SKILLZ INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
results of operations and financial condition of Skillz Inc. (for purposes of
this section, "Skillz ," "we," "us" and "our"). MD&A is provided as a supplement
and should be read in conjunction with the consolidated financial statements and
related notes included in Part II, Item 8, "Financial Statements and
Supplementary Data", of this Annual Report on Form 10-K. This discussion
contains forward-looking statements and involves numerous risks and
uncertainties, including, but not limited to, those described in Part I, Item
1A, "Risk Factors". Actual results may differ materially from those contained in
any forward-looking statements. Our historical results are not necessarily
indicative of the results that may be expected for any period in the future. The
following discussion gives effect to the restatement of our consolidated
financial statements for the fiscal years ended December 31, 2021 and 2020,
discussed in Part II, Item 8, Note 3, "Restatement of Previously Issued
Consolidated Financial Statements" to the consolidated financial statements of
this Annual Report on Form 10-K. See also the related discussion in the
Explanatory Note.
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 byAndrew Paradise andCasey Chafkin with the vision to make eSports accessible to everyone possible. As ofDecember 31, 2022 , the platform had over 2.1 million MAUs and hosted an average of over 1.5 million daily tournaments, including over 0.78 million paid entry daily tournaments, and offered over 79 million in prizes each month. Since our inception in 2012, over 16,000 registered game developers have launched a game integration on our platform. As ofDecember 31, 2022 , over 500 developers had a game on our platform with at least one installed user. Our culture is built upon a set of values established by our founders, aligning the company and its employees in a common vision. Our seven values are: Honor; Mission; Collaboration; Productivity; Willingness; Frugality; and Balance. Our approach has focused on trust and fairness for users enabling game developers to focus on what they do best: build great content. Our technology capabilities are industry-leading and provide the tools necessary for developers to compete with the largest and most sophisticated mobile game developers in the world. Our easy-to-integrate software development kit ("SDK") and developer console allow our developers to monitor, integrate and update their games seamlessly over the air. We ingest and analyze over 300 data points from each game play session, enhancing our data-driven algorithms and LiveOps systems. Moreover, we have developed a robust platform enabling fun, fair and meaningful competitive gameplay. Historically, our top games and related developers have accounted for a substantial portion of our revenue earned from theSkillz platform. For the years endedDecember 31, 2022 , 2021 and 2020, the games Solitaire Cube, 21 Blitz (each developed byTether Studios, LLC ("Tether")) and Blackout Bingo (developed byBig Run Studios Inc. ("Big Run")) combined accounted for 71%, 72%, and 79% of our revenue, respectively. For the years endedDecember 31, 2022 , 2021 and 2020 Tether accounted for 39%, 42%, and 59% of our revenue, respectively. For the years endedDecember 31, 2022 , 2021 and 2020 Big Run accounted for 41%, 39%, and 28% of our revenue, respectively. Our top titles rotate over time as more games generate success on theSkillz platform. In the year endedDecember 31, 2022 , the number of games that generated over$1 million of annualized GMV increased 16% from 44 to 51. GMV represents entry fees that may be paid using cash deposits, prior winnings and end-user incentives. 42
-------------------------------------------------------------------------------- TABLE OF CONTENTS The following supplemental financial information table summarizes key operating metrics for the years endedDecember 31, 2022 , 2021 and 2020: Year Ended
2022 2021 2020
Gross marketplace volume ("GMV") (000s)(1)
513 324
Monthly active users ("MAUs") (000s)(3) 2,105 2,949 2,559
Average GMV per paying monthly active user(4) $ 354.4 $ 395.9 $ 409.6
Average GMV per monthly active user(5) $ 65.0 $ 68.8 $ 51.9
Average revenue per paying monthly active user
("ARPPU")(6) $ 59.7 $ 62.0 $ 59.0
Average revenue per monthly active user
("ARPU")(7) $ 11.0 $ 10.9 $ 7.5
Paying MAU to MAU ratio 18 % 18 % 13 %
Average end-user incentives, included as sales
and marketing expense, per paying active
user(8) 25.33 30.78 26.27
Average end-user incentives, included as sales
and marketing expense, per playing active
user(9) 4.65 5.35 3.33
(1) "GMV" or "Gross Marketplace Volume" means the total entry fees paid by users
for contests hosted on Skillz's platform. Total entry fees include entry fees
paid by end-users using cash deposits, prior winnings from end-users' accounts
and end-user incentives used to enter paid entry fee contests.
(2) "Paying Monthly Active Users" or "PMAUs" means the number of end-users who
entered into a paid contest hosted on Skillz's platform at least once in a
month, averaged over each month in the period.
(3) "Monthly Active Users" or "MAUs" means the number of playing end-users who
entered into a paid or free contest hosted on Skillz's platform at least once in
a month, averaged over each month in the period.
(4) "Average GMV Per Paying Monthly Active User" means the average GMV in a
given month divided by Paying MAUs in that month, averaged over the period.
(5) "Average GMV Per Monthly Active User" means the average GMV in a given month
divided by MAUs in that month, averaged over the period.
(6) "Average Revenue Per Paying Monthly Active User" or "ARPPU" means the
average revenue in a given month divided by Paying MAUs in that month, averaged
over the period and does not include a deduction for end-user incentives that
are included in sales and marketing expense.
(7) "Average Revenue Per Monthly Active User" or "ARPU" means the average
revenue in a given month divided by MAUs in that month, averaged over the period
and does not include a deduction for end-user incentives that are included in
sales and marketing expense.
