FEAC’s unaudited balance sheet as of September 30, 2020 and the related notes included elsewhere in this prospectus; and

Skillz’s unaudited balance sheet as of September 30, 2020 and the related notes included elsewhere in this prospectus.
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2020 has been prepared using, and should be read in conjunction with, the following:

FEAC’s unaudited statement of operations for the period January 15, 2020 (inception) through September 30, 2020 and the related notes included elsewhere in this prospectus; and

Skillz’s unaudited statement of operations for the nine months ended September 30, 2020 and the related notes included elsewhere in this prospectus.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 has been prepared using, and should be read in conjunction with, the following:

Skillz’s audited statement of operations for the year ended December 31, 2019 and the related notes included elsewhere in this prospectus.
Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination. The pro forma adjustments reflecting the consummation of the Business Combination are based on certain currently available information and certain assumptions and methodologies that FEAC believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. FEAC believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
 
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The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination and related transactions taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the post-combination company. They should be read in conjunction with the historical financial statements and notes thereto of FEAC and Skillz.
Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Business Combination and related transactions and has been prepared for informational purposes only. The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give pro forma effect to events that are (1) directly attributable to the Business Combination, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the results of the post-combination company. FEAC and Skillz have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had the post-combination company filed consolidated income tax returns during the periods presented.
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2020 are as follows:
(a)
Reflects the reclassification of cash and investments held in the Trust Account that becomes available following the Business Combination, assuming no redemption.
(b)
Reflects the settlement of $24.2 million in deferred underwriting compensation.
(c)
Represents preliminary estimated transaction costs incurred by FEAC and Skillz of approximately $10.5 million and $15.8 million, respectively, for legal, financial advisory and other professional fees incurred and capitalized as part of the Business Combination. Of the Skillz transaction costs, approximately $13.5 million was capitalized as deferred offering costs, $12.2 million was accrued for as accrued professional fees and $0.7 million was accrued for as accounts payable and accrued expenses on the balance sheet as of September 30, 2020.
(d)
Represents approximately $10.0 million of transaction bonus payable to certain Skillz’ executives in connection with the consummation of the Business Combination. These costs are not included in the unaudited pro forma condensed combined statement of operations as they are nonrecurring.
(e)
Reflects the proceeds of $158.5 million from the issuance and sale of 15,853,052 shares of FEAC Class A Common Stock at $10.00 per shares in the Private Placement pursuant to the terms of the Subscription Agreements.
(f)
Reflects the settlement of $0.2 million of FEAC’s working capital loan at transaction close.
(g)
Reflects 76,246,531 shares of Skillz common stock assuming no redemptions and 39,805,822 shares of Skillz common stock assuming maximum redemptions exchanged for cash consideration to be paid to Skillz stockholders pursuant to the Merger Agreement.
(h)
Reflects the settlement of accrued expenses pursuant to the Administrative Services Agreement with the Sponsor, which will terminate upon consummation of the Business Combination.
(i)
Reflects $3.7 million of compensation cost related to the vesting of existing options to purchase common stock and $2.6 million of compensation cost related to the vesting of restricted shares. The options and restricted shares granted to select Skillz executives vest upon the occurrence of certain defined liquidity events, including the Business Combination. These costs are not included in the unaudited pro forma condensed combined statements of operations as they are nonrecurring.
 
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(j)
Reflects the reclassification of $660.9 million of FEAC Class A common stock subject to possible redemption to permanent equity.
(k)
Reflects the conversion of 25,724,596 shares of Skillz preferred stock into 257,245,960 shares of Skillz common stock on a 1-for-10 basis pursuant to Section 3.01(a) of the Merger Agreement.
(l)
Reflects the conversion of 14,820,695 shares of FEAC Class B common stock held by the Sponsor into 14,820,695 shares of FEAC Class A common stock.
(m)
Represents the recapitalization of 354,987,166 shares of Skillz common stock into 183,469,176 shares of FEAC Class A common stock and 80,857,913 shares of FEAC Class B common stock, assuming no redemptions, and the recapitalization of 391,427,875 shares of Skillz common stock into 210,603,302 shares of FEAC Class A common stock and 80,857,913 shares of FEAC Class B common stock, assuming maximum redemptions.
(n)
Reflects the elimination of FEAC’s historical retained earnings.
(o)
Represents the redemption of the maximum number of shares of 29,855,291 shares of FEAC Class A common stock for $298.6 million allocated to Class A common stock and additional paid-in capital using par value of $0.0001 per share and at a redemption price of $10.00 per share (based on the fair value of the cash and investments held in the Trust Account as of September 30, 2020 of $690.0 million).
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The pro forma adjustments included in the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 are as follows:
(aa)
Represents pro forma adjustment to eliminate historical expenses related to FEAC’s office space, utilities and secretarial and administrative services pursuant to the Administrative Services Agreement, which will terminate upon consummation of the Business Combination.
(bb)
Represents pro forma adjustment to eliminate investment income related to the cash and investments held in Trust Account.
(cc)
Reflects income tax effect of pro forma adjustments using the estimated statutory tax rate of 21%.
(dd)
Reflects the elimination of the remeasurement of Skillz redeemable convertible preferred stock, which will cease to exist upon the conversion of the redeemable convertible preferred stock into Skillz common stock.
(ee)
Reflects the elimination of the deemed dividend related to repurchase of preferred stock, which will cease to exist upon the conversion of Skillz preferred stock into Skillz common stock.
Loss per Share
Represents the net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2019. As the Business Combination and related transactions are being reflected as if they had occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire periods presented. When assuming maximum redemption, this calculation is adjusted to eliminate such shares for the entire period. Basic and diluted loss per share for New Skillz Class A common stock and New Skillz Class B common stock are the same, as each class of common stock is entitled to the same dividend participation rights and economic terms.
 
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The unaudited pro forma condensed combined financial information has been prepared assuming two alternative levels of redemption for the nine months ended September 30, 2020 and for the year ended December 31, 2019 (in thousands, except share and per share data):
Nine Months Ended
September 30, 2020
Year Ended
December 31, 2019
Assuming No
Redemptions
Assuming
Maximum
Redemptions
Assuming No
Redemptions
Assuming
Maximum
Redemptions
Pro forma net loss$(79,488)$(79,488)$(23,605)$(23,605)
Weighted average common shares outstanding, basic and diluted342,119,201339,398,036342,119,201339,398,036
Net loss per share attributable to common stockholders – basic and diluted(1)
$(0.23)$(0.23)$(0.07)$(0.07)
Weighted average common shares calculation, basic and diluted
FEAC public stockholders69,000,00039,144,70969,000,000���39,144,709
Holders of FEAC sponsor shares(2)
6,350,2006,350,2006,350,2006,350,200
Current Skillz stockholders(2)(3)
250,915,949278,050,075250,915,949278,050,075
Private Placement15,853,05215,853,05215,853,05215,853,052
342,119,201339,398,036342,119,201339,398,036
(1)
For the purpose of calculating diluted earnings per share, it was assumed that all 17,250,000 outstanding FEAC Warrants sold in the IPO and the 10,033,333 private placement warrants are exchanged for FEAC Class A common stock. However, since this results in anti-dilution, the effect of such exchange was not included in the calculation of diluted loss per share.
(2)
The pro forma basic and diluted shares of the Holders of FEAC sponsor shares and current Skillz stockholders exclude 5,000,000 Earnout Shares to Holders of FEAC sponsor shares and 5,000,000 Earnout Shares to Skillz to be placed into escrow, as these are not deemed to be participating securities and would reduce the diluted loss per share.
(3)
The pro forma basic and diluted shares of current Skillz stockholders exclude 13,411,140 shares issuable under unvested restricted stock and 49,755,517 shares issuable under unexercised stock options associated with Skillz equity incentive plans and under Skillz unexercised common and preferred warrants as these are contingently issuable shares and would reduce the diluted loss per share.
 
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SELECTED HISTORICAL FINANCIAL INFORMATION OF FEAC
FEAC is providing the following selected historical financial data to assist you in your analysis of the financial aspects of the Business Combination.
FEAC’s consolidated statement of operations data for the period from January 15, 2020 (date of inception) to September 30, 2020 and balance sheet data as of September 30, 2020 is derived from FEAC’s unaudited condensed consolidated financial statements included elsewhere in this prospectus.
This information should be read in conjunction with FEAC’s consolidated financial statements and related notes and “FEAC’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this proxy statement/prospectus. The historical results included below and elsewhere in this prospectus are not indicative of the future performance of FEAC.
Statement of Operations Data
For the Period
from
January 15, 2020
(inception) to
September 30, 2020
(in dollars, except for share
and per share numbers)
Revenue$
General and administrative expenses1,108,508
Loss from operations(1,108,508)
Other income – interest earned on Trust Account691,470
Provision for income taxes(65,470)
Net loss$(482,508)
Basic and diluted weighted average shares outstanding of Class A common stock69,000,000
Basic and diluted net income per share, Class A$
Basic and diluted weighted average shares outstanding of Class B common stock17,250,000
Basic and diluted net loss per share, Class B$(0.03)
Balance Sheet DataSeptember 30, 2020
(in dollars)
Total assets$690,681,526
Total liabilities24,777,726
Total stockholders’ equity and Class A common stock subject to possible redemptions665,903,800
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FEAC
The following discussion and analysis of the financial condition and results of operations of Flying Eagle Acquisition Corp. (for purposes of this section, “FEAC,” “we,” “us” and “our”) should be read in conjunction with the financial statements and related notes of FEAC included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this prospectus.
Overview
We are a blank check company incorporated as a Delaware corporation on January 15, 2020 and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Simultaneously with the consummation of our initial public offering, we consummated the private sale of an aggregate of 10,033,333 warrants, each exercisable to purchase one share of Class A common stock, par value $0.0001 per share at $11.50 per share, to Eagle Equity Partners II, LLC and Harry E. Sloan at a price of $1.50 per warrant, generating gross proceeds, before expenses, of approximately $9,500,000. We intend to consummate an initial business combination using cash from the proceeds of our initial public offering that closed on March 10, 2020 and the Private Placement, and from additional issuances of, if any, our equity and our debt, or a combination of cash, equity and debt.
At September 30, 2020, we held cash of $255,827, current liabilities of $627,726 and deferred underwriting compensation of $24,150,000. Further, we expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete an initial business combination will be successful.
Agreement for Business Combination
On September 1, 2020, we entered into the Merger Agreement with Merger Sub, Skillz and Paradise. If the Merger Agreement is adopted by FEAC’s stockholders, and the transactions contemplated by the Merger Agreement are consummated, Merger Sub will merge with and into Skillz with Skillz surviving the merger as a wholly owned subsidiary of FEAC. In addition, in connection with and following the consummation of the Business Combination, FEAC will be renamed “Skillz, Inc.” and is referred to herein as “New Skillz” as of the time following such change of name.
Skillz is a leading mobile games platform connecting users around the world through fun, fair and meaningful competition. Skillz enables developers to create compelling, competitive gaming experiences for its growing audience of users.
The aggregate value of the consideration paid in respect of Skillz is approximately $3.5 billion. Skillz stockholders will have the right to elect to receive consideration in the form of cash and/or shares of common stock of New Skillz, subject to proration if the aggregate cash consideration to satisfy all cash elections exceeds or is less than the Cash Consideration. The Cash Consideration is anticipated to be equal to (A) the proceeds available from the Trust Account established in connection with FEAC’s initial public offering (the “Trust Account”), after giving effect to any and all redemptions of public shares and the payment of transaction expenses, plus (B) the funds received by FEAC in the Private Placement, plus (C) the amount of cash and cash equivalents of Skillz determined in accordance with GAAP as of 11:59 p.m. Pacific Time on the day prior to the Closing Date, minus (D) $250,000,000. Cash Consideration is calculated in this manner in order to ensure that, after satisfying FEAC’s redemption obligations and paying transaction expenses, $250,000,000 in cash is first retained on the balance sheet of New Skillz (the “Balance Sheet Threshold”) before any cash is used to fund cash consideration to Skillz stockholders. Although Skillz currently has sufficient liquidity to fund its future operations, the Balance Sheet Threshold was mutually agreed upon between FEAC and Skillz based upon, among other things, considerations such as the amount of cash liquidity reasonably necessary to fund growth initiatives, support marketing efforts and provide additional
 
