10-Q: Skillz Q3 Sees Aarki Growth Amidst Tether Litigation & Losses

Skillz Inc. reported mixed Q3 2025 results with revenue growth driven by Aarki, but faced increased nine-month losses and significant litigation risk with a key developer, Tether.

Summary

• Total revenue increased by 11% to $27.4 million for the three months ended September 30, 2025, compared to $24.6 million in the prior year period.
• For the nine months ended September 30, 2025, total revenue slightly decreased by 1% to $74.5 million, down from $75.1 million in the same period of 2024.
• Net loss for the three months ended September 30, 2025, improved by 17% to $(17.4) million, compared to $(21.1) million in Q3 2024.
• However, net loss for the nine months ended September 30, 2025, significantly worsened by 141% to $(52.5) million, compared to $(21.8) million in the prior year period.
• Loss from operations for the three months improved by 22% to $(16.3) million, but for the nine months, it worsened by 114% to $(47.7) million.
• Aarki segment revenue grew substantially by $3.8 million for the three months and $8.9 million for the nine months, largely offsetting declines in the Skillz segment.
• The Skillz segment's revenue decreased by $1.0 million for the three months and $9.5 million for the nine months.
• Sales and marketing costs decreased by 10% to $17.4 million for the three months and by 15% to $51.8 million for the nine months.
• Net cash used in operating activities was $(56.2) million for the nine months ended September 30, 2025, a significant shift from $12.4 million provided in the prior year period.
• Cash, cash equivalents, and restricted cash decreased to $212.8 million as of September 30, 2025, from $281.9 million at December 31, 2024.
• The company received a notice of default on its 2021 Senior Secured Notes due to delayed financial filings but expects to regain compliance upon filing this report.
• A major litigation with Tether, which accounted for 45% of 2024 revenue, is ongoing, with Skillz disputing termination and Tether filing counterclaims exceeding $1 million; a trial is scheduled for August 2026.
• Material weaknesses in internal control over financial reporting were identified in risk assessment, IT general controls, and overall accounting processes, with remediation efforts underway.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant increase in net loss and negative cash flow for the nine-month period, coupled with the high-stakes Tether litigation representing a substantial revenue concentration risk. While Aarki's growth and some litigation resolutions are positive, they are overshadowed by these larger financial and operational challenges, including material weaknesses in internal controls.

Positives

• Aarki segment demonstrated strong revenue growth, increasing by $3.8 million (three months) and $8.9 million (nine months) year-over-year.
• Aarki segment's Adjusted EBITDA turned positive for the three months ended September 30, 2025, reaching $0.316 million, a significant improvement from a $(1.621) million loss in Q3 2024.
• Overall net loss for the three months ended September 30, 2025, improved by 17% to $(17.4) million, compared to $(21.1) million in the prior year.
• Sales and marketing costs decreased by 10% for the three months and 15% for the nine months, indicating cost management efforts.
• The company successfully regained compliance with NYSE listing requirements by filing overdue financial reports.
• Skillz achieved favorable outcomes in the Papaya Gaming litigation, with the court denying Papaya's motion for summary judgment on Skillz's claims and granting Skillz's motion for summary judgment on Papaya's counterclaims.
• Several legal disputes, including a former employee lawsuit, two vendor disputes, and the De-SPAC litigation, have been resolved, reducing contingent liabilities.
• The termination of the operating lease for the former headquarters was settled for $14.0 million, resolving a significant lease liability.

Negatives

• Net loss for the nine months ended September 30, 2025, significantly worsened by 141% to $(52.5) million, compared to $(21.8) million in the prior year period.
• Loss from operations for the nine months ended September 30, 2025, increased by 114% to $(47.7) million, compared to $(22.3) million in the prior year.
• Net cash used in operating activities was $(56.2) million for the nine months ended September 30, 2025, a substantial negative shift from $12.4 million provided in the same period of 2024.
• Cash, cash equivalents, and restricted cash decreased by $69.1 million from December 31, 2024, to September 30, 2025, indicating a significant burn rate.
• The Skillz segment, the company's core competitive multi-player platform, experienced a revenue decline of $9.5 million for the nine months ended September 30, 2025.
• Interest (expense) income, net, shifted from income of $0.7 million in the nine months of 2024 to an expense of $(4.0) million in the nine months of 2025, primarily due to holding less interest-bearing investments.
• The gain from litigation settlement decreased significantly to $7.5 million for the nine months ended September 30, 2025, from $46.0 million in the prior year, impacting overall profitability.
• The company received a notice of default on its 2021 Senior Secured Notes due to delays in filing financial statements, although compliance is expected to be restored.