(8) Amount reflects the average end-user incentives included in sales and
marketing expense in a given month divided by PMAUs in that month, averaged over
the period.
(9) Amount reflects the average end-user incentives included in sales and
marketing expense in a given month divided by MAUs in that month, averaged over
the period.
Engagement marketing is a sales and marketing expense representing rewards and
awards that developers do not have a valid expectation of being offered to
end-users to engage on the platform. Decreases in engagement marketing could
result in lower revenue as paying users no longer receive those end-user
incentives, which include Bonus Cash which can only be used to enter into paid
contests.
User acquisition ("UA") marketing is a sales and marketing expense to acquire
new paying users to the platform. Assuming acquisition cost per user is
constant, decreases in UA marketing typically result in lower revenue as a
result of having fewer new paying users. We reduced our UA marketing spend in
2022 to $117.3 million from approximately $241.5 million in 2021. The reduction
in UA marketing and engagement marketing expenses has resulted in a substantial
reduction in revenue and is expected to continue to result in a reduction in
revenue. We are currently unable to reasonably estimate the quantitative impact,
or range of impact, that reductions in UA marketing and engagement marketing
will have on forward-looking revenue as a result of the number of interrelated
factors impacting revenue, including, but not limited to, retention of existing
users on the platform, ARPPU, efficacy of various engagement marketing programs
on existing users, elasticity of the digital advertising supply curve, and
impact of varying levels of player liquidity on the existing user ecosystem.
Over the course of 2022, our focus was on driving higher efficiency from our
marketing investment by (1) reducing spend on low-return engagement marketing
programs, which we expect will result in lower engagement marketing as a
percentage of
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revenue and (2) driving UA efficiency by optimizing spend across networks, driving higher organic traffic, and migrating a proportion of UA marketing spend toAarki, Inc. ("Aarki"). To the extent we reduce engagement marketing spend, we expect to reduce our Bonus Cash end-user incentives in proportion to such overall engagement marketing reduction. OnJuly 16, 2021 , we completed the acquisition of Aarki and acquired 100% of the outstanding equity and voting interests of Aarki under the terms of the Agreement and Plan of Merger. We paid$162.3 million in consideration comprised of$95.3 million in cash and the remaining$67.1 million comprised of 4.4 million of Skillz Class A common stock to the existing Aarki stockholders. We acquired Aarki to produce efficiencies in user-acquisition costs over the long term, which could be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers. The financial results of Aarki have been included in our consolidated financial statements since the date of the acquisition. As previously disclosed, we recorded certain goodwill and intangible assets in connection with our acquisition of Aarki. Our policy is to evaluate goodwill and long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the third and fourth quarters of 2022, we identified triggering events that indicated the carrying amount of the goodwill and intangible assets may not be recoverable, which were primarily related to a significant decrease in our stock price and market capitalization, as well as downward adjustments to our forecast. As a result of our impairment evaluations, we recorded a non-cash impairment charge of$168.1 million in the consolidated statement of operations and comprehensive loss for the year endedDecember 31, 2022 . This amount includes a full impairment of the goodwill and intangible assets acquired in connection with our acquisition of Aarki, as well as impairment of lease right-of-use assets and other long-lived assets. See Note 2, Summary of Significant Accounting Policies, for further details.
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 forSkillz and our developers. By generating higher player to payor conversion, retention and engagement, we are able to monetize users at a higher rate than what our developers would generate through advertisements or in-game purchases. Our platform allows users to participate in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage of player entry fees in paid (Cash or Bonus Cash) contests, after deducting end-user prizes (i.e., winnings from the Competitions), end-user incentives accounted for as reduction of revenue and the profit share paid to developers (the "Take Rate"). GMV represents entry fees that may be paid using cash deposits, prior winnings (which includes Bonus Cash previously won and returned as winnings), and end-user incentives (which includes Bonus Cash that has been lost during the period). We offer incentives to end-users to drive traffic to theSkillz platform. End-user incentives that are offered on behalf of game developers, such as Ticketz (which can be redeemed for Bonus Cash) and initial deposit Bonus Cash, are accounted for as a reduction of revenue. End-user incentives for which game developers do not have a valid expectation of being offered to end-users to engage on the platform, such as limited-time Bonus Cash offers, are accounted for as a sales and marketing expense. Refer to Note 2 of our consolidated financial statements for further information.
The following table summarizes the components of GMV, including average GMV per
active user and average GMV per paying active user for the years ended
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Year Ended December 31,
2022 2021 2020
As a percentage of GMV(%)
Prior winnings (1) 81 % 81 % 82 %
Cash deposits (2) 12 % 10 % 11 %
End user incentives (3) 7 % 9 % 7 %
As components of average GMV per paying monthly
active user ($)
Prior winnings $ 285.7 $ 320.8 $ 334.3
Cash deposits $ 43.2 $ 42.6 $ 46.2
End user incentives $ 25.5 $ 32.5 $ 29.0
As components of average GMV per monthly active
user ($)
Prior winnings $ 52.4 $ 55.8 $ 42.3
Cash deposits $ 7.9 $ 7.4 $ 5.9
End user incentives $ 4.7 $ 5.6 $ 3.7
(1) 'Prior winnings' include Cash and Bonus Cash that are in the end-user's
account as a result of winnings from Competitions. For the year ended
December 31, 2022 , prior winnings from Cash and Bonus Cash were 92% and 8%,
respectively. For the year ended December 31, 2021 , prior winnings from Cash and
Bonus Cash were 90% and 10%, respectively. For the year ended December 31, 2020 ,
prior winnings from Cash and Bonus Cash were 92% and 8%, respectively.