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working capital. If the Balance Sheet Threshold is not satisfied, all consideration to Skillz stockholders will be in the form of shares of common stock of New Skillz. In order to, among other things, avoid more cash being retained on the balance sheet of New Skillz than the parties believed was reasonably necessary, all cash in excess of the Balance Sheet Threshold will be used to fund Cash Consideration to Skillz stockholders. As a result, if the Skillz stockholders elect to receive an aggregate amount of cash that is greater than the Cash Consideration, the amount of cash to be paid to each Skillz stockholder who elected to receive cash will be adjusted downward on a pro rata basis and each such Skillz stockholder will receive additional shares of New Skillz. If the Cash Consideration exceeds the aggregate amount of cash which the Skillz stockholders elect to receive, the number of shares of New Skillz to be received by each Skillz stockholder that has elected to receive shares will be reduced until the cash portion of such stockholder’s total merger consideration represents the same portion that the Cash Consideration represents of the aggregate merger consideration, and each such Skillz stockholder will receive a pro rata portion of the excess cash. For more detailed information on the cash and stock allocations see “Cash Consideration” on page 0 and “Stock Consideration” on page 0. It is estimated that Cash Consideration will be approximately $568 million if there are no redemptions and approximately $269 million if maximum redemptions occur while still permitting FEAC to satisfy its closing conditions. See “Sources and Uses of Funds for the Business Combination” on page 0 for more information. In connection with or shortly following the signing of the Merger Agreement, certain Skillz stockholders made irrevocable cash elections (the “Cash Commitments”) to receive cash consideration in an aggregate amount of approximately $598 million and certain Skillz stockholders have made irrevocable stock elections to receive stock consideration in an aggregate amount of approximately $480 million (or approximately 48 million shares of common stock of New Skillz) (the “Stock Commitments”). These Cash Commitments and Stock Commitments were entered into with Skillz stockholders that were either significant stockholders of Skillz and/or had representatives on the board of directors of Skillz. Among other things, the willingness of these Skillz stockholders to enter into such commitments provided FEAC and Skillz assurances that substantially all of the Cash Consideration will be allocated to Skillz stockholders that have elected to receive cash consideration.
At the effective time of the Business Combination, the stock consideration to be issued to (i) the then current holders of stock in Skillz (other than Paradise and his controlled affiliates) will be in the form of Class A common stock of New Skillz and (ii) Paradise and his controlled affiliates will be in the form of shares of Class B common stock of New Skillz.
At the effective time, each Skillz option that is outstanding and unexercised, whether or not then vested or exercisable, will be assumed by New Skillz and will be converted into an option to acquire Class A common stock of New Skillz (other than in the case of the Founder, who will receive options exercisable for Class B common stock of New Skillz) with the same terms and conditions as applied to the Skillz option immediately prior to the effective time provided that the number of shares underlying such New Skillz option will be determined by multiplying the number of shares of Skillz common stock subject to such option immediately prior to the effective time, by the ratio determined by dividing the merger consideration value by $10.00 (the product being the “option exchange ratio”), which product shall be rounded down to the nearest whole number of shares, and the per share exercise price of such New Skillz option will be determined by dividing the per share exercise price immediately prior to the effective time by the option exchange ratio, which quotient shall be rounded down to the nearest whole cent.
At the effective time, each share of restricted Skillz common stock (other than those held by an individual who has waived the right to accelerate the vesting of such stock) will become immediately vested and the holder will be entitled to receive the applicable per share merger consideration, less applicable tax withholding, if any. Each share of restricted Skillz common stock held by an individual who has waived the right to accelerate the vesting of such stock will be cancelled and converted into a number of restricted shares of New Skillz stock issuable as merger consideration for one share of Skillz common stock, rounded to the nearest whole share of New Skillz common stock, subject to the same terms and conditions as applied to the Skillz restricted stock immediately prior to the effective time.
At the effective time, each warrant to purchase shares of Skillz capital stock that is issued and outstanding prior to the effective time of the Business Combination and has not been terminated pursuant to its terms will be assumed and converted into a warrant exercisable for shares of Class A common stock of New Skillz on the same terms and conditions as applied to the existing warrants to purchase Skillz capital stock.
 
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Class B common stock of New Skillz will have the same economic terms as the Class A common stock of New Skillz, but the Class B common stock will have twenty (20) votes per share. The New Skillz Class B common stock will be subject to a “sunset” provision if Paradise and other permitted holders of New Skillz Class B common stock collectively cease to beneficially own at least twenty percent (20%) of the number of shares of New Skillz Class B common stock collectively held by Paradise and his permitted transferees as of the effective date of the Business Combination. The Class A common stock and Class B common stock of New Skillz that is required to be issued as merger consideration will be valued at $10.00 per share.
The Business Combination also calls for additional agreements, including, among others, the Subscription Agreements, Share Commitments, as described elsewhere in this prospectus.
Results of Operations
For the period from January 15, 2020 (date of inception) through September 30, 2020, we incurred a loss from operations of $1,108,508, including income tax of $65,470, which was offset by interest income from the trust account of $691,470. Through September 30, 2020, our efforts have been limited to organizational activities, activities relating to the Public Offering, activities relating to identifying and evaluating prospective acquisition candidates and activities relating to general corporate matters. We have not generated any revenue, other than interest income earned on the proceeds held in the trust account. As of September 30, 2020, $690,039,470 was held in the trust account (including $24,150,000 of deferred underwriting discounts and commissions and approximately $15,050,000 from the Private Placement) and we had cash outside of trust of $255,827 and $397,726 in accounts payable and accrued expenses.
Except for the withdrawal of interest to fund FEAC’s working capital requirements (subject to an aggregate limit of $1,000,000) and/or to pay taxes, if any, the Current Charter provides that none of the funds held in trust will be released from the trust account until (i) the completion of an initial business combination; (ii) the redemption of any of the shares of Class A common stock included in the units sold in the Public Offering (the “Units”) properly submitted in connection with a stockholder vote to amend the Charter to modify the substance or timing of FEAC’s obligation to redeem 100% of the common stock included in the Units being sold in the Public Offering if FEAC does not complete an initial business combination by March 10, 2022 or with respect to any other material provisions relating to stockholders’ rights or pre-initial business combination activity or (iii) the redemption of 100% of the shares of Class A common stock included in the Units sold in the Public Offering if FEAC is unable to complete a Business Combination by March 10, 2022. Through September 30, 2020, we have not withdrawn any funds from interest earned on the trust proceeds. Other than the deferred underwriting discounts and commissions, no amounts are payable to the underwriters of the Public Offering in the event of a business combination.
We have also agreed to reimburse an affiliate of the Sponsor for office space, secretarial and administrative services provided to members of our management team, in an amount not to exceed $15,000 per month in the event that such space and/or services are utilized and we do not pay a third party directly for such services. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly fees. For the period from January 15, 2020 (date of inception) through September 30, 2020, FEAC paid $45,000 under this agreement.
Going Concern Considerations and Capital Resources
For the period from January 15, 2020 (date of inception) through September 30, 2020, we incurred an aggregate of $1,108,508, for merger expenses, legal, accounting, and filing fees relating to our SEC reporting obligations and general corporate matters, and miscellaneous operating expenses.
We believe that we do not have sufficient liquidity to meet our current obligations and allow us to operate through March 10, 2022, assuming that an initial business combination is not consummated during that time. Over this time period, we currently anticipate incurring expenses for the following purposes:

due diligence and investigation of prospective target businesses;

legal and accounting fees relating to our SEC reporting obligations and general corporate matters;

structuring and negotiating an initial business combination, including the making of a down payment or the payment of exclusivity or similar fees and expenses; and
 
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other miscellaneous expenses.
As indicated in the accompanying financial statements, at September 30, 2020, we had outside of trust cash in the amount of $255,827 and $397,726 in accounts payable and accrued expenses.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreements involving assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities other than an administrative agreement to reimburse the Sponsor for office space, secretarial and administrative services provided to members of our management team by the Sponsor, members of the Sponsor, and our management team or their affiliates in an amount not to exceed $15,000 per month in the event such space and/or services are utilized and we do not pay a third party directly for such services, from the date of closing of the Public Offering. Upon completion of a business combination or our liquidation, we will cease paying these monthly fees.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:
Offering Costs
We comply with the requirements of Accounting Standards Codification (“ASC”) 340-10-S99-1 and SEC Staff Accounting Bulletin Topic 5 A, “Expenses of Offering.” We incurred offering costs in connection with our Public Offering of approximately $38,688,692, consisting principally of underwriter discounts of $37,950,000 (including approximately $24,150,000 of which payment is deferred) and approximately $738,692 of professional, printing, filing, regulatory and other costs were charged to stockholders’ equity upon completion of the Public Offering. Approximately $64,294 of such offering expenses were accrued but unpaid at September 30, 2020.
Redeemable Shares of Class A Common Stock
All of the 69,000,000 shares of Class A common stock included in the Units sold as part of the Public Offering contain a redemption feature as described in the prospectus for the Public Offering. In accordance with FASB ASC 480, “Distinguishing Liabilities from Equity”, redemption provisions not solely within the control of FEAC require the security to be classified outside of permanent equity. The Current Charter provides a minimum net tangible asset threshold of $5,000,001. FEAC recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security at the end of each reporting period. Increases or decreases in the carrying amount of redeemable shares will be affected by charges against additional paid-in capital.
Net Income (Loss) per Share
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common stock outstanding for the period. We have not considered the effect of the
 
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warrants sold in the Public Offering (including the over-allotment) and private placement warrants to purchase approximately 17,250,000 and 10,033,333 shares of our Class A common stock, respectively, in the calculation of diluted income per share, since their inclusion would be anti-dilutive.
Our statement of operations includes a presentation of net income per share for common stock subject to redemption in a manner similar to the two-class method of net income (loss) per share. Net income (loss) per common share for basic and diluted Class A common stock is calculated by dividing the interest income earned on the trust account, net of franchise taxes of $90,548, working capital up to an aggregate limit of $1,000,000, and income taxes of $53,853, by the weighted average number of Class A common stock since issuance. Net loss per common share for basic and diluted for Class B common stock is calculated by dividing the net loss, which excludes income attributable to Class A common stock, by the weighted average number of Class B common stock outstanding for the period.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.
 
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BUSINESS OF NEW SKILLZ
The following discussion reflects the business of New Skillz, as currently embodied by Skillz. In this section, “we,” “us” and “our” generally refer to Skillz in the present tense or New Skillz from and after the Business Combination.
Overview
We were founded on one simple belief: everyone loves to compete. We are building the competition layer of the internet by re-inventing competitive mobile gaming.
We believe in the potential for all people to unleash their inner champions through competition and for developers to bring their art to the world and achieve their dreams of financial success.
Our proprietary platform revolutionizes and democratizes the mobile gaming industry and allows us to deliver gaming experiences that our player community trusts and loves and “levels the playing field” for every developer.
We built a virtual world where people share in the thrill of victory or the agony of defeat, enjoying healthy rivalry, great achievements and valued recognition. These interactive and highly social experiences power our industry leading average user engagement which we estimated at 62 minutes of game play per paying user per day in 2019 and positions us to be the center of users’ mobile gaming life. 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.
We expand the mobile gaming market by realigning the interests of gamers and developers. In our model, greater user engagement directly leads to more developer revenue. More revenue enables developers to build more content for the platform which, in turn, increases user engagement and retention. This alignment creates a virtuous cycle which delivers powerful network effects.
We benefit from the powerful trend of consumers seeking entertainment experiences that are online and interactive. The market for interactive entertainment has surpassed those for movies, music and books. Today, there are 2.7 billion gamers worldwide and over 10 million developers making content.
We believe the explosive growth of new games makes it hard for developers to rise above the noise. Our competition-based platform offers developers a turn-key go-to-market solution so they can focus on what they do best — make great games.
We believe our monetization approach is superior to traditional methods for free-to-play mobile games which create friction in the gamer experience.
The trust and fairness we foster with our player community is part of the foundation upon which our business is built.
We pioneered the next iteration of the charity walk-a-thon. The next generation’s mass-participatory charity event is the video game tournament. Through our platform, non-profits can reach a dramatically broadened universe of younger, first-time donors. In 2018, we ran 10 events for Susan G. Komen driving 25,000 new first-time donors to their organization. Since then we have been honored to be trusted by many of the world’s top non-profits including the World Wildlife Fund, the NAACP and the American Cancer Society. In the first nine months of 2020, we generated over 200,000 unique donors.
In 2020, we expect to power more than two billion tournaments, including 0.5 billion paid entry tournaments, and facilitate $1.6 billion in GMV generating expected revenue of $225 million. For the quarter ended September 30, 2020, we had 2.7 million MAUs, an increase of 57% from the same period in the prior year.
For the years ended December 31, 2019 and 2018, GMV was $886 million and $365 million, respectively. For the nine months ended September 30, 2020 and 2019, GMV was $1.1 billion and $627 million, respectively.
 
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For the years ended December 31, 2019 and 2018, we hosted 1.51 billion and 0.71 billion tournaments on our platform, respectively, of which 0.28 billion and 0.15 billion, respectively, were paid entry. For the nine months ended September 30, 2020 and 2019, we hosted 1.54 billion and 1.07 billion tournaments on our platform, respectively, of which 0.35 billion and 0.22 billion, respectively, were paid entry.
Our revenue increased 201% in 2018 to $51 million, and our net loss increased 147% to $28 million. Our revenue increased 136% in 2019 to $120 million, and our net loss decreased 15% to $24 million. For the nine months ended September 30, 2020, our revenue increased 91% to $162 million, and our net loss increased 426% to $79 million.
Market Trends in Our Favor

Mobile Gaming is Rapidly Growing:   The mobile gaming market grew at a 20% CAGR from 2014 to 2019 and is expected to grow from $68 billion in 2019 to $150 billion in 2025.

Gaming has Gone Mainstream:   Gaming is the new mass market media. 64% of American adults play video games and that is expected to increase as Millennials, Gen-Z and younger generations represent a larger proportion of the population.

Democratization of Content Creation:   Easy-to-use and powerful mobile game development tools have transformed the game development process into a “click-to-create” process enabling anyone to build game content.
Developer Challenges

Overwhelming Volume of New Games:   The explosive growth in new game content available makes it harder than ever for developers to rise above the noise and reach users with their content. Scaling mobile games requires significant investment in user acquisition capabilities, leaving many developers with unprofitable unit economics.

Increasing Scale Necessary to Compete:   The operations needed to sustain and improve existing games requires expertise, technologies and resources, which many developers lack and distracts them from their core competency — creating new, engaging content.
Our Platform

Live Operations:   Our system runs everything from multivariate testing on acquisition of new cohorts, to optimizing on-system engagement and maximizing revenue retention.

Gamer Competition Engine:   Our easy-to-integrate SDK contains over 200 features in a smaller than 15-megabyte package, which allows for seamless over-the-air updates and a trusted user experience.

