10-Q: Skillz Q1 2025: Revenue Declines Amid Legal Battles

Skillz Inc. reported a 13% revenue decrease in Q1 2025, alongside a significant litigation settlement gain, while addressing NYSE listing compliance and ongoing legal challenges.

Summary

• Net loss improved to $(17.1) million in Q1 2025 from $(26.7) million in Q1 2024.
• Revenue decreased by 13% to $21.9 million in Q1 2025 from $25.2 million in Q1 2024.
• The Skillz segment's entry fee revenue decreased to $17.2 million from $21.8 million.
• The Aarki segment's advertising revenue increased to $4.4 million from $2.9 million.
• Operating loss improved to $(15.5) million from $(26.9) million, primarily due to a $7.5 million gain from the AviaGames litigation settlement.
• Sales and marketing costs decreased by 14% to $18.0 million, and general and administrative costs decreased by 17% to $19.1 million.
• Net cash used in operating activities increased to $(10.9) million in Q1 2025 from $(4.4) million in Q1 2024.
• Skillz received a Notice of Default on September 30, 2025, for delayed financial filings (10-K for 2024, 10-Q for Q1 and Q2 2025).
• The NYSE granted an extension until December 17, 2025, for Skillz to become current with all SEC filings.
• Tether, which accounted for 45% of 2024 revenue, issued a termination notice for all agreements effective September 1, 2025, leading to ongoing litigation.

Sentiment

Score: 3

Explanation: While the company reduced its net loss and operating expenses, and achieved a significant litigation settlement, these positives are overshadowed by a substantial revenue decline, increased cash burn from operations, ongoing legal disputes with a major revenue source (Tether), and critical compliance issues (NYSE delisting threat, debt default notice, material weaknesses in internal controls). The cumulative risks suggest a highly unfavorable investment outlook.

Positives

• Net loss significantly improved to $(17.1) million in Q1 2025 from $(26.7) million in Q1 2024.
• Operating loss improved by 42% to $(15.5) million in Q1 2025 from $(26.9) million in Q1 2024.
• Realized a $7.5 million gain from the AviaGames litigation settlement in Q1 2025, with an additional $22.5 million expected over the next three years.
• Aarki segment advertising revenue increased by $1.7 million, or approximately 59%, to $4.4 million in Q1 2025.
• Sales and marketing costs decreased by $3.0 million (14%) to $18.0 million, reflecting cost management efforts.
• General and administrative costs decreased by $4.0 million (17%) to $19.1 million, indicating further expense control.
• Cost of revenue decreased by $0.5 million (14%) to $3.0 million.
• Successfully settled a vendor dispute for $2.75 million in March 2025, and another for $533 thousand in June 2025.
• Settled the former headquarters operating lease dispute for $14.0 million in April 2025, resolving a significant liability.
• Received $9.8 million from D&O insurance for the Lien, et al. v. Eagle Equity Partners II, LLC, et al. litigation, offsetting a $10.0 million settlement.
• The NYSE granted an extension until December 17, 2025, to regain compliance with listing requirements by filing all delinquent reports.
• The court denied Papaya's motion for summary judgment against Skillz's claims and granted Skillz's motion for summary judgment on Papaya's counterclaims in the Papaya Litigation.

Negatives

• Total revenue decreased by $3.3 million (13%) to $21.9 million in Q1 2025 from $25.2 million in Q1 2024.
• The core Skillz segment's entry fee revenue decreased by $4.6 million to $17.2 million in Q1 2025 from $21.8 million in Q1 2024.
• Net cash used in operating activities increased significantly to $(10.9) million in Q1 2025 from $(4.4) million in Q1 2024.
• Net interest shifted from income of $0.1 million in Q1 2024 to an expense of $(1.1) million in Q1 2025, primarily due to a decrease in interest income.
• Other (expense) income, net, shifted from income of $0.1 million in Q1 2024 to an expense of $(0.6) million in Q1 2025.
• Received a Notice of Default on September 30, 2025, for failure to timely file annual and quarterly reports (10-K for 2024, 10-Q for Q1 and Q2 2025), which could lead to an Event of Default if not cured within 120 days.
• Tether, which accounted for 45% of 2024 revenue, issued a termination notice for all agreements effective September 1, 2025, leading to litigation and potential material adverse effect if top games (Solitaire Cube, 21 Blitz) are removed.
• Identified material weaknesses in internal control over financial reporting related to risk assessment, IT general controls, and evaluation of accounting processes.
• The reduction in user acquisition (UA) marketing and engagement marketing expenses in fiscal year 2024 and Q1 2025 has resulted in a substantial reduction in revenue and is expected to continue to result in a reduction in revenue.