(2) 'Cash deposits' represents currency deposits into the end-user's Skillz
account during the respective period.
(3) 'End user incentives' is based on amounts recorded as a reduction of revenue
or sales and marketing expense during the respective period. End-user incentives
primarily consist of (i) Bonus Cash, (ii) Ticketz (which can be redeemed for
Bonus Cash) and (iii) promotional offers. Bonus Cash relates to all Bonus Cash
that has been lost during the period (i.e., when the related cost has been
incurred by the Company). Refer to Note 2 of our consolidated financial
statements for further information.
Prizes include Cash, Bonus Cash, physical merchandise and items sponsored by
third-parties. Prizes for the year ended December 31, 2022 consisted of
approximately 92% Cash, 8% Bonus Cash returned to the winning player from their
entry fees and less than 1% physical merchandise. Prizes for the year ended
December 31, 2021 consisted of approximately 90% Cash, 10% Bonus Cash returned
to the winning player from their entry fees and less than 1% physical
merchandise. Prizes for the year ended December 31, 2020 consisted of
approximately 92% Cash, 8% Bonus Cash returned to the winning player from their
entry fees and less than 1% physical merchandise.
The following are key elements of our financial model:
•The scale, growth and engagement of the users - As we continue to acquire
users, our ability to match comparable players, on both skill level and
tournament template, in a fair and timely manner improves. Better matching leads
to stronger engagement and the ability to create larger tournaments with more
profitable take rates. This creates a stickier, more engaging, and continuously
improving experience for our players, which in turn attracts more players to our
platform, creating a positively reinforcing cycle leading to ever-improving
gaming experiences.
•The scale, growth and partnership of our developers - We have created a
platform that drives economic success for our developers. Our end-to-end
platform allows developers to focus on creating games by automating and
optimizing integral parts of their businesses - from user acquisition and
monetization to game optimization. Our built-in payments, analytics, customer
support, and live operations platform enables our developers to consistently
learn, grow, earn and share in our success.
•Product-first philosophy and data science capabilities - We have built a
culture that puts product first, driving our impact with users and developers
and then scaling marketing investment. In 2022, 46% of our salary costs were
spent on product development. Our easy-to-integrate SDK contains over 200
features in a less than 16-MB package which allows for over-the-air upgrades.
Our intuitive Developer Console dashboard enables our developers to rapidly
integrate and monitor the performance of their games. Our LiveOps system enables
us to manage and optimize the user experience across the thousands of games on
our platform. We collect over 300 data points during each gameplay session to
feed our big data assets which augment all elements of our platform. Our key
data science technologies drive our player rating and matching, anti-cheat and
anti-fraud, and user experience personalization engine.
•Our unit economics - Our proprietary and highly scalable software platform
operates at a low direct cost (i.e. direct software and server costs),
contributing to our gross margins. Once acquired, each user cohort contributes
to revenue
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over its life such that at three months, approximately 20% of users in a cohort
continue to be paying users and the balance of PMAUs have churned. Thereafter,
our retention curve continues to flatten with a limited portion of users
continuing to contribute to revenue in each cohort for subsequent years. A
cohort is all the users acquired in the period presented. A user is considered
part of a cohort based on the first time they make a deposit and enter a paid
tournament. Once a user is considered part of a cohort, they are always counted
in that cohort. During the year ended December 31, 2022 , we experienced lower
than average user retention driven by reduced user incentives, product feature
changes and macroeconomic conditions.
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 bySkillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. By utilizing theSkillz monetization services, game developers can enhance the player experience by enabling them to compete in head-to-head matches, live tournaments, leagues, and charity tournaments and increase player retention through referral bonus programs, loyalty perks, on-system achievements and bonus cash.Skillz provides developers with a SDK that they can download and integrate with their existing games. The SDK serves as a data interface betweenSkillz and the game developers that enablesSkillz 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 andSkillz 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 earningSkillz loyalty perks; •Fair play in each tournament via theSkillz suite of fairness tools, including skill-based player matching and fraud monitoring; •Improved end-user retention by rewarding the most loyal players with Ticketz which can be redeemed in theSkillz virtual store and are earned in every match and can be redeemed for prizes or credits to be used towards future paid entry fee tournaments; •Marketing campaigns through main-stream online advertising networks and social media platforms to drive end-user traffic to developers' games within theSkillz ecosystem; •Systematic calls to end-user action via push notifications to users with game results, promotional offers, and time-sensitive actions; and •Process end-user payments, billings and settlements on behalf of the developer to enable players to connect their preferred payment method to deposit and enter into the game developers' multi-player competitions for cash prizes. Generally, end-users are required to deposit funds into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services,Skillz is responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users pay an entry fee using cash deposits, prior winnings in the end-users' accounts and end-user incentives (specifically Bonus Cash).Skillz is entitled to a revenue share based on total entry fees for paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide monetization services. Revenue related to Bonus Cash is recognized only once when the Bonus Cash is lost.Skillz does not recognize the cost of Bonus Cash when it is returned to the user who won the Competition.Skillz typically withholds 16% to 20% of the total entry fees when distributing the prize money as a commission. That commission is shared betweenSkillz 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 bySkillz to provide monetization services. 46
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TABLE OF CONTENTS Costs and Expenses Cost of Revenue Our cost of revenue consists of variable costs. These include mainly (i) payment processing fees, (ii) customer support costs, (iii) direct software costs, (iv) amortization of internal use software and (v) server costs. We incur payment processing costs on user deposits. We also incur costs directly related to servicing end-user support tickets on behalf of the game developer that are logged by users directly within the Skillz SDK. These support costs include an allocation of the facilities expense, such as rent, maintenance and utilities costs according to headcount, needed to service these tickets. We use a third party as our cloud computing service; we incur server and software costs as a direct result of running our SDK in our developers' games. We also incur costs related to the amortization of intangible assets which include developed technology. Research and Development Research and development expenses consist of software development costs, comprised mainly of product and platform development, server and software costs that support research and development activities, and to a lesser extent, allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, stock-based compensation and restructuring charges. We expect research and development expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future. Sales and Marketing Sales and marketing expenses consist primarily of direct advertising costs, engagement marketing expenses that are not recorded as a reduction of revenue, UA marketing expenses and amortization of intangible assets which include customer relationships. Sales and marketing expenses also include allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, stock-based compensation and restructuring charges. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.