Developer Console:   Our dashboard where developer partners can rapidly integrate and monitor their game performance.

Payment Infrastructure:   Our robust payment infrastructure processes 70 payment transactions per second with 99.9875% system uptime. In a money-in and money-out system, users expect the reliability of a payment business.

Data Science:   Our algorithms and machine learning technologies augment all sides of our platform. Key features of our proprietary data science technologies include anti-cheat, anti-fraud, player rating and matching and segmentation engine. Strong anti-cheat and anti-fraud protections are among the most critical elements to foster a healthy competitive ecosystem because they maintain the trust and fairness of the user experience.
Our Core Strengths

Deep Technology Moat:   We have invested extensively in developing our proprietary platform, resulting in many significant inventions and a broad portfolio of 58 issued and pending patents. We currently analyze 1.5 billion data points per day which we use to enhance our data-driven algorithms, continuously fortifying our position as the world’s leading competitive mobile gaming platform.
 
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Strong Network Effects:   Compelling competitive content on our platform attracts users, increasing the size of our audience, which, in turn, attracts more developers to create new interactive experiences using our platform, producing a powerful network effect.

Attractive Unit Economics:   Our average Three-year Lifetime Value to User Acquisition Cost of our 2018, 2019 and nine months ended September 30, 2020 cohorts is expected to be 4.5x (and after taking into account the end-user incentives recorded in sales and marketing expense is expected to be 3.0x) and we pay back end-user acquisition spend in just four months, enabling us to efficiently scale our business.

Brand Synonymous with Trust and Fairness:   We pioneered the competitive mobile gaming category and believe our brand is synonymous with trust and fairness.
Our Growth Strategies

Grow the Core:   We reach fewer than 2% percent of mobile gamers in North America markets and are investing in marketing to expand our audience.

Expand the Content Available on our Platform:   We intend to expand beyond casual content into other genres of interactive entertainment by powering competitive experiences in everything from first-person shooter to racing to real-time strategy games.

Expand Internationally:   We see a significant opportunity to expand internationally. In 2019, we generated more than 90% of our revenue from users in North America, even though the international market is approximately four times larger than the North American market.

Increase Brand and Influencer Partnerships:   More than 80% of our GMV is paid out in prizes today. We believe brand advertisers sponsoring those prizes have the potential to broaden our reach and drive increased profitability for our business.

New Monetization Models:   In 2019, only 10% of our MAUs entered into paid contests. We plan to monetize the remaining 90% through non-intrusive, low friction advertisements, virtual goods or brand-sponsored prizes that will generate new economic opportunities for us and enable more developers to succeed.

Acquisitions:   We may consider selective acquisitions to accelerate our growth.
Our Business
Industry Trends in Our Favor
Mobile Gaming is Rapidly Growing
The global games market is substantial and growing rapidly. According to Newzoo, the interactive entertainment market grew from $84 billion in 2014 to $149 billion in 2019, and is larger than each of the markets of film box office, music and books. While the global games market as a whole has grown rapidly, the mobile gaming market has outpaced the broader industry’s growth. According to Newzoo, mobile games was a $68 billion market in 2019 and the largest and fastest-growing segment of the global games market, growing at a 20% CAGR from 2014 to 2019. The proliferation of smartphones has been a key driver of this growth. According to Statista, in 2019 over 40% of the world’s population currently owns a smartphone and that number continues to grow, creating an increasingly large market for game developers to target. According to Statista, in 2019, a quarter of all time on mobile devices was spent in games.
 
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Gaming Has Eclipsed Movies, Music and Books
[MISSING IMAGE: tm2030148d1-ph_gaming4clr.jpg]
Source: Newzoo, PWC, Grandview Research.
Note: Movies = Global Film Box Office; OTT = “over-the-top” (i.e. streaming media offered directly to viewers via the internet)
Gaming has Gone Mainstream
Gaming appeals to a diverse population, spanning genders, income levels and age groups. The growth of the casual segment is contributing to the attractiveness of mobile gaming, with simple gameplay that attracts new users and allows large audiences to take part. New content genres combined with broad smartphone adoption have made mobile gaming mainstream and act as catalysts for greater inclusion across the board. According to the Entertainment Software Association, 41% of gamers are women. Additionally, the ubiquity of smartphones means that almost anyone can play games without having to purchase additional hardware like consoles. This makes mobile gaming more accessible to a greater range of income levels. Moreover, gaming is prolific among younger demographics. While 64% of American adults play video games, that is expected to increase as Millennials, Gen-Z and younger generations represent a larger proportion of the population.
Democratization of Content Creation
The introduction of standardized game development and distribution platforms has democratized content creation, leading to a significant increase in content. Traditionally, game development required large studios and customized software development, creating high barriers to entry. Today’s mobile game development tools such as Unity and Unreal are intuitive and low-cost, transforming the game development process into a “click-to-create” process enabling anyone to build game content. In 2019, there were over 10 million game developers making content. Moreover, distribution platforms such as Apple App Store, the Samsung Galaxy Store and the Google Play Store have become ubiquitous, enabling developers to reach a broader audience and fueling a surge in content.
Developer Challenges
Overwhelming Volume of New Games
The explosive growth in new game content available makes it harder than ever for developers to rise above the noise and reach users with their content. Scaling mobile games requires significant investment in user acquisition capabilities, leaving many developers with unprofitable unit economics. We believe that in-app advertisements and purchases, the traditional forms of mobile game monetization, create friction with the user. With in-app advertisements, the gamer’s experience is constantly disrupted by intrusive ads, engagement and retention rates are at risk of being negatively impacted. With in-app purchases, developers offer virtual items to users, such as additional characters, upgrades and extra lives, that can be purchased for real money. Under this model, developers must continuously build new purchasable content for a shrinking group of users — often referred to as the “content treadmill”. Developers often decide to introduce “pay-to-win” mechanics which we believe hurts the user experience because it undermines fairness.
 
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Increasing Scale Necessary to Compete
Live operations and user acquisition are the lifeblood of successful mobile game publishers. Yet most mobile game developers lack the resources and capabilities to perform at the same level as the larger developers. Moreover, many developers may not have the expertise, data, or tools to optimize live operation or user acquisition.
Our Platform
Overview
Our proprietary platform revolutionizes and democratizes the mobile gaming industry and allows us to deliver gaming experiences that our player community trusts and loves and “levels the playing field” for every developer. We believe we are re-inventing competitive mobile gaming and thereby expanding the mobile gaming market. Our technology platform aligns the interests of developers and gamers with respect to user monetization, instead of putting them at odds. Traditional mobile games utilize in-game advertisements or purchases, which create friction in the user experience, hurting engagement and retention. By monetizing user engagement primarily through prizes, we create a compelling alternative for both developers and users for any competitive game. With our system, the more users enjoy playing in contests for prizes and the longer they play, the more revenue we generate for developers. This dynamic generates significantly stronger monetization for developers.
Live Operations
Delivering high-quality live operations in games is critical to user retention and engagement. Our live operations, or LiveOps, system is used to manage and optimize the user experience across the thousands of games on our platform. We have built a highly automated system to power LiveOps for the games on our platform. LiveOps in mobile games on our platform encompasses everything from generation of new events to creating new and exciting tournament formats in which users can compete and brand and influencer-sponsored events. With our highly automated system, we are able to run LiveOps for the games on our system and we believe we are supporting those games with a fraction of the number of people required by a typical game developer.
We use these marketing and system optimization technologies to run multivariate testing on our system settings in order to optimize user engagement and retention for games on our platform. This system manages the presentation of tournament formats, frequency of events and merchandising of the Ticketz store, which is our in-game store that allows users to redeem prizes using Ticketz earned in gameplay on our platform.
With our segment manager tool, we can administer important system settings for users on the platform, including, among other things, the types of tournaments a user sees and is eligible to enter, deposit offers and promotions available to a user, and the incentives and achievements presented to a user at various moments of their gaming journey.
Gamer Competition Engine
Our end-to-end technology platform enables mobile game developers to improve the gameplay experiences and drive improved engagement, retention and revenue from their content. Our easy-to-integrate software development kit, or “SDK” contains over 200 features in a smaller than 15-megabyte package, which allows for seamless over-the-air updates.
User rating and matching is a challenging technical problem, as the fastest match is the next user in line to play, while the fairest match (i.e., a theoretically perfectly matched skill rating) could take a much longer time to find. User retention is sensitive to both fair matching and time to match and, therefore, we have invested significantly in the technology necessary to optimize these competing objectives.
Our SDK includes many social features such as in-game chat, friends tournaments and leagues which allow players to interact and build relationships, strengthening the Skillz player community. Our players enjoy social experiences around our games, by communicating during and after competitions, on topics
 
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ranging from sharing gameplay strategies to building healthy rivalries and making personal connections. Our Friends feature allows players to challenge a friend to a match and broadcasts that player’s affinity for Skillz to their social network.
Developer Console
Our intuitive developer console dashboard enables our game developers to rapidly integrate and monitor the performance of their games on our platform. The first step for a game developer integrating our tournament management system is to sign up for a free account on our developer portal. Developer onboarding has been optimized through multiple iterations to enable developers to quickly and easily set up an account, access technical documentation, download the SDK and access customer support. The developer portal has been built such that an average game developer can implement our SDK in about a day with little or no technical support. Once a game goes live on our platform, the developer portal provides the game developers with a single system through which they can access analytics on user behavior and monetization for the games.
Payment Infrastructure
We have developed a robust payment infrastructure that we use to process 70 payment transactions per second with 99.9875% system uptime. We believe our technology capabilities are critical to building and maintaining trusted relationships with our developers and users.
Data Science
Our algorithms and machine learning technologies augment all sides of our platform. Key features of our proprietary data science technologies include anti-cheat, anti-fraud, player rating and matching and segmentation engine. We believe our technology capabilities are industry-leading and have helped to differentiate our product offerings and fueled our growth.
Strong anti-cheat and anti-fraud protections are among the most critical elements required to foster a healthy competitive ecosystem. Our systems need to continuously evolve to stay ahead of sophisticated attempts to defraud or stack the odds against users. As a component of our proprietary security systems, we use the robust data we analyze to build statistical maps to predict users’ probable next outcome. This enables us to statistically detect anomalies, which are escalated for further review and, if appropriate, remediation.
High personalization is an integral element to enhancing the gamer experience on our platform. For example, we invented a technology for creating user segments based on dynamically linking behaviors. Our technology allows us to overlap, concatenate and exclude different behaviors to create new user journeys through game environments. We have identified 65 different behavior sets, which enables us to increase the number of potential unique user journeys exponentially and dynamically adjust for a significantly more personalized experience.
We give gamers the confidence to transact on our platform by delivering on our values of trust and fairness. We enable game developers to focus on what they do best: build great content. We provide developers with a comprehensive technology platform necessary to compete with the largest and most sophisticated mobile game developers in the world.
Our Developer Community
We have a growing community of developers using our platform to bring their art to the world. Content creation has been democratized in recent years with the introduction of standardized game development and distribution platforms and, as of September 30, 2020, we had over 9,000 registered game developers that have launched game integration on our system. Our self-serve platform enables our developer customers to integrate and monitor their game performance through sophisticated dashboards. This allows the developers to do what they do best — building great games, while we help them on all other fronts by delivering services such as payments, analytics, LiveOps, prize fulfillment and customer service. Historically, a small number of games have accounted for a substantial portion of our revenue. For the year
 
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ended December 31, 2019, Solitaire Cube and 21 Blitz (each developed by Tether) together with Blackout Bingo (developed by Big Run) accounted for 72% of revenue. During the nine months ended September 30, 2020, Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 79% of our revenue. For the year ended December 31, 2019, Tether and Big Run accounted for 83% and 0.1%, respectively, of our revenue. For the nine months ended September 30, 2020, Tether and Big Run accounted for 63% and 25%, respectively, of our revenue. See section entitled “Risk Factors — Risks Related to Skillz’s Business and Industry” for a discussion of risks relating to a limited number of games (and related developers) that historically have accounted for a substantial portion of our revenue.
Games on our platform go live with free-to-play capabilities first before applying for prized competitions. We determine which games are enabled for prizes based on a number of criteria to ensure the game meets our standards, including: a minimum of 100 Daily Active Users (“DAUs”); whether the game is skill-based, according to our patented algorithm; proper implementation of our patented technology which eliminates randomness from our developer’s games to ensure that outcomes are determined by the user’s decisions; free of bugs, crashes and user-interface errors; and at least a 4-star rating in the relevant app store. We maintain player data and handle all communications with the players on behalf of our developers. This data model allows us to deliver superior monetization for the benefit of all the developers on our platform.
Our Gamer Community
We built a virtual world where our community shares in the thrill of victory or the agony of defeat, enjoying healthy rivalry, great achievements and valued recognition. Our social features such as chat, friend tournaments and leagues allow players to interact and build relationships, strengthening our player community. While we have highly effective means of acquiring users through paid channels, we also benefit from significant organic traffic. As Skillz becomes a household name, we expect to attract continued and valuable organic user traffic to our platform.
As illustrated in the table below, the end-user demographic is the mass market and, we believe, resembles the population at large.
[MISSING IMAGE: tm2030148d1-ph_demo4clr.jpg]
Note: Income and age demographics based on Axciom survey data of paying users as of 2018.
Gender demographics based on Ad Network install data as of 2019.
Our Core Strengths
We are a pioneer in competitive mobile gaming, founded on the simple belief that everyone loves to compete. In 2020, we expect to power more than two billion tournaments, including 0.5 billion paid entry tournaments, and facilitate $1.6 billion in GMV. We believe that we are positioned as the market leader in competitive mobile gaming due to the following strengths:
Deep Technology Moat
We have invested extensively in developing our proprietary platform, resulting in many significant inventions and a broad portfolio of 58 issued and pending patents. We currently analyze over 300 data points from each game play session, representing over 1.5 billion distinct data points each day, which we use
 
