10-Q: Skillz Reports Q2 2025 Loss Amid Revenue Dip, Legal Battles

Skillz Inc. reported a net loss of $17.9 million for Q2 2025, a significant decline from a $26.0 million net income in the prior year, driven by reduced litigation gains and ongoing operational challenges.

Summary

• Skillz reported a net loss of $17.9 million for the three months ended June 30, 2025, a substantial decrease from a net income of $26.0 million in the same period of 2024.
• Revenue for Q2 2025 was $25.2 million, a slight decrease from $25.3 million in Q2 2024, primarily due to lower Skillz segment revenue offset by higher Aarki advertising revenue.
• For the six months ended June 30, 2025, the net loss was $35.1 million, significantly higher than the $0.7 million net loss in the prior year period.
• Total revenue for the six months ended June 30, 2025, decreased by 7% to $47.1 million from $50.5 million in the same period of 2024.
• Operating activities shifted from providing $23.4 million in cash in H1 2024 to using $31.7 million in H1 2025.
• The company received a notice of default on its 2021 Senior Secured Notes due to delays in filing its annual and quarterly reports, with compliance contingent on filing all overdue reports by December 17, 2025.
• Skillz is engaged in significant litigation with Tether, a developer whose games (Solitaire Cube and 21 Blitz) accounted for 45% of 2024 revenue, following Tether's termination notice.
• The company continues to address material weaknesses in its internal control over financial reporting related to risk assessment and information technology general controls (ITGCs).
• Skillz repurchased $7.7 million of its Class A common stock in the first six months of 2025 and an additional $1.2 million subsequent to June 30, 2025, under its extended share repurchase program.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant financial losses, a substantial decline in operating cash flow, ongoing critical litigation with a major revenue contributor (Tether), and serious compliance issues with both the NYSE and debt covenants. While there are some positive legal outcomes and cost reductions, the overall picture presents considerable uncertainty and risk.

Positives

• Sales and marketing costs decreased by 21% to $16.4 million in Q2 2025 and 18% to $34.4 million in H1 2025, reflecting reduced user acquisition and engagement marketing spend.
• General and administrative costs decreased by 3% to $16.7 million in Q2 2025 and 11% to $35.8 million in H1 2025, primarily due to lower employee-related costs.
• The Aarki segment showed strong revenue growth, with advertising revenue increasing by $3.4 million in Q2 2025 and $5.0 million in H1 2025 compared to the prior year periods.
• Skillz achieved favorable outcomes in several legal disputes, including receiving $7.5 million in March 2025 as a royalty payment from the AviaGames settlement, with additional annual payments expected through 2028.
• The company settled a vendor dispute for $2.75 million and another for $533 thousand, resolving outstanding claims.
• Skillz received $9.8 million from its D&O insurance carrier in connection with the Lien et al. v. Eagle Equity Partners II, LLC et al. litigation, largely offsetting the $10 million settlement.
• The court denied Papaya Gaming's motion for summary judgment on Skillz's claims and granted Skillz's motion for summary judgment on Papaya's counterclaims, indicating progress in that litigation.

Negatives

• Net loss for Q2 2025 was $17.9 million, a significant deterioration from a net income of $26.0 million in Q2 2024, primarily due to the absence of a large litigation settlement gain.
• Net loss for H1 2025 increased to $35.1 million from $0.7 million in H1 2024.
• Operating income shifted to a loss of $16.0 million in Q2 2025 from an income of $25.6 million in Q2 2024.
• Operating cash flow turned negative, with $31.7 million used in operating activities for H1 2025, compared to $23.4 million provided in H1 2024.
• Cash and cash equivalents decreased to $228.7 million as of June 30, 2025, from $271.9 million as of December 31, 2024.
• The company received a notice of default on its 2021 Senior Secured Notes due to delayed SEC filings, risking an Event of Default if compliance is not regained within 120 days of September 30, 2025.
• Skillz received a termination notice from Tether, whose games (Solitaire Cube and 21 Blitz) represented 45% of 2024 revenue, leading to ongoing litigation and potential material adverse effects.
• The company received a notice from the NYSE regarding non-compliance with listing requirements due to delayed filings and was granted an extension until December 17, 2025, to become current.
• Material weaknesses in internal control over financial reporting were identified in risk assessment and IT general controls, indicating deficiencies in financial reporting processes.