General and Administrative
General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, stock-based compensation and restructuring charges. General and administrative expenses also include expenses related to a loss contingency accrual. We expect our general and administrative expenses, excluding impact of the CEO award cancellation of performance stock units to stock based compensation expenses, to decrease for the foreseeable future as we reposition the Company for profitability. We do not anticipate that we will grow headcount significantly and expect to reduce certain general and administrative expenses including professional service expenses, investor relations activities, and other administrative services.
Impairment of
In the third quarter of 2022, we revised our financial outlook, resulting in lower projected user acquisition spend and a slower than expected migration of that spend to the Aarki technology-driven marketing platform, which will result in unrealized cost-saving synergies. We determined that this constituted an indicator of impairment for one our held and used long-lived asset groups, primarily consisting of developed technology and customer relationship intangible assets. As a result of our impairment evaluation, we recorded a non-cash intangible asset impairment charge of$51.2 million in the consolidated statement of operations and comprehensive loss. In the fourth quarter of 2022, we experienced a sharp decline in our share price and market capitalization, and also had another downward adjustment to our forecast. We determined that these factors constituted a further indicator of impairment for our long-lived assets. As a result of our impairment evaluation, we recorded a non-cash impairment charge of$31.4 million in the consolidated statement of operations and comprehensive loss, which primarily related to intangible assets and a lease right-of-use asset. As a result of the indicators of impairment identified in the fourth quarter of 2022, we also determined that an interim goodwill impairment test was necessary as ofDecember 31, 2022 . As a result, the Company performed a quantitative goodwill impairment evaluation as of that date and determined the fair value of its reporting unit was less than its carrying value and recorded a goodwill impairment charge of$85.5 million .
See Note 2, Summary of Significant Accounting Policies, for further details.
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Results of Operations
The following table sets forth a summary of our results of operations for the
periods indicated and reflects the revisions as discussed in Note 3, Restatement
of Previously Issued Financial Statements (in thousands, except share and per
share data):
Year Ended December 31,
2022 2021 2020
(As Restated) (As Restated)
Revenue $ 269,709 $ 380,154 $ 229,047
Costs and expenses:
Cost of revenue 30,718 25,243 12,281
Research and development 52,265 46,232 23,225
Sales and marketing 277,014 466,691 254,269
General and administrative 163,018 135,802 42,462
Impairment of goodwill and long-lived assets 168,051 - -
Total costs and expenses 691,066 673,968 332,237
Loss from operations (421,357) (293,814) (103,190)
Interest expense, net (23,992) (1,222) (1,325)Change in fair value of common stock warrant liabilities 6,004
87,922 (23,049)
Other income (expense), net 125 49 (21,400)
Loss before income taxes (439,220) (207,065) (148,964)
Provision (benefit) for income taxes (345) (19,140) 115
Net loss $ (438,875) $ (1.07) $ (0.49) $ (0.51) Diluted$ (1.07) $ (0.71) $ (0.51) Weighted average shares outstanding: Basic 409,969,539 384,625,249 294,549,146 Diluted 409,969,539 388,549,673 294,549,146 Other comprehensive loss: Change in unrealized loss on available-for-sale investments, net of tax (1,315) (248) - Total other comprehensive loss$ (1,315) $ (248) $ - Total comprehensive loss$ (440,190) $ (188,173) $ (149,079) Revenue Year Ended December 31, (In thousands, except 2021 to 2022 % 2020 to 2021 % percentages) 2022 2021 2020 Change Change (As Restated) (As Restated) Revenue$ 269,709 $ 380,154 $ 229,047 (29) % 66 % 2022 Compared to 2021 Revenue decreased by$110.4 million , or 29%, to$269.7 million in 2022 from$380.2 million in 2021. The decrease was attributable primarily to lower retention from existing user cohorts driven by a combination of factors, including past product changes, which together have had a negative impact on overall user experience. Furthermore, there were$124.2 million , or 51%, and$72.0 million , or 38%, decreases in spend to acquire new paying users and engagement marketing spend, respectively, as the Company scaled-back spending to achieve better user acquisition efficiency and eliminated low-return engagement marketing programs. ARPU decreased 1% over the same period. 48 -------------------------------------------------------------------------------- TABLE OF CONTENTS Our year-over-year revenue growth rate for the year endedDecember 31, 2022 declined 29%, which was down from our year-over-year revenue growth rate for the year endedDecember 31, 2021 of 66%. The decrease in the revenue growth rate compared to the previous period is primarily due to transitioning our focus from revenue growth to promoting profitable growth and efficiency. The transition to profitable growth and efficiency led the Company to reduce the rate of investment in UA marketing and engagement marketing. Our year-over-year growth rate for the year endedDecember 31, 2022 for UA marketing and engagement marketing was (51)% and (38)%, respectively, and was down from our year-over-year growth rate for the year endedDecember 31, 2021 for UA marketing and engagement marketing of 77% and 85%, respectively.