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to enhance our data driven algorithms, continuously fortifying our position as the world’s leading competitive mobile gaming platform.
Strong Network Effects
We have a vibrant and growing ecosystem of developers and users. Compelling competitive content on our platform attracts users, increasing the size of our audience, which, in turn, attracts more developers to create new interactive experiences using our platform, producing a powerful network effect. We believe this network effect fuels our growth.
Attractive Unit Economics
Our platform has demonstrated highly compelling unit economics. The average Three-Year Lifetime Value of our 2018, 2019 and nine months ended September 30, 2020 cohorts is expected to be 4.5x our total user acquisition costs (and after taking into account the end-user incentives recorded in sales and marketing expense is expected to be 3.0x). User acquisition costs include expenses incurred in the period for all of the costs 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. Our payback period has averaged four months over these same periods. These returns on marketing investment support our ability to continue to efficiently scale our business.
Brand Synonymous with Trust and Fairness
We pioneered the competitive mobile gaming category and believe our brand is synonymous with trust and fairness. As we build our brand awareness, we expect it will help us attract new users and developers. Above all else, Skillz stands for trust and fairness and that reputation in our community is of the utmost importance to us.
Our Growth Strategy
According to Newzoo, there are currently 2.7 billion mobile gamers worldwide. We currently serve only 2.7 million MAUs as of September 30, 2020, a small fraction of the addressable market. We believe we are just in the early phases of addressing our significant market opportunity. The key elements of our growth strategy are:
Grow the Core
We believe we reach fewer than two percent of mobile gamers in North America today. Yet we tap into a universal desire for competition. Unlike other digital platforms that provide static entertainment, competition-based mobile gaming like ours provides highly coveted socially interactive experiences. We believe that competition enhances engagement in gaming content because gaming is inherently competitive. By enabling the competitive element of mobile gaming, we can continue to attract new audiences, while also driving higher engagement rates. In 2019, Skillz estimates the average paying user spent 62 minutes per day in game play on Skillz, which exceeds other leading social media and gaming platforms. We intend to leverage our existing platform to continue to increase user engagement. 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.
Expand the Content Available on our Platform
We see a significant opportunity for our developers to expand beyond casual content into other genres of interactive entertainment by powering competitive experiences in everything from first-person shooter to racing to real-time strategy games. We are investing in the platform to foster diversified content production on our platform and in our developer sales initiatives.
Expand Internationally
We see a significant opportunity to expand internationally. In 2019, we generated more than 90% of our revenue from users in North America. According to Newzoo, in 2020, the international market for
 
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mobile gaming is estimated to be approximately 4 times larger than the North American market. We believe we have the potential to reach these users through our existing channels and developer partners who can create localized content. We evaluate new markets for potential expansion based on many factors including market size and growth, propensity to spend on gaming, content extensibility, payments requirements, and regulatory framework.
Increase Brand and Influencer Partnerships
We see a significant opportunity to build partnerships with brands to sponsor tournaments on our platform. Brand advertisers are seeking new ways to engage with existing and potential customers online and are increasingly looking to us for sponsorship opportunities. More than 80% of our GMV is paid out in prizes today and we believe brand advertisers sponsoring prizes represents a material business opportunity for us to both broaden our reach and increase profitability.
Further, we are investing in influencer-sponsored tournaments. Influencers have an outsized impact on the purchasing behaviors of next-generation users. Influencers maintain a social media presence on platforms such as Twitch, Instagram and YouTube, and have thousands or even millions of followers who view, comment, like, share and follow their gameplay. Influencers can have a more powerful impact than traditional advertising methods because they bring their followers into their gameplay and daily lives in an authentic way.
New Monetization Models
In 2019, only 10% of our MAUs enter into paid contests. We plan to monetize the remaining 90% through non-intrusive, low friction advertisements, virtual goods, or brand-sponsored prizes that will generate new economic opportunities for us and enable more developers to succeed. Introducing non-intrusive, low friction advertisements would provide more developers a way of monetizing user engagement on the platform and we believe advertisements will be even more effective for games on our platform given the evergreen nature of competitive contests and user engagement patterns. According to GameAnalytics, mobile gaming industry ARPDAU ranges from $0.03 to $0.15 and we believe we could introduce advertisements and see similar levels of monetization.
Acquisitions
We have a culture of creating new products through iterating and testing new ideas that add value to our platform through increased virality, retention, and engagement. As we continue to build for the future, we may consider selective acquisitions to accelerate our international expansion, gain new strategic partnerships, or expand our platform offerings.
Our People
We were founded in 2012 by Andrew Paradise and Casey Chafkin. Our founders have imprinted a set of values that has set the culture for the company and its employees. Our seven values are: Honor; Mission; Collaboration; Productivity; Willingness; Frugality; and Balance.
Our founders and our business have been recognized for leadership. In 2018, we were recognized as one of Forbes’ “Next Billion Dollar Startups” and our CEO was named an Entrepreneur 360. In 2019, we were recognized as one of Fast Company’s most innovative companies and were named #31 on CNBC’s Disruptor 50. In the first nine months of 2020, we were named by Inc. Magazine to their Private Titans list.
We believe that our people are the reason for our success and we have organized ourselves to maximize productivity and performance. We maintain a high bar for talent and actively work to build diversity within our workforce.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards.
 
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As of September 30, 2020, we had 211 employees. None of our employees are represented by a labor organization or is a party to any collective bargaining agreement.
Gaming for Good
We pioneered the next iteration of the charity walk-a-thon. The next generation’s mass-participatory charity event is the video game tournament. Through our initiative, Gaming for Good, or G4G, our platform enables mass-participatory video game tournaments that harness the power of community through competition. Through our platform, non-profits can reach a dramatically broadened universe of younger, first-time donors. A diverse range of charitable initiatives have benefited from the power of our platform and gamer community. For non-profit organizations, their brand and reputations are among their most valuable assets. We have been honored to be trusted by some of the world’s leading non-profits, such as the World Wildlife Fund, the NAACP, and the American Cancer Society, to engage their audience of supporters and grow their reach. In 2018, we ran 10 events for Susan G. Komen driving 25,000 new first time donors to their organization. In the first nine months of 2020, we generated over 200,000 unique donors.
Games on Our Platform
We offer a wide range of contests for the users. We enable game genres that can be played: (i) asynchronously; (ii) turn-based synchronously; or (iii) synchronously. An example of an asynchronous game would be a match-3 puzzle game or bingo game where users play the exact same game at different times and then the scores are compared when both contestants have played to determine the winner. An example of a turn-based synchronous game would be a dominoes game in which users take turns in real-time and the winner is determined when the game ends. An example of a synchronous game would be a real-time strategy game where users are making multiple moves simultaneously and then the winner is determined when the game ends.
[MISSING IMAGE: tm2030148d1-ph_prizes4clr.jpg]
Distribution
Our developers distribute their games through direct app downloads from our websites, as well as third-party platforms, such as the Apple App Store, which traditionally has been the main distribution channels for our developers’ games. In accordance with the Apple App Store policy, Apple does not take any share of the end-user deposits on our system; however, Apple does receive a fee for end-user deposits made through Apple Pay.
 
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Marketing
Our ability to effectively market to potential users is important to our operational success. With a blend of our analytics and data science, we leverage software tools to efficiently acquire, retain and engage users while reinforcing our trusted consumer-facing brand for both the end users and our developer partners. We acquire and engage users primarily through digital ad networks, our game developers and affiliate partners. We use a combination of paid marketing channels, in combination with compelling offers and exciting games, to achieve our objectives. We optimize our marketing investment across all our channels in order to generate strong returns on our marketing spending. The average Three-Year Lifetime Value of our 2018, 2019 and nine months ended September 30, 2020 cohorts is expected to be 4.5x our total user acquisition costs (and after taking into account the end-user incentives recorded in sales and marketing expense is expected to be 3.0x). User acquisition costs include expenses incurred in the period for all of the costs 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. Our payback period, or the time it has taken to recoup our investment in user acquisition, has averaged four months over these same periods.
In addition to traditional paid advertising channels, we cross-promote our product offerings to our existing user base across our gaming ecosystem. On average, users that have entered a paid-entry fee tournament download 10 Skillz-hosted games. Through our cross-promotion channels, we use a combination of content, contests and special offers to engage existing users.
We have significant opportunities to extend our marketing channels to offline media and deploy omni-channel marketing strategies to further expand our business. For example, partnerships with celebrities and influencers have the potential to cost-effectively reach new users. Moreover, we intend to opportunistically engage in brand marketing to drive broader consumer and developer awareness of our platform.
We have engagement marketing programs that provide rewards and awards for players engaging on the platform. Players earn loyalty currency, called Ticketz, every time they play a paid entry contest. The frequency and amount of entry fees determine the amount of Ticketz that are earned. Players can earn trophies as awards for performing certain actions or achieving milestones in games. Tickets earned through the loyalty rewards and awards programs can be exchanged in our in-app Ticketz Store for various prizes ranging from Skillz-branded apparel to luxury goods and vehicles.
Customer Advocacy
We provide 24/7 customer support and trust and safety services to our developer’s end-users. The customer support team responds to all user inquiries including support for game crashes, payment issues, and loyalty program inquiries. In the first nine months of 2020, our customer support team achieved a 93% Player CSAT and 46 Player NPS rating. The Trust & Safety team reviews any suspicious payments and chargebacks, and investigates anomalous scoring patterns and user reports of cheating, among other things. We leverage our data science technologies to reduce a population of bad actors by a factor of 500, leaving just a handful of potential cheaters and fraudsters per million active users requiring manual intervention. These suspected bad actors are reviewed on a case-by-case basis with several escalating levels of review, which ultimately may require an in-person play test on a Skillz-provided mobile device administered by a third-party security vendor to confirm the user’s ability.
Intellectual Property
Our business relies substantially on the creation, use and protection of intellectual property. We protect our intellectual property by relying on international, federal, state and common law rights. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors. We actively seek patent protection covering our inventions and as of September 30, 2020 we have 58 patents granted or pending.
Property
Our principal business operations are located in San Francisco, California. We lease space in Portland, Oregon and Las Vegas, Nevada for our customer support and engineering operations. We intend to acquire additional space as we add employees and expand geographically.
 
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Legal Proceedings
We are engaged in the defense of certain claims and lawsuits arising out of the ordinary course and conduct of our business and have certain unresolved claims pending, the outcomes of which are not determinable at this time. We have insurance policies covering certain potential losses where such coverage is available and cost effective. In our opinion, any liability that might be incurred by us upon the resolution of any claims or lawsuits will not, in the aggregate, have a material adverse effect on our financial condition or results of operations.
Government Regulation and Compliance
Regulation
We are subject to a variety of laws in the U.S. and abroad that affect our business, including state and federal laws regarding skill-based gaming, consumer protection, electronic marketing, data protection and privacy, competition, taxation, intellectual property, export and national security, which are continuously evolving. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the U.S. It is also likely that as our business grows and evolves, particularly if we expand to other countries, we will become subject to laws and regulations in additional jurisdictions or other jurisdictions may claim that we are required to comply with their laws and regulations.
State and federal laws in the U.S. distinguish between games of skill and games of chance. We only enable games for paid entry-fee contests in states in which skill-based gaming is permitted and not required to be licensed as gambling under applicable state law. As of September 30, 2020, we enable cash prizes in 41 states and the District of Columbia, covering approximately 90% of the U.S. population. Skillz enables cash prizes in all states except for Arizona, Arkansas, Connecticut, Delaware, Louisiana, Montana, South Carolina, South Dakota, and Tennessee. We use proprietary algorithms and data science tools to ensure that the degree of skill involved in affecting the outcome of a contest is sufficient to comply with applicable state laws. The scope and interpretation of the laws that are or may be applicable to the determination as to whether a contest is skill-based, and therefore beyond the scope of a state’s gambling laws and licensing requirements, are subject to interpretation and evolving. We have not received any licenses, authorizations or approvals confirming that the paid entry-fee contests hosted on our platform comply with applicable laws. Our compliance is based on our interpretation of existing state and federal laws regarding skill-based gaming. There is a risk that existing or future laws in the states in which we operate may be interpreted in a manner that is not consistent with our current practices, and could have an adverse impact on our business and prospects. Additionally, existing and future laws that permit skill-based gaming may be accompanied in the future by restrictions or taxes that make it impractical or less feasible to operate in these jurisdictions.
It is possible that a number of laws and regulations may be adopted or construed to apply to us that could restrict the online and mobile industries, including player privacy, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing of in-app purchases, or regulation of currency, banking institutions, unclaimed property or money transmission, may be interpreted to cover the games featured on our platform and the entry fees paid in respect of such contests. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere regarding these activities may impede the growth of social game services and impair our business, financial condition or results of operations.
Compliance
Because we handle, collect, store, receive, transmit and otherwise process certain personal information of the users and employees, we are also subject to federal, state and foreign laws related to the privacy and
 
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protection of such data. Regulations such as the General Data Protection Regulation of the European Union and the California Consumer Privacy Act are untested laws that could affect our business and the potential impact is unknown.
We have developed internal compliance programs to ensure we comply with legal and regulatory requirements for skill-based gaming. We use geofencing technology to restrict user access to paid entry fee contests in only those jurisdictions where video games of skill are permitted. While we are firmly committed to full compliance with all applicable laws and have developed appropriate policies and procedures in order to comply with the requirements of the evolving regulatory regimes, we cannot assure that our compliance program will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine.
Competition
We primarily compete with alternative monetization services for mobile game content. This includes platforms that facilitate in-app advertisements and purchases. We principally compete on a number of factors, including a robust technology toolset designed with the ability to convert, engage and retain users. Our developers compete for end users with other forms of consumer discretionary entertainment that vie for the users’ time and disposable income. This includes companies that provide video entertainment, music entertainment, social networking and other forms of leisure entertainment. The large companies in our ecosystem may play multiple different roles given the breadth of their business. Examples of these larger companies are Sony, Amazon, Facebook, Apple, Google, and Unity. Most of these companies are also our partners and customers.
 