Risks

• The ongoing litigation with Tether, a developer that accounted for 45% of 2024 revenue, poses a material adverse effect on the business and results of operations if Skillz is unable to negotiate new terms or if the litigation is unsuccessful, potentially leading to the removal of key games (Solitaire Cube and 21 Blitz) from the platform.
• Material weaknesses in internal control over financial reporting related to risk assessment, information technology general controls (ITGCs), and overall accounting processes could adversely affect the company's ability to record, process, summarize, and report financial information reliably.
• The company's application of revenue code for indirect taxes in certain jurisdictions may be challenged by taxing authorities, potentially resulting in additional tax liabilities.
• The derivative lawsuit (Hanna v. Paradise, et al.) alleging breaches of fiduciary duties by current and former officers and directors could result in unspecified damages and restitution for Skillz.
• The lawsuit against Voodoo SAS et al. alleging false advertising and unfair competition (use of bots) is ongoing, with motions for preliminary injunction and dismissal awaiting court decisions, creating uncertainty.
• The reduction in user acquisition (UA) marketing and engagement marketing expenses in 2024 and the first nine months of 2025 has resulted in a substantial reduction in revenue and is expected to continue to do so.
• The company's ability to identify and market suitable replacements for games like Solitaire Cube and 21 Blitz, should they be removed from the platform due to the Tether dispute, is uncertain and could impact future revenue.

Future Outlook

The company expects the reduction in user acquisition and engagement marketing expenses to continue to result in a reduction in revenue. The outcome of the Tether litigation, which involves a developer accounting for 45% of 2024 revenue, could have a material adverse effect on the business if new terms are not negotiated or if the litigation is unsuccessful. The company is evaluating the impact of new accounting standards (ASU 2023-09, ASU 2024-03, ASU 2025-05, ASU 2025-06) on its future financial statements and disclosures. Remediation efforts for identified material weaknesses in internal controls are ongoing.

Management Comments

• "We believe the disclosures made are adequate to make the information presented not misleading."
• "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."
• "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."
• "Our existing liquidity resources are sufficient to continue operating activities for at least one year past the issuance date of the condensed consolidated financial statements."

Industry Context

The mobile gaming and advertising technology industries are highly competitive and rapidly evolving. Skillz's dual focus on a competitive multi-player platform and AI-driven advertising solutions (Aarki) positions it across two dynamic sectors. The growth in Aarki's advertising revenue suggests a potential diversification or shift in revenue streams, possibly capitalizing on the demand for effective mobile app advertising in a privacy-first world. However, the decline in the core Skillz segment's revenue, coupled with reduced marketing spend, indicates challenges in user acquisition and engagement within the competitive gaming marketplace. The ongoing legal disputes, particularly regarding 'bots' and fair play, highlight a broader industry concern about integrity and trust in skill-based gaming platforms.

Comparison to Industry Standards

• The significant revenue concentration with Tether (45% of 2024 revenue) is higher than typical industry diversification standards for platform businesses, exposing Skillz to substantial single-developer risk. For example, major app stores or gaming platforms typically have a much more diversified developer base.
• The identified material weaknesses in internal control over financial reporting are below industry best practices and regulatory expectations for publicly traded companies, contrasting with the robust control environments expected of larger, more mature technology firms like Unity or Epic Games.
• While Aarki's revenue growth is positive, a direct comparison to industry benchmarks for AI-driven advertising platforms (e.g., AppLovin, ironSource) would require more detailed metrics like customer acquisition cost, retention rates, and average revenue per user, which are not provided in this filing.
• The shift to negative cash flow from operations for the nine-month period, from positive in the prior year, indicates a deterioration in operational efficiency that would be a concern compared to profitable or cash-flow positive industry peers in the mobile gaming or ad-tech space.