2021 Compared to 2020
Revenue increased by$151.1 million , or 66%, to$380.2 million in 2021 from$229.0 million in 2020. The increase was attributable primarily to an increase in paying MAUs, driven by sales and marketing investment to acquire new paying users. ARPU increased 45% over the same period. Our year-over-year revenue growth rate for the year endedDecember 31, 2021 was 66%, which was down from our year-over-year revenue growth rate for the year endedDecember 31, 2020 of 91%. The decrease in the revenue growth rate compared to the previous period is primarily due to transitioning our focus from revenue growth to promoting profitable growth and efficiency. The transition to profitable growth and efficiency led the Company to reduce the rate of investment in UA marketing and engagement marketing. Our year-over-year growth rate for the year endedDecember 31, 2021 for UA marketing and engagement marketing was 77% and 85%, respectively, and was down from our year-over-year growth rate for the year endedDecember 31, 2020 for UA marketing and engagement marketing of 160% and 102%, respectively.
Cost of Revenue
Year Ended December 31,
(In thousands, except 2021 to 2022 % 2020 to 2021 %
percentages) 2022 2021 2020 Change Change
(As Restated)
Cost of revenue $ 30,718 $ 25,243 $ 12,281 22 % 106 %
2022 Compared to 2021
Cost of revenue increased by $5.5 million , or 22%, to $30.7 million in 2022 from
$25.2 million in 2021. The increase in cost of revenue was primarily driven by
amortization of acquired developed technology intangible assets, and an increase
in server expense. This increase was partially offset by a decrease in payment
processing costs. Cost of revenue as a percentage of revenue increased to 11% in
2022 from 7% in 2021.
2021 Compared to 2020
Cost of revenue increased by $13.0 million , or 106%, to $25.2 million in 2021
from $12.3 million in 2020. The increase in cost of revenue was primarily driven
by amortization of acquired developed technology intangible assets, an increase
in server expense, and an increase in payment processing costs. Cost of revenue
as a percentage of revenue increased to 7% in 2021 from 5% in 2020.
Research and Development
Year Ended December 31,
(In thousands, except 2021 to 2022 % 2020 to 2021 %
percentages) 2022 2021 2020 Change Change
(As Restated)
Research and development $ 52,265 $ 46,232 $ 23,225 13 % 99 %
49-------------------------------------------------------------------------------- TABLE OF CONTENTS 2022 Compared to 2021 Research and development costs increased by$6.0 million , or 13%, to$52.3 million in 2022 from$46.2 million in 2021. The increase was primarily driven by a$13.5 million increase in research and development headcount costs, of which$11.7 million related to salaries and bonuses due to an increase in headcount from the acquisition of Aarki and$1.9 million of restructuring expenses, a$1.2 million increase related to equipment and software expense, and$0.3 million related to an increase in facilities expense. These increases were partially offset by decreases of$2.7 million related to stock-based compensation,$5.8 million in professional fees, and$0.5 million in other expenses. Research and development expenses as a percentage of revenue increased to 19% in 2022 compared to 12% in 2021.
2021 Compared to 2020
Research and development costs increased by$23.0 million , or 99%, to$46.2 million in 2021 from$23.2 million in 2020. The increase was primarily driven by a$18.2 million increase in research and development headcount costs, a$2.5 million increase in server and software costs, a$0.3 million increase in facilities costs, a$0.4 million increase in allocation of related overhead costs, and a$1.4 million increase in capitalized internal-use software development costs, as certain projects entered the application development stage. Research and development expenses accounted for 12% of revenues in 2021 compared to 10% in 2020. Sales and Marketing Year Ended December 31, (In thousands, except 2021 to 2022 % 2020 to 2021 % percentages) 2022 2021 2020 Change Change (As Restated) (As Restated) Sales and marketing$ 277,014 $ 466,691 $ 254,269 (41) % 84 % 2022 Compared to 2021 Sales and marketing costs decreased by$189.7 million , or 41%, to$277.0 million in 2022 from$466.7 million in 2021. The decrease was attributable primarily to 51% and 38% decreases in UA marketing and engagement marketing spend, respectively. UA marketing expenses were$117.3 million and$241.5 million in 2022 and 2021, respectively. Engagement marketing expenses were$117.4 million and$189.4 million in 2022 and 2021, respectively. Engagement marketing as a percentage of revenue decreased to 44% in 2022 from 50% in 2021. This decrease reflects reduced investments in low-return marketing programs that resulted in a decrease in our engagement marketing expense per user in 2022 compared to 2021.
2021 Compared to 2020
Sales and marketing costs increased by$212.4 million , or 84%, to$466.7 million in 2021 from$254.3 million in 2020. The increase was attributable primarily to 77% and 85% increases in UA marketing and engagement marketing spend, respectively. UA marketing expenses were$241.5 million and$136.6 million in 2021 and 2020, respectively. Engagement marketing expenses were$189.4 million and$102.1 million in 2021 and 2020, respectively. Engagement marketing as a percentage of revenue increased to 50% in 2021 from 45% in 2020. This increase reflects investment in marketing programs that resulted in an increase in our engagement marketing cost per user in 2021 compared to 2020.