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SELECTED HISTORICAL FINANCIAL INFORMATION OF SKILLZ
Skillz’s balance sheet data as of September 30, 2020 and statement of operations data for the nine months ended September 30, 2020 and 2019, are derived from Skillz’s unaudited financial statements included elsewhere in this prospectus. Skillz’s balance sheet data and statement of operations data as of and for the years ended December 31, 2019 and 2018, are derived from Skillz’s audited financial statements included in this prospectus.
The information should be read in conjunction with Skillz’s financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Skillz” contained elsewhere in this prospectus. Skillz’s historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a fiscal year.
Nine Months
Ended
September 30,
2020
Nine Months
Ended
September 30,
2019
Year Ended
December 31,
2019
Year Ended
December 31,
2018
(in thousands, except share and per share amounts)
Statement of Operations Data:
Revenue$162,392$85,126$119,872$50,778
Costs and expenses
Cost of revenue8,8063,8355,7132,112
Research and development13,2537,80311,2417,547
Sales and marketing172,38177,942111,37051,689
General and administrative24,33611,99116,37614,975
Total costs and expenses218,776101,571144,70076,323
Loss from operations(56,384)(16,445)(24,828)(25,545)
Interest expense, net(1,297)(2,127)(2,497)(2,190)
Other income (expense), net(20,749)3,6533,720(45)
Loss before income taxes(78,430)(14,919)(23,605)(27,780)
Provision for income taxes100
Net loss$(78,530)$(14,919)$(23,605)$(27,780)
Remeasurement of redeemable convertible preferred stock(865,952)(62,519)(62,519)(18,798)
Deemed dividend related to repurchase of preferred stock(1,153)
Net loss attributable to common stockholders$(945,635)$(77,438)$(86,124)$(46,578)
Net loss per common share
Net loss per share attributable to common stockholders  –  basic and diluted$(6.64)$(0.58)$(0.64)$(0.36)
Weighted average shares outstanding
Weighted-average common shares outstanding  –  basic and
diluted
142,475,767134,316,073135,124,756129,930,282
 
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September 30,
2020
December 31,
2019
December 31,
2018
(in thousands)
Balance Sheet Data:
Total assets$86,881$38,856$26,029
Total current liabilities40,59710,48110,212
Total liabilities40,65320,19124,953
Working capital26,21624,61114,565
Redeemable convertible preferred stock1,120,724156,33554,056
Total stockholder’s deficit(1,074,496)(137,670)(52,980)
Nine Months
Ended
September 30,
2020
Nine Months
Ended
September 30,
2019
Year Ended
December 31,
2019
Year Ended
December 31,
2018
(in thousands)
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities$(29,744)$(11,321)$(21,937)$(16,948)
Investing activities(3,009)(2,134)(3,223)(867)
Financing activities63,98624,96331,16833,330
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SKILLZ
The following discussion and analysis of the financial condition and results of operations of Skillz Inc. (for purposes of this section, “Skillz,” “we,” “us” and “our”) should be read together with Skillz’s audited financial statements as of and for the years ended December 31, 2019 and 2018, and Skillz’s unaudited interim financial statements as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019, in each case together with the related notes thereto, included elsewhere in this prospectus. The discussion and analysis should also be read together with the section entitled “Selected Historical Financial Information of Skillz” and the pro forma financial information as of and for the nine months ended September 30, 2020 and for the year ended December 31, 2019 included in this prospectus. See “Unaudited Pro Forma Condensed Financial Information.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements.
Overview
We operate a marketplace that connects the world through competition, serving both developers and users. Our platform enables fair, fun and competitive gaming experiences and the trust we foster with users is the foundation upon which our community is built. We believe our marketplace benefits from a powerful network effect: compelling content attracts users to our platform, while the increasing size of our audience attracts more developers to create new interactive experiences on our platform.
Skillz was founded in 2012 by Andrew Paradise and Casey Chafkin with the vision to make eSports accessible to everyone possible. Today, the platform has over 40 million registered users and hosts an average of over 5 million daily tournaments, including 1.5 million paid entry daily tournaments offering over $100 million in prizes each month. As of September 30, 2020, we had over 9,000 registered game developers on our platform that have launched a game integration. For the year ended December 31, 2019, Solitaire Cube and 21 Blitz (each developed by Tether) together with Blackout Bingo (developed by Big Run) accounted for 72% of revenue. During the nine months ended September 30, 2020, Solitaire Cube, 21 Blitz and Blackout Bingo accounted for 79% of our revenue. For the year ended December 31, 2019, Tether and Big Run accounted for 83% and 0.1%, respectively, of our revenue. For the nine months ended September 30, 2020, Tether and Big Run accounted for 63% and 25%, respectively, of our revenue. In 2020, we expect to power more than two billion tournaments, including 0.5 billion paid entry tournaments, and generate $1.6 billion in GMV and $225 million in revenue.
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.
We currently serve 2.7 million monthly active users (“MAUs”), a small fraction of the estimated 2.7 billion mobile gamers worldwide according to Newzoo, leaving us with a significant runway for sustained growth. For fiscal year 2019 and 2018 we had 1.6 million and 0.8 million MAUs, respectively, and had a monthly average revenue per user (“ARPU”) of $6.38 and $5.22, respectively. For the nine months ended September 30, 2020 and 2019, we served 2.6 million and 1.5 million MAUs, respectively, and had monthly ARPU of $6.93 and $6.55, respectively. ARPU does not include end-user incentives included in our sales and marketing expense. During 2018, 2019 and the nine months ended September 30, 2020, the average monthly amount of such incentives was $2.12, $2.69 and $2.87, respectively. We monitor the conversion of users to paying users based on the ratio of Paying MAU to MAU. For each of fiscal years 2019 and 2018, our Paying MAU to MAU ratio was 10%. For the nine months ended September 30, 2020
 
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and 2019, our Paying MAU to MAU ratio was 12% and 11%, 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 2019, we generated less than 10% of our revenues from users outside of North America, leaving us with several large unpenetrated international markets. We see a significant opportunity to build partnerships with brands to sponsor tournaments on our platform to both increase our brand awareness and achieve improvements in our unit economics through advertiser sponsored prizes.
Our Financial Model
Skillz’s financial model aligns the interests of gamers and developers, driving value for our stockholders. By monetizing through competition, our system eliminates friction that exists in traditional monetization models between the developer and the gamer. The more gamers enjoy our platform the longer they play, creating more value for Skillz and our developers. By generating higher player to payor conversion, retention and engagement, we are able to monetize users at more than five times higher what our developers would generate through advertisements or in-game purchases.
Our platform allows users to participate in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage of player entry fees in paid contests, after deducting end-user prize money (i.e. winnings from the Competitions), end-user incentives accounted for as reduction of revenue and the profit share paid to developers (the “Take Rate”). GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives. Cash deposits represented approximately 11% of total entry fees for the year ended December 31, 2019 and the nine months ended September 30, 2020. Prior cash winnings that have not been withdrawn represented approximately 82% of total entry fees for the year ended December 31, 2019 and the nine months ended September 30, 2020. End-user incentives represented approximately 7% of total entry fees for the year ended December 31, 2019 and the nine months ended September 30, 2020. Our model has allowed us to grow users, developers and revenue steadily while driving meaningful operating leverage.
The following are key elements of our financial model:

The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading to ever-improving gaming experiences. In the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018, we estimate that paying users spent an average of 60, 62, and 63 minutes per day in game play on our platform, respectively, based on the average number of tournament entries per day multiplied by 4 minutes per tournament.Skillz tracks the number of games that end users play but does not monitor end user playing time on its platform, and this estimate is based on the time allowed to complete a tournament in the top three games for paying users featured on our platform. Accordingly, the actual time paying users spend per day on the platform may be less than such estimate.

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. 35% of our current personnel costs are spent on product development. Our easy-to-integrate SDK contains over 200 features in a smaller than 15-MB package which allows for over-the-air upgrades. Our intuitive Developer Console dashboard enables our developers to rapidly integrate and monitor the performance of their games. Our LiveOps system enables us to manage and optimize the user experience across the thousands of games on our platform.
 
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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 and $6.6 million in the fourth year. Our 2017 cohort contributed $9.9 million in revenue in the first year, $10.3 million in the second year and $9.6 million in the third year. Our 2018 cohort contributed $33.2 million in revenue in the first year and $36.1 million in the second year.
We also complement these stable cohort dynamics with disciplined user acquisition spending. The three-year lifetime value of our 2018, 2019 and nine months ended September 30, 2020 cohorts is expected to be 4.5x our total user acquisition costs (and after taking into account the end-user incentives recorded in sales and marketing expense is expected to be 3.0x). Our payback period has averaged four months over these same periods.
Key Components of Results of Operations
Revenue
Skillz provides a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement.
By utilizing the Skillz monetization services, game developers can enhance the player experience by enabling them to compete in head-to-head matches, live tournaments, leagues, and charity tournaments and increase player retention through referral bonus programs, loyalty perks, on-system achievements and rewarding them with prizes (including Bonus Cash prizes). Skillz provides developers with a SDK that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer. Specifically, these monetization services include end-user registration services, player matching, fraud and fair play monitoring, and billing and settlement services. The SDK and Skillz monetization services provide the following key benefits to the developers:

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

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

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

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

Systematic calls to end-user action via push notifications to players 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.
 
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Generally, end-users are required to deposit funds into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services, Skillz is responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users pay an entry fee using cash deposits, prior cash winnings in the end-users’ accounts that have not been withdrawn, and end-user incentives (specifically Bonus Cash). Skillz recognizes revenue related to each game regardless of how entry fees are paid. Skillz is responsible for distributing the prize money to the winner on behalf of the game developer. Skillz typically withholds 16% – 20% of the total entry fees when distributing the prize money as a commission. That commission is shared between Skillz and the game developers; however, the game developers’ share is calculated solely based upon entry fees paid by net cash deposits received from end-users, adjusted for certain costs incurred by Skillz to provide monetization services.
Costs and Expenses
Cost of revenue
Our cost of revenue consists of variable costs. These include mainly (i) payment processing fees, (ii) customer support costs, (iii) direct software costs, (iv) amortization of internal use software and (v) server costs.
We incur payment processing costs on user deposits. We also incur costs directly related to servicing end-user support tickets on behalf of the game developer that are logged by users directly within the Skillz SDK. These support costs include an allocation of the facilities expense needed to service these tickets. We use a third party as our cloud computing service; we incur server and software costs as a direct result of running our SDK in our developers’ games.
Research and Development
Research and development expenses consist of software development costs, comprised mainly of product and platform development, 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.
Sales and Marketing
Sales and marketing expenses consist primarily of direct advertising costs and discretionary end-user incentives. 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.
General and Administrative
General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation.
We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the Securities Exchange Commission, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Results of Operations
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
The following table sets forth a summary of our results of operations for the interim periods indicated, and the changes between periods.
 
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Nine months ended September 30,
(Unaudited)
20202019$ Change% Change
(in thousands, except share and per share data)
Revenue$162,392$85,126$77,26691%
Costs and expenses
Cost of revenue8,8063,8354,971130
Research and development13,2537,8035,45070
Sales and marketing172,38177,94294,439121
General and administrative24,33611,99112,345103
Total costs and expenses218,776101,571117,205115
Loss from operations(56,384)(16,445)(39,939)243
Interest expense, net(1,297)(2,127)830(39)
Other income (expense), net(20,749)3,653(24,402)(668)
Loss before income taxes(78,430)(14,919)(63,511)426
Provision for income taxes100100NM
Net loss(78,530)(14,919)(63,611)426
Remeasurement of redeemable convertible preferred
stock
(865,952)(62,519)(803,433)1,285
Deemed dividend related to repurchase of preferred
stock dividends
(1,153)(1,153)NM
Net loss attributable to common stockholders(945,635)(77,438)(868,197)1,121
Net loss per share attributable to common stockholders – basic and diluted$(6.64)$(0.58)$(6.06)1,045
Weighted average common shares outstanding – basic and
diluted
142,475,767134,316,073
Revenue
Revenue increased by $77.3 million, or 91%, to $162.4 million in the nine months ended September 30, 2020 from $85.1 million in the nine months ended September 30, 2019. The increase was attributable primarily to an 80% increase in MAU, driven by sales and marketing investment to acquire new paying users. Average revenue per user (ARPU) increased 6% over the same period.
Cost of Revenue
Cost of revenue increased by $5.0 million, or 130%, to $8.8 million in the nine months ended September 30, 2020 from $3.8 million in the nine months ended September 30, 2019, growing directionally in line with revenue. The increase in cost of revenue was primarily driven by payment processing and software costs. Cost of revenue as a percentage of revenue remained consistent at 5% in the nine months ended September 30, 2020 and 2019.
Research and Development
Research and development costs increased by $5.5 million, or 70%, to $13.3 million in the nine months ended September 30, 2020 from $7.8 million in the nine months ended September 30, 2019. The increase was driven by a $6.9 million increase in research and development headcount costs and a $0.2 million increase in the allocation of related overhead costs, partially offset by a $1.6 million increase in capitalized software costs, as certain projects entered the application development stage. Research and development expenses accounted for 8% of revenues in the nine months ended September 30, 2020, compared to 9% in the nine months ended September 30, 2019.
 