Risks

• The termination notice from Tether, whose top two games (Solitaire Cube and 21 Blitz) accounted for 45% of 2024 revenue, poses a material adverse effect risk if the games are removed and suitable replacements are not found.
• Failure to timely file all required SEC reports (10-K for 2024, 10-Q for Q1, Q2, and Q3 2025) could lead to an Event of Default on the 2021 Senior Secured Notes and potential delisting from the NYSE.
• Material weaknesses in internal control over financial reporting, particularly in risk assessment and ITGCs, could adversely affect the ability to record, process, summarize, and report financial information reliably.
• Significant revenue concentration, with three developer partners accounting for 69-70% of consolidated revenue in H1 2025, makes the company vulnerable to changes in relationships with these partners.
• The company is subject to indirect tax liabilities, and challenges by taxing authorities could result in additional tax liabilities that may materially impact financial statements.
• Ongoing litigation, including with Tether, Voodoo SAS, and Papaya Gaming, carries inherent uncertainties and could result in unfavorable outcomes, significant legal expenses, or damages.
• The reduction in user acquisition (UA) marketing and engagement marketing expenses is expected to continue to result in a reduction in revenue.

Future Outlook

The company expects a continued reduction in revenue due to lower user acquisition and engagement marketing expenses. It is actively working to regain compliance with NYSE listing requirements and the terms of its senior secured notes by filing all overdue financial reports. The outcome of the Tether litigation, which involves a significant portion of the company's past revenue, remains uncertain and could materially impact future operations.

Management Comments

• Management will continue to enhance and standardize policies and procedures across the Company to ensure consistency and performance of internal controls.
• 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.
• Management will continue to engage, educate and train personnel, including external consultants, throughout the Company on the importance of documenting and following internal controls.

Industry Context

The mobile gaming and AI advertising industries are dynamic, with companies like Skillz navigating challenges such as user acquisition costs and platform monetization. Skillz's strategy of reducing marketing spend, while impacting revenue, aims to improve profitability. The ongoing legal disputes, particularly concerning the use of 'bots' and patent infringement, highlight competitive pressures and intellectual property challenges within the mobile gaming sector. The reliance on a few key developers also underscores the importance of strong platform relationships in this ecosystem.

Corporate Governance

Legal Proceedings

• **Former Employee Lawsuit**: Resolved with a final award of $6.7 million, plus $733 thousand in post-judgment interest. The former employee's appeal regarding additional interest was abandoned.
• **Vendor Disputes**: Two disputes settled. One for $2.75 million paid in March 2025, and another for $533 thousand paid in June 2025.
• **Skillz v. AviaGames**: Settled for a total of $80.0 million, with Skillz receiving $48.0 million initially and an additional $7.5 million in March 2025 as the first of four annual royalty payments.
• **Skillz v. Tether Litigation**: Tether issued a termination notice for all agreements, effective September 1, 2025, for convenience and alleged cause. Skillz filed suit in Delaware, alleging breach of contract. Tether filed counterclaims exceeding $1 million. Skillz moved to dismiss counterclaims, with a hearing set for January 23, 2026. A trial is scheduled for August 2026. Tether's games accounted for 45% of 2024 revenue.
• **Hanna v. Paradise, et al. (De-SPAC Litigation)**: A putative derivative complaint alleging breaches of fiduciary duties and unjust enrichment related to a March 2021 public offering. Settled in principle for $10 million, largely offset by $9.8 million in D&O insurance recovery. Court ordered limited discovery on director independence.
• **Skillz v. Voodoo SAS et al.**: Skillz filed suit alleging false advertising and unfair competition (use of bots). Motions for preliminary injunction and dismissal are fully briefed and awaiting court decisions.
• **Skillz v. Papaya Gaming, Ltd., et al.**: Skillz sued for false advertising and unfair business practices (use of bots). The court denied Papaya's motion to dismiss Skillz's claims and later granted Skillz's motion for summary judgment on Papaya's counterclaims. Rulings on expert testimony admissibility are pending.
• **Lien, et al. v. Eagle Equity Partners II, LLC, et al.**: Class action against former officers and directors of Flying Eagle Acquisition Corp. (Skillz's predecessor). Settled for $10 million, with Skillz obligated to indemnify legal costs, offset by $9.8 million D&O insurance recovery.
• **Termination of Operating Lease**: Settled with the landlord of the former San Francisco headquarters for a lump sum payment of $14.0 million in fiscal year 2025, resolving the dispute.
• **Indirect Taxes**: The company has indirect tax liabilities of $15.4 million as of June 30, 2025, and is undergoing an examination in the State of Washington. Potential for additional tax liabilities if positions are challenged.