General and Administrative
Year Ended December 31,
(In thousands, except 2021 to 2022 % 2020 to 2021 %
percentages) 2022 2021 2020 Change Change
(As Restated) (As Restated)
General and administrative $ 163,018 $ 135,802 $ 42,462 20 % 220 %
2022 Compared to 2021
General and administrative costs increased by $27.2 million , or 20%, to $163.0
million in 2022 from $135.8 million in 2021. The increase was primarily driven
by a $50.8 million increase in stock-based compensation expense, which includes
$65.1 million of stock-based compensation expense recognized for the
cancellation of performance stock units previously granted to the CEO without
the concurrent grant or offer of a replacement award, a $6.6 million increase in
payroll expenses related to salaries and benefits, including $1.7 million of
restructuring expenses, a $0.4 million increase in depreciation and
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amortization expense, and a $0.5 million increase in facilities expenses. These
increases were partially offset by a $13.6 million decrease in professional
fees, a $5.0 million decrease in bonus and commission expenses, a decrease of
$1.1 million in other state and local tax expenses, and a $11.6 million decrease
in litigation charges. General and administrative expenses as percentage of
revenues increased to 60% in 2022 compared to 36% in 2021.
2021 Compared to 2020
General and administrative costs increased by$93.3 million , or 220%, to$135.8 million in 2021 from$42.5 million in 2020. The increase was primarily driven by a$42.8 million increase in headcount costs, of which a$31.0 million increase is related to stock-based compensation expense, a$7.3 million increase in professional fees related to the Company's follow-on offering, a$15.0 million increase in professional fees driven by the Company's acquisition of Aarki, a$16.4 million increase in public company-related insurance costs and legal costs, a$2.7 million increase in other public company costs and a$11.6 million increase in expense related to a loss contingency accrual, partially offset by a$2.7 million decrease in facilities expenses. General and administrative expenses as percentage of revenues increased to 36% in 2021 compared to 19% in 2020.
Impairment of
Year Ended December 31,
(In thousands, except
percentages) 2022 2021 2020 2021 to 2022 % Change 2020 to 2021 % ChangeImpairment of goodwill and long-lived assets$ 168,051 $ - $ - NM NM During the year endedDecember 31, 2022 we recorded an impairment of goodwill and long-lived assets of$168.1 million . The impairments were driven primarily by a sharp decrease in our stock price and market capitalization that we experienced throughout the year, as well as downward adjustments to our operating forecasts, which were considered triggering events for our goodwill and long-lived assets and indicated the assets may not be recoverable. See Note 2, Summary of Significant Accounting Policies, for further details. Interest expense, net Year Ended December 31, (In thousands, except 2020 to 2021 % percentages) 2022 2021 2020 2021 to 2022 % Change Change Interest expense, net$ (23,992) $ (1,222) $ (1,325) NM (8) % 2022 Compared to 2021 Interest expense, net increased by$22.8 million , to$24.0 million in 2022 from$1.2 million in 2021. The increase was due to interest expense related to our senior secured notes issued in 2021. This increase was partially offset by interest income from our marketable securities and a gain on extinguishment of debt related to a debt repurchase of our 2021 secured notes inJuly 2022 .
2021 Compared to 2020
Interest expense, net decreased by$0.1 million , to$1.2 million in 2021 from$1.3 million in 2020. The decrease was primarily driven by the repayment of a previously outstanding loan in 2020, partially offset by an increase in interest expense related to our senior secured notes issued inDecember 2021 .
Change in fair value of common stock warrant liabilities
Year Ended December 31,
(In thousands, except
percentages) 2022 2021 2020 2021 to 2022 % Change 2020 to 2021 % Change
Change in fair value of common
stock warrant liabilities $ 6,004 $ 87,922 $ (23,049) NM NM
51-------------------------------------------------------------------------------- TABLE OF CONTENTS 2022 Compared to 2021 The change in fair value of warrant liabilities decreased by$81.9 million to$6.0 million in 2022 from$87.9 million in 2021. Refer to Note 14, Common Stock Warrants, of the notes to the consolidated financial statements for further discussion.
2021 Compared to 2020
The change in fair value of warrant liabilities increased by$111.0 million to$87.9 million in 2021 from$(23.0) million in 2020. Refer to Note 14, Common Stock Warrants, of the notes to the consolidated financial statements for further discussion. Other income (expense), net Year EndedDecember 31 , (In thousands, except
2021 to 2022 %
percentages) 2022 2021 2020 Change 2020 to 2021 % Change
Other income, net $ 125 $ 49 $ (21,400) 155 % NM
2022 Compared to 2021
Other income, net increased by
2021 Compared to 2020
Other income (expense) increased by
Provision (benefit) for income taxes
Year Ended December 31,
(In thousands, except
percentages) 2022 2021 2020 2021 to 2022 % Change 2020 to 2021 % Change
Provision (benefit) for income
taxes $ (345) $ (19,140) $ 115 NM NM
2022 Compared to 2021
Benefit for income taxes decreased by $18.8 million to $0.3 million in 2022 from
a benefit from income taxes of $19.1 million . The decrease was primarily driven
by a discrete benefit related to the partial release of valuation allowance
related to the acquisition of Aarki in the prior period.
2021 Compared to 2020
Provision for income taxes decreased by$19.3 million to a benefit of$19.1 million in 2021 from$0.1 million in 2020. The decrease was primarily driven by a discrete benefit related to the partial release of valuation allowance due to the acquisition of Aarki and a decrease in accrued state tax liabilities.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively with GAAP financial information, may be helpful to investors in assessing our operating performance. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.