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Sales and Marketing
Sales and marketing costs increased by $94.4 million or 121%, to $172.4 million in the nine months ended September 30, 2020 from $77.9 million in the nine months ended September 30, 2019. The increase was attributable primarily to a 125% increase in spend to acquire new paying users and a 89% increase in engagement marketing spend. Engagement marketing as a percentage of revenue decreased to 41% in the nine months ended September 30, 2020 from 42% in the nine months ended September 30, 2019.
General and Administrative Costs
General and administrative costs increased by $12.3 million or 103%, to $24.3 million in the nine months ended September 30, 2020 from $12.0 million in the nine months ended September 30, 2019. The increase was primarily driven by a $5.7 million increase in stock-based compensation expense, a $4.4 million increase in rent expense, and a $2.2 million increase in third-party outsourcing, legal, and professional services fees. General and administrative expenses accounted for 15% of revenues in the nine months ended September 30, 2020, compared to 14% in the nine months ended September 30, 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table sets forth a summary of our results of operations for the periods indicated, and the changes between periods.
Year Ended December 31,
20192018$ Change% Change
(in thousands, except share and per share data)
Revenue$119,872$50,778$69,094136%
Costs and expenses
Cost of revenue5,7132,1123,601171
Research and development11,2417,5473,69449
Sales and marketing111,37051,68959,681115
General and administrative16,37614,9751,4019
Total costs and expenses144,70076,32368,37790
Loss from operations(24,828)(25,545)717(3)
Interest expense, net(2,497)(2,190)(307)14
Other income (expense), net3,720(45)3,765(8,367)
Loss before income taxes(23,605)(27,780)4,175(15)
Provision for income taxesNM
Net loss(23,605)(27,780)4,175(15)
Remeasurement of redeemable convertible preferred
stock
(62,519)(18,798)(43,271)233
Net loss attributable to common stockholders(86,124)(46,578)(39,546)85
Net loss per share attributable to common stockholders – basic and diluted$(0.64)$(0.36)$(0.28)78
Weighted average common shares outstanding – basic and diluted135,124,756129,930,282
Revenue
Revenue increased by $69.1 million, or 136%, to $119.9 million in 2019 from $50.8 million in 2018. The increase was attributable primarily to a 99% increase in MAUs, driven by sales and marketing investment to acquire new paying users. ARPU increased 19% over the same period.
 
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Cost of Revenue
Cost of revenue increased by $3.6 million, or 171%, to $5.7 million in 2019 from $2.1 million in 2018, growing directionally in line with revenue. The increase in cost of revenue was primarily driven by payment processing and software costs. Cost of revenue as a percentage of revenue increased one percentage point to 5% in 2019 from 4% in 2018.
Research and Development
Research and development expenses increased by $3.7 million, or 49%, to $11.2 million in 2019 from $7.5 million in 2018. The increase was driven by a $3.4 million increase in research and development headcount costs and a $1.6 million increase in the allocation of related overhead costs, partially offset by a $1.3 million increase in capitalized internal-use software development costs, as certain projects entered the application development stage. Research and development expenses accounted for 9% of revenues in 2019 compared to 15% in 2018.
Sales and Marketing
Sales and marketing expenses increased by $59.7 million, or 115%, to $111.4 million in 2019 from $51.7 million in 2018. The increase was attributable primarily to a 113% increase in spend to acquire new paying users and 145% increase in engagement marketing spend. Engagement marketing as a percentage of revenue increased to 42% in 2019 from 41% in 2018.
General and Administrative Costs
General and administrative expenses increased by $1.4 million, or 9%, to $16.4 million in 2019 from $15.0 million in 2018. The increase is attributed to higher personnel expenses driven by growth in headcount and higher general corporate expenses. General and administrative expenses accounted for 14% of revenues in 2019 compared to 29% in 2018, primarily due to stock-based compensation expense from the sale of common stock by employees to certain external investors in 2018.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are 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.
EBITDA and Adjusted EBITDA
“EBITDA” is defined as net loss before other non-operating interest expense or income, provision for income taxes, and depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation and other special items determined by management, including, but not limited to fair value adjustments for certain financial liabilities (including derivatives) associated with debt and equity transactions, and impairment charges as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of EBITDA and 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 EBITDA and Adjusted EBITDA we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures 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.
 
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Because of these limitations, EBITDA and 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 EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
Nine months ended September 30,
20202019
Net loss$(78,530)$(14,919)
Interest expense, net1,2972,127
Income tax expense100
Depreciation and amortization1,092455
EBITDA(76,041)(12,337)
Stock-based compensation9,565969
Other non-operating costs (income)(1)
20,749(3,653)
Impairment charge(2)
3,395
Adjusted EBITDA$(42,332)$(15,021)
(1)
For the nine months ended September 30, 2020, other non-operating costs (income) include net remeasurement losses of $20.8 million related to fair value adjustments of financial instruments held by the Company, primarily attributable to the redeemable convertible Series E preferred stock forward option contract liability. For the nine months ended September 30, 2019, other non-operating costs (income) include a $3.6 million remeasurement gain for the bifurcated derivative liability related to the Company’s 2018 Convertible Promissory Notes.
(2)
This represents an impairment charge of a lease deposit and prepayment in connection with a lease agreement related to our new corporate facilities in San Francisco.
Year Ended December 31,
20192018
Net loss$(23,605)$(27,780)
Interest expense, net2,4972,190
Income tax expense
Depreciation and amortization711404
EBITDA(20,397)(25,186)
Stock-based compensation1,2376,680
Other non-operating costs (income)(1)
(3,648)46
Adjusted EBITDA$(22,808)$(18,460)
(1)
For the year ended December 31, 2019, other non-operating costs (income) includes a $3.6 million remeasurement gain for the bifurcated derivative liability related to the Company’s 2018 Convertible Promissory Notes. For the year ended December 31, 2018, other non-operating costs (income), include a remeasurement loss for the bifurcated derivative liability related to the Company’s 2018 Convertible Promissory Notes.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sales of convertible preferred stock. As of September 30, 2020, our principal sources of liquidity were our cash and cash equivalents in the amount of $56.9 million, which are primarily invested in money market funds.
 
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In December 2019, the Company entered into a mezzanine term loan for up to $40.0 million; $30.0 million of which is immediately available and an additional $10.0 million available upon the achievement of certain performance milestones (“2019 Mezzanine Term Loan”). The Company drew $10.0 million of the $30 million immediately available from the 2019 Mezzanine Term Loan. In June 2020, the Company paid the $10.0 million outstanding principal amount related to the 2019 Mezzanine Loan, plus all accrued and unpaid interest.
As of the date of this prospectus, our existing cash resources and additional financing from the issuance of our redeemable convertible Series E preferred stock in the second fiscal quarter of 2020, are sufficient to continue operating activities for at least one year past the issuance date of the financial statements.
The following table provides a summary of cash flow data (in thousands):
Nine Months Ended
September 30,
20202019
Net cash used in operating activities$(29,744)$(11,321)
Net cash used in investing activities(3,009)(2,134)
Net cash provided by financing activities63,98624,963
Year Ended
December 31,
20192018
Net cash used in operating activities$(21,937)$(16,948)
Net cash used in investing activities(3,223)(867)
Net cash provided by financing activities31,16833,330
Cash Flows from Operating Activities
Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development and selling, 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 $29.7 million for the nine months ended September 30, 2020. The most significant component of our cash used during this period was a net loss of $78.5 million, which included non-cash expenses of $20.8 million related to fair value adjustments of financial instruments, $9.6 million related to stock-based compensation, $3.4 million related to an impairment charge, and $1.6 million related to depreciation and amortization and accretion of unamortized discounts, as well as net cash inflows of $13.4 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of an increase in other liabilities of $27.7 million, primarily related to an increase in accrued sales and marketing costs.
Net cash used in operating activities was $11.3 million for the nine months ended September 30, 2019. The most significant component of our cash used during this period was a net loss of $14.9 million, which included $2.6 million related to depreciation and amortization and accretion of unamortized discounts, non-cash expenses of $1.0 million related to stock-based compensation, as well as net cash inflows of $3.8 million from changes in operating assets and liabilities, partially offset by $3.7 million related to fair value adjustments of derivatives. The net cash outflows from changes in operating assets and liabilities were primarily the result of an increase in other liabilities of $5.8 million, primarily related to an increase in accrued sales and marketing costs.
Net cash used in operating activities was $21.9 million for the year ended December 31, 2019. The most significant component of our cash used during this period was a net loss of $23.6 million, which included non-cash expenses of $4.1 million related to stock-based compensation, depreciation, amortization, and net cash inflows of $1.2 million from changes in operating assets and liabilities, partially offset by $3.6 million in fair value adjustments of derivatives.
 
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Net cash used in operating activities was $16.9 million for the year ended December 31, 2018. The most significant component of our cash used during this period was a net loss of $27.8 million, which included non-cash expenses of $6.7 million related to stock-based compensation, $1.7 million related to depreciation and accretion of unamortized discount and amortization of issuance costs, and net cash inflows of $2.4 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of an increase in accounts payable and other liabilities due of $3.4 million, primarily related to an increase in accrued sales and marketing costs.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.0 million and $2.1 million for the nine months ended September 30, 2020 and 2019, respectively. In both periods, the net cash used in investing activities related to purchases of property and equipment, including internal-use software.
Net cash used in investing activities was $3.2 million and $0.9 million for the years ended December 31, 2019 and 2018, respectively. In both periods, the net cash used in investing activities related to purchases of property and equipment, including internal-use software.
Cash Flows from Financing Activities
Net cash provided by financing activities was $64.0 million for the nine months ended September 30, 2020, which was primarily due to net proceeds from the issuance of redeemable convertible Series E preferred stock of $76.6 million and net proceeds from the exercise of stock options of $0.7 million, offset by $10.2 million of debt repayments and payments towards issuance costs under our debt facilities, $2.5 million of repurchases of common and preferred stock, and $0.7 million of payments made towards deferred offering costs.
Net cash provided by financing activities was $25.0 million for the nine months ended September 30, 2019, which was primarily due to net proceeds from the issuance of redeemable convertible Series D-1 preferred stock of $25 million.
Net cash provided by financing activities was $31.2 million for the year ended December 31, 2019, which was primarily due to $24.9 million in net proceeds from the issuance of redeemable convertible Series D-1 preferred stock and net proceeds from borrowings of $6.1 million under our debt facilities.
Net cash provided by financing activities was $33.3 million for the year ended December 31, 2018, which was primarily due to net proceeds from the issuance of redeemable convertible Series D preferred stock of $18.2 million and net proceeds from borrowings of $14.9 million related to the convertible promissory notes.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as of September 30, 2020, and the years in which these obligations are due:
Contractual Obligations and Commitments
Total
Less than
1 Year
1 – 3 Years3 – 5 Years
More than
5 Years
(in thousands)
Operating lease obligations$30,974$2,643$9,394$4,952$13,985
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.
 
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Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market and other risks, including the effects of changes in interest rates, inflation, as well as risks to the availability of funding sources.
Interest Rate Risk
The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2020, we had cash and cash equivalents of $56.9 million, which included money market fund accounts for which the fair market value would be affected by changes in the general level of U.S. interest rates. However, due to the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.
Foreign Currency Risk
There was no material foreign currency risk for the nine months ended September 30, 2020 and 2019, or the years ended December 31, 2019 and 2018.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in the notes to our financial statements, we believe that the following accounting policies are most critical to understanding our financial condition and historical and future results of operations:
• revenue recognition;
• stock-based compensation and common stock valuation; and
• fair value of redeemable convertible preferred stock
Revenue Recognition
Skillz provides monetization services to game developers enabling them to offer competitive games to our end-users. These activities are not distinct from each other as we provide an integrated service enabling the game developers to provide the competitive game service to the end-users, and as a result, they do not represent separate performance obligations. We are entitled to a revenue share based on total entry fees for paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide the monetization services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash deposits received from end-users. In addition, we reduce revenue for certain end-user incentives which are determined to be a payment to a customer.
Skillz collects the entry fees and related charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is not subject to significant judgment.
 