Risks

• **Tether Litigation**: The termination notice from Tether (45% of 2024 revenue) could lead to the removal of top games (Solitaire Cube, 21 Blitz) from the platform, potentially causing a material adverse effect on business and results of operations if new terms are not negotiated or litigation is unsuccessful.
• **NYSE Delisting Risk**: Failure to file all delinquent SEC reports (10-K for 2024, 10-Q for Q1, Q2, Q3 2025) by the NYSE's extended deadline of December 17, 2025, could result in delisting from the New York Stock Exchange.
• **Debt Default Risk**: Failure to regain compliance with reporting covenants under the 2021 Senior Secured Notes indenture within 120 days of the September 30, 2025 Notice of Default could trigger an Event of Default, potentially accelerating debt repayment.
• **Material Weaknesses in Internal Controls**: Identified material weaknesses in risk assessment, IT general controls, and accounting process evaluation could adversely affect the ability to accurately record, process, summarize, and report financial information reliably, impacting investor confidence.
• **Dependence on Key Developers**: Games provided by three developer partners accounted for 71% of consolidated revenue in Q1 2025, indicating significant concentration risk if any of these relationships are disrupted.
• **Indirect Tax Liabilities**: The application of revenue code for indirect taxes in certain jurisdictions may be challenged by taxing authorities, potentially resulting in additional tax liabilities.
• **Litigation Outcomes**: The unpredictable nature of ongoing legal proceedings (e.g., Hanna v. Paradise, Skillz v. Voodoo SAS, Skillz v. Papaya Gaming) could in the future materially affect results of operations, cash flows, or financial position.
• **Impact of Reduced Marketing Spend**: The reduction in user acquisition (UA) marketing and engagement marketing expenses has already resulted in a substantial reduction in revenue and is expected to continue, potentially hindering future growth.

Future Outlook

The reduction in user acquisition and engagement marketing expenses in fiscal year 2024 and Q1 2025 has resulted in a substantial reduction in revenue and is expected to continue. Skillz anticipates receiving additional $7.5 million royalty payments from AviaGames in March 2026, 2027, and 2028. The company is evaluating the impact of new accounting standards (ASU 2023-09 and ASU 2024-03) and does not expect the One Big Beautiful Bill Act (OBBBA) to have a material tax impact. Skillz is actively working to file its remaining delinquent quarterly reports to regain compliance with debt covenants and NYSE listing requirements. Litigation with Tether is scheduled for trial in August 2026, and other legal proceedings continue with pending court decisions and further briefings.

Management Comments

• "We believe the termination notice [from Tether] to be invalid and in breach of Tether's obligations under the Tether Agreements."
• "We intend to defend our position [against Tether], but can provide no assurances regarding the outcome of the claim and the impact it may have on our business."
• "The removal of Solitaire Cube and 21 Blitz contrary to the terms set forth in the agreements and/or before Skillz can provide a suitable replacement to such games may cause a material adverse effect on our platform business and results of operations."
• "Management, with oversight from the Audit Committee, will continue toward remediation of material weaknesses and reinforce the overall design and capability of our internal control environment."
• "Management will continue to make strategic investments in qualified personnel, external consultants, together with deploying available tools and systems to streamline and automate the execution and documentation of internal controls throughout the Company."
• "Notwithstanding the material weaknesses, management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Form 10-Q, in conformity with GAAP."

Industry Context

The mobile gaming industry continues to evolve with competitive multi-player platforms and advertising solutions. Skillz operates in the eSports gaming platform space, focusing on monetization for game developers, while Aarki provides AI-driven advertising solutions for mobile app developers. The ongoing legal disputes, particularly with a major developer like Tether, highlight the competitive and potentially litigious nature of the mobile gaming ecosystem and the critical importance of intellectual property and contractual agreements. The company's efforts to reduce marketing spend while facing revenue decline suggest a challenging market environment or a strategic shift towards profitability over growth, potentially impacting its competitive positioning.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct benchmarking against global industry standards.
• The decline in revenue for the core Skillz segment, while Aarki's advertising revenue grew, suggests a mixed performance in a competitive mobile gaming and advertising market.
• The significant dependence on a few developers (71% of Q1 2025 consolidated revenue from three partners) indicates a higher concentration risk compared to a diversified industry standard.
• The numerous ongoing legal battles with competitors (AviaGames, Papaya, Voodoo) and a key developer (Tether) suggest a highly contested market space, which may be more litigious than average.