Corporate Governance

Legal Proceedings

• **Tether Litigation**: Skillz filed suit against Tether on September 1, 2025, alleging breach of contract after Tether issued a termination notice for all agreements. Tether filed counterclaims on October 10, 2025, alleging breach of contract, unjust enrichment, and other claims, seeking damages exceeding $1 million. A trial is scheduled for August 2026.
• **Skillz v. Papaya Gaming, Ltd., et al.**: Skillz sued Papaya for false advertising and unfair business practices. The court denied Papaya's motion for summary judgment on Skillz's claims (October 28, 2025) and granted Skillz's motion for summary judgment on Papaya's counterclaims (November 24, 2025). Rulings on expert testimony admissibility are pending.
• **Hanna v. Paradise, et al. (Derivative Suit)**: An alleged stockholder filed a derivative complaint in March 2024, alleging breaches of fiduciary duties by current and former officers and directors related to a March 2021 public offering. The court ordered limited discovery on director independence on July 3, 2025, converting a motion to dismiss to a motion for summary judgment.
• **Skillz v. Voodoo SAS et al.**: Skillz filed suit on July 1, 2024, alleging violations of the Lanham Act and New York's General Business Law for false advertising and fixing tournament outcomes with bots. Motions for a preliminary injunction and to dismiss the amended complaint are fully briefed and awaiting court decisions.
• **Former Employee Lawsuit**: Resolved with a final judgment of $6.7 million, including post-judgment interest of $733 thousand. A subsequent appeal by the former employee for additional interest was abandoned on January 8, 2025.
• **Vendor Disputes**: Two disputes were settled in March 2025 for $2.75 million and in June 2025 for $533 thousand, resolving claims of unauthorized scope expansion, overbilling, and breach of contract.
• **Lien, et al. v. Eagle Equity Partners II, LLC, et al. (De-SPAC Litigation)**: Settled in principle for $10.0 million. Skillz received $9.8 million from its insurance carrier, offsetting the indemnification expense. The settlement stipulation was executed on May 19, 2025, subject to court approval.
• **Termination of Operating Lease**: The dispute with the landlord of the former headquarters was settled in April 2025 for a lump sum payment of $14.0 million, resolving the operating lease liability.

Stakeholder Impact

• **Shareholders**: The significant increase in net loss and negative cash flow for the nine-month period, coupled with the substantial risk from the Tether litigation, could negatively impact share price and investor confidence. The ongoing share repurchase program aims to return value to shareholders, but its effectiveness is limited by overall financial performance.
• **Employees**: The company's strategic investments in qualified personnel and ongoing efforts to remediate internal control weaknesses may benefit employees through improved processes and stability. However, the overall financial challenges could create uncertainty.
• **Customers (End-Users)**: The ongoing legal disputes regarding 'bots' and fair play (e.g., Voodoo, Papaya) directly impact the trust and engagement of end-users on the Skillz platform. The termination notice from Tether, if it leads to the removal of popular games, could significantly reduce the appeal of the platform for users.
• **Developers**: The Tether litigation highlights the risks for developers relying on the Skillz platform and for Skillz's reliance on key developers. The company's efforts to provide monetization services and support through its SDK are crucial for developer retention.
• **Creditors (Senior Secured Note Holders)**: The notice of default on the 2021 Senior Secured Notes due to delayed filings, while expected to be cured, signals potential compliance risks. Continued financial losses and negative cash flow could raise concerns about the company's ability to meet future debt obligations, although current liquidity is deemed sufficient for one year.
• **Suppliers/Vendors**: Resolution of vendor disputes indicates the company is addressing its obligations, which can foster better relationships with its supply chain.

Next Steps

• Continue remediation efforts for identified material weaknesses in internal control over financial reporting.
• Defend against Tether's counterclaims and pursue Skillz's affirmative claims in the ongoing litigation, with a trial scheduled for August 2026.
• Monitor and await court rulings on certain motions related to the admissibility of expert testimony in the Papaya litigation.
• Further briefing in support of summary judgment on demand futility grounds is expected in the Hanna v. Paradise, et al. derivative suit.
• Skillz's motion to dismiss the majority of Tether's counterclaims is set for hearing on January 23, 2026.
• The company will continue to evaluate the impact of recently issued accounting pronouncements (ASU 2023-09, ASU 2024-03, ASU 2025-05, ASU 2025-06) on its financial statements and disclosures.

Key Dates

Recommendation

Skillz presents a mixed and highly uncertain investment profile. While the Aarki segment shows promising growth and the company has successfully resolved several legal disputes and regained NYSE compliance, the core Skillz segment is struggling with declining revenue. The most significant concern is the ongoing litigation with Tether, which accounted for 45% of 2024 revenue. The potential loss of such a substantial revenue source, coupled with a significant increase in net loss and negative cash flow for the nine-month period, creates immense uncertainty and downside risk. The identified material weaknesses in internal controls also add to operational risk. Until there is greater clarity on the Tether litigation outcome and a sustained improvement in the Skillz segment's performance and overall cash flow, a 'hold' recommendation is appropriate. Investors should monitor these key developments closely, as the risk-reward balance is currently unfavorable for a 'buy' but the potential for Aarki's growth and successful litigation outcomes prevents a 'sell' at this juncture.

Keywords

Skillz, Aarki, Mobile Gaming, eSports, Advertising Solutions, SEC Filing, 10-Q, Financial Results, Litigation, Tether, Patent Infringement, Internal Controls, Revenue, Net Loss, Cash Flow, Share Repurchase, Senior Secured Notes, Corporate Governance