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Revenue is recognized at the time the performance obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that we expect to receive in exchange for the Monetization Services. We recognize revenue upon completion of a game, which is when our performance obligation to the game developer is satisfied. We do not have contract assets or contract liabilities as the payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, we have the right to receive payment for the services rendered. Our agreements with game developers can generally be terminated for convenience by either party upon thirty days prior written notice, and in certain of our larger developer agreements, the developer, if required by us, must continue to make its games available on our platform for a period of up to twelve months. As we are able to terminate our developer agreements at our convenience, we have concluded the contract term for revenue recognition does not extend beyond the contractual notification period. We do not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied).
End-User Incentive Programs
To drive traffic to the platform, we provide promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction of revenue at the later of when revenue is recognized or when we pay or promise to pay the incentive. Promotions and incentives recorded as sales and marketing expense are recognized when we incur the related cost. In either case, the promotions and incentives are recognized when they are used by end-users to enter into a paid competition.
Marketing promotions and discounts accounted for as a reduction of revenue.   These promotions are typically pricing actions in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based on our agreement with the game developers, we consider that the game developers have a valid expectation that certain incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably available to the game developers regarding our customary business practices, published policies and specific statements.
An example of an incentive for which the game developer has a valid expectation is Ticketz, which are a currency earned for every competition played based on the amount of the entry fee. Ticketz can be redeemed for Bonus Cash. Another example is initial deposit Bonus Cash which is a promotional incentive program that can be earned in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users.
Marketing promotions accounted for as sales and marketing expense.   When we conclude that the game developers do not have a valid expectation that the incentive will be offered, we record the related cost as sales and marketing expense. The Company’s assessment is based on an evaluation of all information reasonably available to the game developers regarding our customary business practices, published policies and specific statements. These promotions are offered to end-users to draw, re-engage, or generally increase end-users’ use of our platform.
An example of this type of incentive is limited-time Bonus Cash offers, which are targeted to specific end-users, typically those who deposit more frequently or have not made a deposit recently, via email or in-app promotions. We target groups of end-users differently, offering specific promotions we think will best stimulate engagement. Similar to Bonus Cash earned from a redemption of Ticketz or an initial deposit, limited-time Bonus Cash can only be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users. The Company also hosts engagement marketing leagues run over a period of days or weeks, which award league prizes in the form of cash or luxury goods to end-users with the most medals at the end of the league. End-users accumulate medals by winning Skillz enabled paid entry fee competitions. Skillz determines whether or not to run a league, what prizes should be awarded, over what time period the league should run, and to which end-users the prizes should be paid, all at its discretion. The league parameters vary from one league to the next and are not reasonably known to the game developers. League prizes in the form of cash can be withdrawn or used by end-users to enter into future paid entry fee competitions.
 
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Stock-Based Compensation
We recognize the cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. For awards that vest solely based on a service condition, the cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. For awards that vest based on service, performance and market conditions, we recognize stock-based compensation expense when the performance conditions are probable of being achieved. The compensation cost related to awards with market conditions is recognized regardless of whether the market condition is satisfied, if the requisite service is provided. We recognize stock-based compensation costs and reverse previously recognized costs for unvested options in the period forfeitures occur. We determine the fair value of stock options that vest solely based on a service condition using the Black-Scholes option pricing model, which is impacted by the following assumptions:

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

Expected volatility — The expected volatility rate is based on an average historical stock price volatility of comparable publicly-traded companies in the industry group as there has been no public market for the Company’s shares to date.

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

Expected dividend yield — The Company has not paid and does not expect to pay dividends. Consequently, the Company uses an expected dividend yield of zero.
For awards with market conditions, we determine the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of a qualifying event, and expected capital raise percentage. We estimate the volatility of common stock on the date of grant based on the weighted average historical stock price volatility of comparable publicly-traded companies in our industry group. We estimate the expected term based on various exercise scenarios, as these awards are not considered “plain vanilla.” The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We estimate the expected date of a qualifying event and the expected capital raise percentage based on management’s expectations at the time of measurement of the award’s value.
Common Stock Valuation
The grant date fair value of Skillz Common Stock has been determined by our board of directors with the assistance of management and a third-party valuation specialist. The grant date fair value of Skillz common stock was determined based on valuation methodologies which utilize certain assumptions, including probability weighting of events, recent sales of stock to external investors, volatility, time to liquidity, a risk-free interest rate, and an assumption for a discount for lack of marketability where applicable. We have historically used a combination of the Option Pricing Model (“OPM”) and Common-Stock Equivalent (“CSE”) methods, which primarily derived the implied equity value for our common stock from a contemporaneous transaction involving our convertible preferred stock. Application of these methods involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of future events.
Once our stock is publicly traded, our board of directors intends to determine the fair value of Skillz Common Stock based on the closing price of Skillz Common Stock on or around the date of grant.
Redeemable Convertible Preferred Stock
Preferred stock that is 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 our control is classified
 
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outside of permanent equity. Convertible preferred stock that is probable of becoming redeemable in the future is recorded at its maximum redemption amount at each balance sheet date, with adjustments to the redemption amount recorded through equity.
The redeemable convertible Series C, Series D, Series D-1 and Series E preferred stock is probable of becoming redeemable in the future and is recorded at its maximum redemption amount, which is the greater of the original issue price or the then-current fair value, at each balance sheet date. The fair value of the redeemable convertible preferred stock is estimated primarily based on valuation methodologies which utilize certain assumptions, including probability weighting of events, recent sales of stock to external investors, volatility, time to liquidity, a risk-free interest rate, and an assumption for a discount for lack of marketability, where applicable.
Recent Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this prospectus 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.
 
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SKILLZ INDEBTEDNESS
Senior Credit Facility
In May 2018, Skillz entered into a Loan and Security Agreement with Silicon Valley Bank, (“SVB”), which was most recently amended in December 2019 (the “Senior Credit Facility”). The Senior Credit Facility provides a growth capital term loan of up to $6,000,000 (the “Term Loan”), of which $3,500,000 was funded on the original closing date thereof, and a revolving credit facility of up to $30,000,000 based on borrowing base availability (the “Revolver”). Interest on the Term Loans is payable monthly in arrears, and principal payments on the Term Loan are payable in twenty-four (24) equal monthly installments beginning on March 1, 2019 through maturity in February 2021. Interest on the Revolver is payable monthly in arrears, and principal amounts thereunder may be borrowed, repaid and reborrowed from time to time through maturity in February 2021. Any outstanding principal plus any accrued but unpaid interest under the Term Loan and the Revolver are payable in full upon maturity in February 2021.
Borrowings under the Senior Credit Facility bear interest on the outstanding daily balance at a rate equal to the greater (i) 5.25% and (ii) one half of one percentage points (0.50%) above the prime rate.
Principal amounts outstanding under the Senior Credit Facility totaled $10.0 million as of December 31, 2019 and $3.5 million as of December 31, 2018. As of the date of this prospectus, Skillz has $30 million available for drawdown under the Term Loan and $30 million available for drawdown under the Revolver.
In addition to the regular monthly payment of principal plus accrued interest, upon the earliest to occur of (a) December 1, 2021, (b) the acceleration of the Term Loans and (c) the prepayment of the Term Loans in full prior to the maturity thereof, Skillz must pay to SVB an amount equal to the aggregate principal amount of the Term Loans funded by SVB multiplied by three percent (3.00%). Further, upon Skillz’s voluntary termination of the Term Loan or the Revolver prior to February 2021, in addition to the payment of any amounts then-owing, Skillz must pay a termination fee in an amount equal to $50,000; provided that no termination fee shall be charged if the Senior Credit Facility is replaced or refinanced with a new facility from SVB or any of its affiliates.
The Senior Credit Facility contains customary affirmative covenants, including financial reporting covenants and financial maintenance covenants requiring compliance with minimum revenue and minimum EBITDA levels. The Senior Credit Facility also contains customary negative covenants limiting Skillz’s ability to incur debt, incur liens, undergo certain fundamental changes, dispose of assets, make investments, merge with other companies, pay dividends and enter into certain transactions with affiliates. The Senior Credit Facility also contains customary events of default. Obligations under the Credit Facility are subject to acceleration upon the occurrence of specified events of default, including failure to comply with covenants.
To secure the payment and performance in full of all of the obligations under the Senior Credit Facility, Skillz granted SVB a continuing senior priority security interest in, and pledged to SVB, substantially all of the personal property of Skillz as collateral, wherever located, whether then owned or thereafter acquired or arising, and all proceeds and products thereof, excluding intellectual property (but not the accounts or proceeds thereof), provided the intellectual property is subject to a negative pledge.
 
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DESCRIPTION OF NEW SKILLZ SECURITIES
As a result of the Business Combination, FEAC Stockholders who receive shares of New Skillz Class A common stock in the transactions will become New Skillz stockholders. Your rights as New Skillz stockholders will be governed by Delaware law and the Proposed Charter and bylaws. The following description of the material terms of New Skillz’s securities reflects the anticipated state of affairs upon completion of the Business Combination.
In connection with the reorganization as part of the Business Combination, FEAC will amend and restate its charter and bylaws. The following summary of the material terms of New Skillz’s securities following the Business Combination is not intended to be a complete summary of the rights and preferences of such securities. You are encouraged to read the applicable provisions of Delaware law, the Proposed Charter and the post-Business Combination bylaws in their entirety for a complete description of the rights and preferences of New Skillz securities following the Business Combination
Authorized and Outstanding Capital Stock
The Proposed Charter authorizes the issuance of 635,000,000 shares, of which 500,000,000 shares will be shares of New Skillz Class A common stock, par value $0.0001 per share, 125,000,000 shares will be shares of New Skillz Class B common stock, par value $0.0001 per share, and 10,000,000 shares will be shares of New Skillz preferred stock, par value $0.0001 per share.
As of November 6, the record date, FEAC had approximately 66,435,404 shares of FEAC Class A common stock, 17,250,000 shares of FEAC Class B common stock outstanding. FEAC also has issued 26,642,163 warrants consisting of 16,608,830 public warrants and 10,033,333 private placement warrants and 2,564,596 units outstanding. After giving effect to the Business Combination, New Skillz will have 274,672,427 shares of Class A common stock outstanding (assuming no redemptions) and 80,857,913 shares of Class B common stock outstanding (assuming no redemptions).
New Skillz Common Stock
New Skillz Class A Common Stock
Voting Rights
Holders of New Skillz Class A common stock will be entitled to cast one vote per New Skillz Class A share. Generally, holders of all classes of New Skillz common stock vote together as a single class, and an action is approved by New Skillz stockholders if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, while directors are elected by a plurality of the votes cast. Holders of New Skillz Class A common stock will not be entitled to cumulate their votes in the election of directors.
Dividend Rights
Holders of New Skillz Class A common stock will share ratably (based on the number of shares of Class A common stock held) if and when any dividend is declared by the New Skillz Board out of funds legally available therefor, subject to restrictions, whether statutory or contractual (including with respect to any outstanding indebtedness), on the declaration and payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class or series of stock having a preference over, or the right to participate with, the New Skillz Class A common stock with respect to the payment of dividends.
Liquidation, Dissolution and Winding Up
On the liquidation, dissolution, distribution of assets or winding up of New Skillz, each holder of New Skillz Class A common stock will be entitled, pro rata on a per share basis, to all assets of New Skillz of whatever kind available for distribution to the holders of common stock, subject to the designations,
 
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preferences, limitations, restrictions and relative rights of any other class or series of preferred stock of New Skillz then outstanding.
Other Matters
Holders of shares of New Skillz Class A common stock do not have subscription, redemption or conversion rights. Upon completion of the Business Combination, all the outstanding shares of New Skillz Class A common stock will be validly issued, fully paid and non-assessable.
New Skillz B Common Stock
Voting Rights
Holders of New Skillz Class B common stock will be entitled to cast 20 votes per New Skillz Class B share. Generally, holders of all classes of New Skillz common stock vote together as a single class, and an action is approved by New Skillz stockholders if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, while directors are elected by a plurality of the votes cast. Holders of New Skillz Class B common stock will not be entitled to cumulate their votes in the election of directors.
Dividend Rights
Holders of New Skillz Class B common stock will share ratably (based on the number of shares of Class B common stock held) if and when any dividend is declared by the New Skillz Board out of funds legally available therefor, subject to restrictions, whether statutory or contractual (including with respect to any outstanding indebtedness), on the declaration and payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class or series of stock having a preference over, or the right to participate with, the New Skillz Class B common stock with respect to the payment of dividends.
Optional Conversion Rights
Holders of New Skillz Class B common stock will have the right to convert shares of their New Skillz Class B common stock into fully paid and non-assessable shares of New Skillz Class A common stock, on a one-to-one basis, at the option of the holder at any time upon written notice to New Skillz.
Mandatory Conversion Rights
Holders of New Skillz Class B common stock shall have their New Skillz Class B common stock automatically converted into New Skillz Class A common stock, on a one-to-one basis, upon the occurrence of any of the events described below:
(1)
Any sale, assignment, transfer, conveyance, hypothecation, or other transfer or disposition, directly or indirectly, of any New Skillz Class B common stock or any legal or beneficial interest in such share, whether or not for value and whether voluntary or involuntary or by operation of law (including by merger, consolidation, or otherwise), including, without limitation the transfer of a share of New Skillz Class B common stock to a broker or other nominee or the transfer of, or entering into a binding agreement with respect to, voting control over such share by proxy or otherwise, other than a permitted transfer.
(2)
Upon the first date on which Paradise, together with all other qualified stockholders, collectively cease to beneficially own at least 20% of the number of New Skillz Class B common stock (as such number of shares is equitably adjusted in respect of any reclassification, stock dividend, subdivision, combination, or recapitalization of the New Skillz Class B common stock) collectively held by Paradise and his permitted transferees.
(3)
Upon the date specified by the affirmative vote of the holders of at least two-thirds of the outstanding shares of New Skillz Class B common stock, voting as a separate class.
 