Adjusted EBITDA
"Adjusted EBITDA" is defined as net loss, excluding interest expense, net;
change in fair value of common stock warrant liabilities; other income
(expense), net; provision (benefit) for income taxes; depreciation and
amortization; stock-based compensation expense and related payroll tax expense;
and certain other non-cash or non-recurring items impacting net loss from time
to time, including, but not limited to change in fair value adjustments of
common stock warrant liabilities, impairment charges, and acquisition related
expenses for transaction costs, loss contingency accruals, restructuring charges
and
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one-time nonrecurring expenses, as they are not indicative of business
operations. Adjusted EBITDA is intended as a supplemental measure of our
performance that is neither required by, nor presented in accordance with, GAAP.
We believe that the use of Adjusted EBITDA provides an additional tool for
investors to use in evaluating ongoing operating results and trends and in
comparing the Company's financial measures with those of comparable companies,
which may present similar non-GAAP financial measures to investors. However, you
should be aware that when evaluating Adjusted EBITDA we may incur future
expenses similar to those excluded when calculating this measure. In addition,
our presentation of this measure should not be construed as an inference that
our future results will be unaffected by unusual or non-recurring items. Our
computation of Adjusted EBITDA may not be comparable to other similarly titled
measures computed by other companies, because all companies may not calculate
Adjusted EBITDA in the same fashion.
Because of these limitations, Adjusted EBITDA should not be considered in
isolation or as a substitute for performance measures calculated in accordance
with GAAP. We compensate for these limitations by relying primarily on our GAAP
results and using Adjusted EBITDA on a supplemental basis. You should review the
reconciliation of net loss to Adjusted EBITDA below and not rely on any single
financial measure to evaluate our business.
The following table reconciles net loss to Adjusted EBITDA for the periods indicated and reflects the revisions as discussed in Note 3, Restatement of Previously Issued Financial Statements (in thousands):
Year Ended December 31,
2022 2021 2020
(As Restated) (As Restated)
Net loss $ (438,875) $ (187,925) $ (149,079)
Interest expense, net(1) 23,992 1,222 1,325
Stock-based compensation(2) 108,202 60,331 23,757
Change in fair value of common stock warrant liabilities (6,004)
(87,922) 23,049
Provision (benefit) for income taxes (345) (19,140) 115
Depreciation and amortization 17,871 11,665 1,609
Other (income) expense, net(3) (125) (49) 21,400
Acquisition related expenses(4) - 7,983 -
Impairment charges(5)(6) 168,051 - 3,395
Loss contingency accrual(7) - 11,557 -
Restructuring charges(8) 4,830 - -
One-time nonrecurring expenses(9)(10)(11) 26 14,630 4,747
Adjusted EBITDA $ (122,377) $ (187,648) $ (69,682)
(1)For the year ended 2022, amount includes $2.6 million gain on extinguishment
of debt for our 2021 senior secured notes. Please refer to Note 10, Long-Term
Debt, for more details.
(2)For the year ended 2022, amount includes stock-based compensation recognized
for the cancellation of the Chief Executive Officers' award of 16.1 million
performance share units granted on September 14, 2021 (the "CEO Performance
Stock Units").
(3)For the year ended 2020, other (income) expense, net is primarily attributed
to a $21.7 million adjustment to the fair value of the redeemable convertible
Series E preferred stock forward contract liability.
(4)For the year ended 2021, this represents acquisition-related expenses for our
Aarki acquisition.
(5)For the year ended 2020, 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 .
(6)For the year ended 2022, amount includes impairment of goodwill and
long-lived assets related to the developed technology, customer relationships,
computer equipment, and lease ROU assets. Please refer to Note 6, Goodwill and
Intangible Assets, and Note 2, Summary of Significant Accounting Policies, for
more details.
(7)For the year ended 2021, this amount represents a loss contingency accrual
related to a litigation matter relating to a former employee as discussed in
Note 12, Commitments and Contingencies.
(8)For the year ended 2022, amount includes restructuring charges related to
employee termination benefits.
(9)For the year ended 2022, amounts represent one-time nonrecurring expenses
related to IPO bonuses for certain employees, net of amounts forfeited by
terminated employees.
(10)For the year ended 2021, amounts represent one-time nonrecurring expenses
related to the follow-on offering and executive severance expense.