Corporate Governance

Legal Proceedings

• **Former Employee Suit**: Resolved in January 2025 after the former employee abandoned an appeal, affirming a final judgment of $6.7 million plus $733 thousand in post-judgment interest.
• **Vendor Dispute One**: Settled in March 2025 for a payment of $2.75 million by the Company in exchange for mutual releases of all claims.
• **Vendor Dispute Two (License Agreement)**: Settled in April 2025 for a payment of $0.5 million by the Company in June 2025, resolving a dispute over a license agreement.
• **Skillz v. AviaGames (Patent & Unfair Competition Cases)**: Settled in April 2024 for a total of $80.0 million, with Skillz receiving $48.0 million (net $46.0 million) in 2024. Skillz is also set to receive an additional $7.5 million annually over four years (starting March 2025) as royalty payments.
• **Skillz v. Tether Litigation**: Initiated by Skillz on September 1, 2025, after Tether issued a termination notice for all agreements (effective September 1, 2025). Skillz alleges breach of contract, while Tether filed counterclaims exceeding $1 million. Skillz moved to dismiss counterclaims in November 2025, with a trial scheduled for August 2026.
• **Hanna v. Paradise, et al. (Derivative Complaint)**: Ongoing litigation filed in March 2024, alleging breaches of fiduciary duties related to a March 2021 secondary public offering. The court converted a motion to dismiss to a motion for summary judgment in July 2025, ordering limited discovery.
• **Skillz v. Voodoo SAS et al.**: Ongoing litigation filed in July 2024, alleging false advertising and unfair competition due to Voodoo's alleged use of bots. Motions for preliminary injunction and to dismiss are fully briefed and awaiting court decisions.
• **Skillz v. Papaya Gaming, Ltd., et al.**: Ongoing litigation filed in March 2024, alleging false advertising and unfair business practices related to bot deployment. The court denied Papaya's motion for summary judgment against Skillz's claims and granted Skillz's motion for summary judgment on Papaya's counterclaims in October/November 2025.
• **Lien, et al. v. Eagle Equity Partners II, LLC, et al. (Class Action)**: Settled in principle for $10 million in March 2025, with Skillz obligated to indemnify legal costs. D&O insurance contributed $9.8 million, and Skillz paid the $10.0 million settlement in July 2025.
• **Indirect Tax Examination**: The Company is currently undergoing an examination in the State of Washington regarding its indirect tax liability.

Stakeholder Impact

• **Shareholders**: Potential negative impact from revenue decline, increased operating cash burn, NYSE delisting risk, debt default risk, and significant uncertainty from the Tether litigation. Material weaknesses in internal controls could further erode confidence.
• **Employees**: Potential impact from strategic shifts, ongoing legal proceedings, and the need for qualified accounting personnel to address internal control weaknesses.
• **Customers (Game Developers)**: Uncertainty regarding the platform's stability due to the Tether litigation (a major developer) and the company's overall financial health. High dependence on a few developers creates risk for both Skillz and those developers.
• **Customers (End-Players)**: Potential impact on game availability and experience if key games are removed due to the Tether dispute.
• **Creditors (2021 Senior Secured Notes holders)**: Risk of an Event of Default due to delayed financial filings, although the company is working to regain compliance. The ongoing litigation with Tether adds to credit risk.
• **Suppliers/Vendors**: Resolution of vendor disputes indicates ongoing business relationships, but also highlights potential for disagreements and the need for clear contractual terms.

Next Steps

• File Quarterly Reports on Form 10-Q for the quarters ended June 30, 2025, and September 30, 2025, as soon as practicable to regain compliance with debt covenants and NYSE listing requirements by December 17, 2025.
• Continue efforts to remediate identified material weaknesses in internal control over financial reporting by enhancing policies, investing in qualified personnel, and deploying tools and systems.
• Defend against Tether's termination notice and counterclaims, and pursue affirmative claims in litigation, with a trial scheduled for August 2026.
• Await court rulings on remaining motions related to the administration of expert testimony in the Skillz v. Papaya Litigation.
• Further briefing is expected in the Hanna v. Paradise, et al. derivative complaint, with no schedule currently in place.
• Account for the tax effects of the One Big Beautiful Bill Act (OBBBA) in the quarter ending September 30, 2025.
• Evaluate the disclosure requirements related to new accounting standards, ASU 2023-09 and ASU 2024-03.

Key Dates

Recommendation

The company faces severe headwinds including a significant revenue decline in its core segment, increasing cash burn from operations, and critical compliance issues (NYSE delisting threat, debt default notice). The ongoing litigation with Tether, a developer accounting for 45% of 2024 revenue, poses an existential threat to a substantial portion of the business. Furthermore, the disclosure of material weaknesses in internal control over financial reporting raises serious concerns about financial integrity and management oversight. While there were some positive legal settlements, these are overshadowed by the fundamental operational and governance challenges. The cumulative risks suggest a highly unfavorable investment outlook.

Keywords

Mobile gaming, eSports platform, Skillz, Aarki, SEC 10-Q, Financial results, Revenue decline, Net loss, Litigation settlement, Tether, NYSE compliance, Internal controls, Debt default, Share repurchase, Advertising solutions, Mobile app developers