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Liquidation Rights
On the liquidation, dissolution, distribution of assets or winding up of New Skillz, each holder of New Skillz Class B common stock will be entitled, pro rata on a per share basis, to all assets of New Skillz of whatever kind available for distribution to the holders of common stock, subject to the designations, preferences, limitations, restrictions and relative rights of any other class or series of preferred stock of New Skillz then outstanding.
Preferred Stock
The Proposed Charter provides that the New Skillz Board has the authority, without action by the stockholders, to designate and issue shares of preferred stock in one or more classes or series, and the number of shares constituting any such class or series, and to fix the voting powers, designations, preferences, limitations, restrictions and relative rights of each class or series of preferred stock, including, without limitation, dividend rights, dividend rates, conversion rights, exchange rights, voting rights, rights and terms of redemption, dissolution preferences, and treatment in the case of a merger, business combination transaction, or sale of New Skillz’s assets, which rights may be greater than the rights of the holders of the common stock. There will be no shares of preferred stock outstanding immediately upon consummation of the Business Combination.
The purpose of authorizing the New Skillz Board to issue preferred stock and determine the rights and preferences of any classes or series of preferred stock is to eliminate delays associated with a stockholder vote on specific issuances. The simplified issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of New Skillz outstanding voting stock. Additionally, the issuance of preferred stock may adversely affect the holders of New Skillz Class A common stock by restricting dividends on the Class A common stock, diluting the voting power of the Class A common stock or subordinating the dividend or liquidation rights of the Class A common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of New Skillz Class A common stock.
Unvested Stock Options
At the effective time, each outstanding option to purchase shares of Skillz common stock (a “Skillz option”) that is outstanding and unexercised, whether or not then vested or exercisable, will be assumed by New Skillz and will be converted into an option to acquire shares of New Skillz Class A common stock (other than in the case of Paradise, who will receive options exercisable for New Skillz Class B common stock) with the same terms and conditions as applied to the Skillz option immediately prior to the effective time provided that the number of shares underlying such New Skillz option will be determined by multiplying the number of shares of Skillz common stock subject to such option immediately prior to the effective time, by the rati determined by dividing the merger consideration value by $10.00 (the product being the “option exchange ratio”) and the per share exercise price of such New Skillz option will be determined by dividing the per share exercise price immediately prior to the effective time by the option exchange ratio.
As of September 30, 2020, New Skillz had unvested outstanding options to purchase 19,918,085 shares of its common stock, with a weighted average exercise price of $0.59 per share.
Warrants
Skillz Warrants
At the effective time, each warrant to purchase shares of Skillz’s capital stock (each a “Skillz Warrant”) that is issued and outstanding immediately prior to the effective time and not terminated pursuant to its terms will be converted into a warrant exercisable for the merger consideration which such holder would have received if it had exercised such Skillz Warrant immediately prior to the effective time (assuming such Skillz Warrant was fully vested).
As of September 30, 2020, 3,893,880 Skillz Warrants to purchase shares of Skillz preferred stock and 971,842 Skillz Warrants to purchase shares of Skillz common stock were outstanding.
 
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Public Stockholders’ Warrants
There are currently outstanding an aggregate of 23,255,662 warrants, which, following the consummation of the Business Combination, will entitle the holder to acquire New Skillz Class A common stock. Each whole warrant will entitle the registered holder to purchase one share of New Skillz Class A common stock at an exercise price of $11.50 per share, subject to adjustment as discussed below, beginning the later of 30 days after the Closing and 12 months from the closing of our initial public offering, which occurred on March 10, 2020. A holder may exercise its warrants only for a whole number of shares of New Skillz Class A common stock. This means only a whole warrant may be exercised at a given time by a warrant holder. No fractional warrants will be issued upon separation of the units and only whole warrants will trade. Accordingly, unless holder has at least three units, such holder will not be able to receive or trade a whole warrant. The warrants will expire five years after the completion of the Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
Redemption of Warrants for Cash
Once the warrants become exercisable, New Skillz may call the warrants for redemption for cash:

in whole and not in part;

at a price of $0.01 per warrant;

upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant holder; and

if, and only if, the closing price of the common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending three business days before New Skillz sends the notice of redemption to the warrant holders.
If and when the warrants become redeemable by New Skillz for cash, New Skillz may exercise its redemption right even if New Skillz is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
New Skillz has established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and New Skillz issues a notice of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the New Skillz Class A common stock may fall below the $18.00 redemption trigger price (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) as well as the $11.50 warrant exercise price after the redemption notice is issued.
Redemption procedures and cashless exercise
If New Skillz calls the warrants for redemption as described above, New Skillz’s management will have the option to require any holder that wishes to exercise his, her or its warrant to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless basis,” New Skillz’s management will consider, among other factors, New Skillz’s cash position, the number of warrants that are outstanding and the dilutive effect on New Skillz’s stockholders of issuing the maximum number of shares of New Skillz Class A common stock issuable upon the exercise of its warrants. If New Skillz management takes advantage of this option, all holders of warrants would pay the exercise price by surrendering their warrants for that number of shares of New Skillz Class A common stock equal to the quotient obtained by dividing (x) the product of the number of New Skillz Class A common stock underlying the warrants, multiplied by the excess of the “fair market value” of the New Skillz Class A common stock (defined below) over the exercise price of the warrants by (y) the fair market value. The “fair market value” will mean the average closing price of the New Skillz Class A common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If the New Skillz management takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of New Skillz Class A common stock to be received upon exercise of the warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner
 
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will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. New Skillz believes this feature is an attractive option to New Skillz if New Skillz does not need the cash from the exercise of the warrants after New Skillz’s initial business combination. If New Skillz calls the New Skillz warrants for redemption and New Skillz’s management does not take advantage of this option, the holders of the private placement warrants and their permitted transferees would still be entitled to exercise their private placement warrants for cash or on a cashless basis using the same formula described above that other warrant holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis, as described in more detail below.
A holder of a warrant may notify New Skillz in writing in the event it elects to be subject to a requirement that such holder will not have the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (as specified by the holder) of the New Skillz Class A common stock outstanding immediately after giving effect to such exercise.
If the number of outstanding shares of New Skillz Class A common stock is increased by a share capitalization payable in shares of New Skillz Class A common stock, or by a split-up of common stock or other similar event, then, on the effective date of such share capitalization, split-up or similar event, the number of shares of New Skillz Class A common stock issuable on exercise of each warrant will be increased in proportion to such increase in the outstanding shares of common stock. A rights offering to holders of common stock entitling holders to purchase New Skillz Class A common stock at a price less than the fair market value will be deemed a share capitalization of a number of shares of New Skillz Class A common stock equal to the product of  (i) the number of shares of New Skillz Class A common stock actually sold in such rights offering (or issuable under any other equity securities sold in such rights offering that are convertible into or exercisable for New Skillz Class A common stock) and (ii) the quotient of  (x) the price per share of New Skillz Class A common stock paid in such rights offering and (y) the fair market value. For these purposes (i) if the rights offering is for securities convertible into or exercisable for shares of New Skillz Class A common stock, in determining the price payable for New Skillz Class A common stock, there will be taken into account any consideration received for such rights, as well as any additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of shares of New Skillz Class A common stock as reported during the ten (10) trading day period ending on the trading day prior to the first date on which the New Skillz Class A common stock trades on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In addition, if New Skillz, at any time while the warrants are outstanding and unexpired, pays a dividend or make a distribution in cash, securities or other assets to the holders of New Skillz Class A common stock on account of such New Skillz Class A common stock (or other securities into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, (c) to satisfy the redemption rights of the holders of Class A common stock in connection with a proposed initial business combination, or (d) in connection with the redemption of New Skillz’s public shares upon New Skillz’s failure to complete the New Skillz initial business combination, then the warrant exercise price will be decreased, effective immediately after the effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each share of New Skillz Class A common stock in respect of such event.
If the number of outstanding shares of New Skillz Class A common stock is decreased by a consolidation, combination, reverse share split or reclassification of New Skillz Class A common stock or other similar event, then, on the effective date of such consolidation, combination, reverse share split, reclassification or similar event, the number of shares of New Skillz Class A common stock issuable on exercise of each warrant will be decreased in proportion to such decrease in outstanding share of New Skillz Class A common stock.
Whenever the number of shares of New Skillz Class A common stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator of which will be the number of shares of New Skillz Class A common stock purchasable upon the exercise of the warrants immediately prior to such adjustment, and (y) the denominator of which will be the number of shares of New Skillz Class A common stock so purchasable immediately thereafter.
 
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In case of any reclassification or reorganization of the outstanding New Skillz Class A common stock (other than those described above or that solely affects the par value of such New Skillz Class A common stock), or in the case of any merger or consolidation of New Skillz with or into another corporation (other than a consolidation or merger in which New Skillz is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding New Skillz Class A common stock), or in the case of any sale or conveyance to another corporation or entity of the assets or other property of New Skillz as an entirety or substantially as an entirety in connection with which New Skillz is dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the warrants and in lieu of the New Skillz Class A common stock immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of New Skillz Class A common stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised their warrants immediately prior to such event. If less than 70% of the consideration receivable by the holders of New Skillz Class A common stock in such a transaction is payable in the form of New Skillz Class A common stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant properly exercises the warrant within thirty days following public disclosure of such transaction, the warrant exercise price will be reduced as specified in the warrant agreement based on the warrant value (as defined in the warrant agreement) of the warrant. The purpose of such exercise price reduction is to provide additional value to holders of the warrants when an extraordinary transaction occurs during the exercise period of the warrants pursuant to which the holders of the warrants otherwise do not receive the full potential value of the warrants.
The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and New Skillz. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, and that all other modifications or amendments will require the vote or written consent of the holders of at least 50% of the then outstanding public warrants, and, solely with respect to any amendment to the terms of the private placement warrants, a majority of the then outstanding private placement warrants. You should review a copy of the warrant agreement, which will be filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to New Skillz, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive New Skillz Class A common stock. After the issuance of New Skillz Class A common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, New Skillz will, upon exercise, round down to the nearest whole number the number of shares of New Skillz Class A common stock to be issued to the warrant holder.
Private Placement Warrants
The private placement warrants (including the New Skillz Class A common stock issuable upon exercise of the private placement warrants) will not be transferable, assignable or salable until thirty (30) days after the Closing (except in limited circumstances) and they will not be redeemable by New Skillz for cash so long as they are held by the initial stockholders or their permitted transferees. The initial purchasers of the private placement warrants, or their permitted transferees, have the option to exercise the private placement warrants on a cashless basis. Except as described in this section, the private placement warrants have terms and provisions that are identical to those of the warrants sold in the initial public offering, including
 
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that they may be redeemed for shares of New Skillz Class A common stock. If the private placement warrants are held by holders other than the initial purchasers thereof or their permitted transferees, the private placement warrants will be redeemable by New Skillz and exercisable by the holders on the same basis as the warrants included in the units being sold in the initial public offering
Exclusive Forum
The Proposed Charter provides that, to the fullest extent permitted by law, unless New Skillz otherwise consents in writing, the Court of Chancery (the “Chancery Court”) of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal district for the District of Delaware or other state courts of the State of Delaware) shall, to the fullest extent permitted by law, by the sole and exclusive forum for any action brought (1) any derivative action or proceeding brought on behalf of New Skillz, (2) any action asserting a claim of breach of a fiduciary duty owed by, or any other wrongdoing by, any current or former director, officer, other employee or stockholder of the Corporation, (3) any action asserting a claim against New Skillz arising pursuant to any provision of the DGCL, the Proposed Charter or the New Skillz Bylaws, or as to which the DGCL confers jurisdiction on the Court of Chancery, (4) any action to interpret, apply, enforce or determine the validity of any provisions of the Proposed Charter or the New Skillz Bylaws, or (5) any other action asserting a claim governed by the internal affairs doctrine. Notwithstanding the foregoing, the federal district courts of the United States shall be the exclusive forum for the resolution of any action, suit or proceeding asserting a cause of action arising under the Securities Act of 1933, as amended.
Anti-Takeover Effects of Provisions of the Proposed Charter, the New Skillz Bylaws and Applicable Law
Certain provisions of the Proposed Charter, New Skillz Bylaws, and laws of the State of Delaware, where New Skillz is incorporated, may discourage or make more difficult a takeover attempt that a stockholder might consider in his or her best interest. These provisions may also adversely affect prevailing market prices for the New Skillz Class A common stock and the New Skillz Class B common stock. New Skillz believes that the benefits of increased protection give New Skillz the potential ability to negotiate with the proponent of an unsolicited proposal to acquire or restructure New Skillz and outweigh the disadvantage of discouraging those proposals because negotiation of the proposals could result in an improvement of their terms.
Authorized but Unissued Shares
Delaware law does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of the NYSE, which would apply if and so long as the New Skillz Class A common stock remains listed on the NYSE, require stockholder approval of certain issuances equal to exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock. Additional shares that may be used in the future may be issued for a variety of corporate purposes, including future public offerings, to raise additional capital, or to facilitate acquisitions. The existence of authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of New Skillz by means of a proxy contest, tender offer, merger, or otherwise.
Dual Class Stock
As described above, the Proposed Charter provides for a dual class common stock structure which provides Paradise with the ability to control the outcome of matters requiring stockholder approval, even though he owns significantly less than a majority of the shares of outstanding New Skillz Class A common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of New Skillz or its assets.
Number of Directors
The Proposed Charter and the New Skillz Bylaws provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, the number of directors may be fixed from time to time pursuant to a resolution adopted by the New Skillz Board; providing, however, that unless approved by (i) if before the first date on which the issued and outstanding shares of New Skillz
 
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Class B common stock represents less than 50% of the total voting power of the then outstanding shares of capital stock of New Skillz that would then be entitled to vote in the election of directors at an annual meeting of stockholders, the holders of a majority in voting power of the shares of capital stock of New Skillz that would then be entitled to vote in the election of directors at an annual meeting or by written consent, or (ii) if after the first date on which the issued and outstanding shares of New Skillz Class B common stock represents less than 50% of the total voting power of the then outstanding shares of capital stock of New Skillz that would then be entitled to vote in the election of directors at an annual meeting of stockholders, by the holders of two-thirds (2/3rds) of the voting power of the shares of capital stock of New Skillz that would then be entitled to vote in the election of directors at an annual meeting of stockholders, the number of directors may not exceed seven. The initial number of directors will be set at five.
Requirements for Advance Notification of Stockholder Meetin