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(11)For the year ended 2020, amounts represent one-time transaction expenses
related to the FEAC Business Combination.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sales of capital stock. As ofDecember 31, 2022 , our principal sources of liquidity were our cash and cash equivalents in the amount of$362.5 million , which are primarily invested in money market funds and marketable securities with maturity less than three months, and marketable securities in the amount of$184.0 million . InDecember 2021 , the Company offered$300 million in aggregate principal senior secured notes due 2026 in a private offering. The notes were sold in a private placement to qualified institutional buyers. Annual interest started to accrue fromDecember 20, 2021 at a stated rate of 10.25% and will be payable semiannually onJune 15 andDecember 15 of each year, beginning onJune 15, 2022 . The notes mature onDecember 15, 2026 . We used the net proceeds from the offering for general corporate purposes, which included investments in marketable securities classified as available-for-sale in operating activities. We may also use the proceeds for potential acquisitions of other companies, products, or technologies that we may identify in the future. The notes contain customary covenants restricting our and certain of our subsidiaries' ability to incur debt, incur liens, make distributions to holders of our stock, make certain transactions with our affiliates, as well as certain financial covenants specified in the indentures. We were in compliance with all covenants applicable to the notes as ofDecember 31, 2022 and 2021. We are aware that our outstanding debt securities are currently trading at substantial discounts to their respective principal amounts. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, as we did during the third quarter of 2022, continue to seek to retire or purchase our outstanding debt through cash purchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. OnSeptember 1, 2022 , the Company redeemed$10.5 million principal amount of the 2021 senior secured notes which resulted in a gain on extinguishment of debt of$2.6 million as the notes were redeemed for total consideration below par value of the notes. The redemption price was equal to 69.5% of the aggregate principal amount plus accrued and unpaid interest. The gain is reflected in the interest expense, net line item of the Company's condensed consolidated statement of operations for the year endedDecember 31, 2022 . Our existing liquidity resources are sufficient to continue operating activities for at least one year past the issuance date of the consolidated financial statements. Our future cash requirements will depend on many factors, including our rate of revenue growth and the expansion of our sales and marketing activities. We also may invest in or acquire complementary businesses, applications or technologies.
The following table provides a summary of cash flow data (in thousands):
Year Ended December 31,
2022 2021 2020
Net cash used in operating activities $ (179,597) $ (180,154) $ (56,232)
Net cash provided by (used in) investing activities $ 311,386 $ (643,924) $ (3,246)
Net cash provided by (used in) financing activities $ (10,605) $
802,682
Cash Flows from Operating Activities
Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities. Net cash used in operating activities was$179.6 million for the year endedDecember 31, 2022 . The most significant component of our cash used during this period was a net loss of$438.9 million , which included non-cash expenses of$108.2 million related to stock-based compensation, including$65.1 million related to the cancellation of performance stock units granted to our CEO, non-cash goodwill and long-lived asset impairment charge of$168.1 million , non-cash income of$6.0 54 -------------------------------------------------------------------------------- TABLE OF CONTENTS million for the change in fair value related to Private Common Stock Warrants,$17.9 million related to depreciation and amortization, a gain on extinguishment of debt for$2.6 million , and net cash outflows of$32.4 million from changes in operating assets and liabilities. The net cash outflows from changes of operating assets and liabilities were primarily the result of decreases in other liabilities of$28.0 million , accounts payable of$17.2 million , and a loss contingency accrual of$4.4 million . These net cash outflows were slightly offset by decreases of$5.6 million and$11.6 million in accounts receivable and prepaid expenses and other assets, respectively. Net cash used in operating activities was$180.2 million for the year endedDecember 31, 2021 . The most significant component of our cash used during this period was a net loss of$187.9 million , which included non-cash income of$87.9 million for the change in fair value related to Public and Private Common Stock Warrants, a$19.4 million deferred income tax benefit, non-cash expenses of$60.3 million related to stock-based compensation,$11.7 million related to depreciation and amortization, accretion of unamortized discounts and amortization of issuance costs, and net cash inflows of$42.3 million from changes in operating assets and liabilities. The net cash inflows from changes of operating assets and liabilities were primarily the result of an increase in other liabilities of$28.7 million , primarily related to an increase in accrued sales and marketing costs. Net cash used in operating activities was$56.2 million for the year endedDecember 31, 2020 . The most significant component of our cash used during this period was a net loss of$149.1 million , which included non-cash expenses of$21.5 million related to fair value adjustments of the redeemable convertible Series E preferred stock forward contract liability,$23.0 million for the change in fair value of Public and Private Common Stock Warrants,$23.8 million related to stock-based compensation,$3.6 million related to impairment charges, and$1.6 million related to depreciation and amortization, accretion of unamortized discounts and amortization of issuance costs, as well as net cash inflows of$18.8 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$15.6 million .
Cash Flows from Investing Activities
Net cash provided by investing activities was$311.4 million for the year endedDecember 31, 2022 . The net cash provided by investing activities included$167.8 million in proceeds from sales of marketable securities and$599.5 million in proceeds from maturities of marketable securities, partially offset by$454.1 million in purchases of marketable securities. Net cash used in investing activities was$643.9 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2021 , the net cash used in investing activities included the$504.0 million purchases of marketable securities,$84.0 million used for acquisition of Aarki, net of cash acquired, and$54.8 million used for investments in non-marketable equity securities.
Net cash used in investing activities was
Cash Flows from Financing Activities
Net cash used in financing activities was
Net cash provided by financing activities was$802.7 million for the year endedDecember 31, 2021 , which was primarily due to$402.1 million in net proceeds from the issuance of common stock in connection with the Company's follow-on offering,$280.9 million of borrowings under debt agreements, net of issuance costs, and$130.6 million of proceeds from the exercise of common stock warrants, partially offset by$13.2 million in payments made towards offering costs. Net cash provided by financing activities was$296.6 million for the year endedDecember 31, 2020 , which was primarily due to$246.5 million in net proceeds from the issuance of common stock in connection with the FEAC Business Combination, net proceeds from the issuance of redeemable convertible Series E preferred stock of$76.6 million , partially offset by$13.4 million due to taxes paid related to the net share settlement of equity awards,$10.0 million of debt repayments under our debt facilities, and$2.0 million in payments made towards offering costs. 55
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Contractual Obligations and Commitments
Our material cash requirements include the following contractual and other obligations.
Leases
We have operating lease arrangements for office space, and finance lease
agreements for certain network equipment. As of
Secured Notes and Term Loan
Refer to "Liquidity and Capital Resources" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K for more information.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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