Related Party Transactions

• The AviaGames settlement included a Side Letter Agreement with Big Run Studios, Inc., a game developer, providing that a portion of the settlement funds allocated to Big Run Studio be utilized to repay $2.0 million outstanding under a Loan and Security Agreement with Skillz. Skillz received $48.0 million of the $50.0 million initial settlement, with $2.0 million of that satisfying the loan.

Stakeholder Impact

• **Shareholders**: Significant net losses and negative operating cash flow could erode shareholder value. The NYSE non-compliance and potential delisting, along with the Tether litigation, introduce substantial uncertainty and risk to the stock price. Share repurchase program aims to return value but is offset by financial performance.
• **Employees**: Stock-based compensation remains a component of overall compensation. The company's 401(k) plan includes employer matching contributions.
• **Customers (End-users)**: End-user incentive programs (Bonus Cash, Ticketz) are provided to drive engagement, but reduced marketing spend may impact user acquisition and retention. The Tether litigation could affect the availability of popular games.
• **Developers**: Revenue concentration from a few developer partners (69-70% from three partners) highlights the critical importance of these relationships. The Tether litigation demonstrates the risks associated with developer agreements.
• **Creditors (Senior Secured Note Holders)**: The notice of default on the 2021 Senior Secured Notes due to delayed filings creates a risk of an Event of Default if compliance is not regained, potentially impacting the company's debt obligations.

Next Steps

• File the Quarterly Report on Form 10-Q for the quarter ending September 30, 2025, to complete the necessary steps to regain compliance with NYSE listing requirements and debt covenants.
• Skillz's motion to dismiss the majority of Tether's counterclaims is set for a hearing on January 23, 2026.
• A trial for Skillz's affirmative claims against Tether and Tether's counterclaims is scheduled for August 2026.
• Further briefing in support of summary judgment on demand futility grounds is expected in the Hanna v. Paradise, et al. litigation.
• The lease for new office space in Bangalore, India, will commence on August 18, 2025.
• The company is evaluating the impact of the newly enacted One Big Beautiful Bill Act (OBBBA) on its consolidated financial statements.

Key Dates

Recommendation

The company's financial performance has significantly deteriorated, marked by a substantial shift from net income to a considerable net loss and negative operating cash flow. Critical compliance issues with the NYSE and debt covenants, stemming from delayed filings, introduce immediate and severe risks, including potential delisting and an Event of Default. The ongoing litigation with Tether, a developer responsible for 45% of 2024 revenue, poses an existential threat to a major revenue stream. Furthermore, identified material weaknesses in internal controls indicate fundamental operational deficiencies. While some legal disputes have seen favorable outcomes and cost-cutting measures are in place, the cumulative weight of these negative factors creates an extremely high-risk profile with significant downside potential, making a 'strong sell' recommendation appropriate for investors.

Keywords

Skillz, mobile gaming, eSports, Aarki, advertising technology, SEC filing, 10-Q, financial results, litigation, patent infringement, corporate governance, debt default, NYSE listing, share repurchase, internal controls