Following an 84.5% fall in the price of its common shares over the past year, Skillz (NYSE:SKLZ) presently trades on a trailing 12-month price-to-sales multiple of 0.63x. During the early 2021 SPAC bubble, the San Francisco-based mobile games competition platform previously traded at a high of $43 per share with a price-to-sales ratio of roughly 60x. It is now clear how management’s predictions of brisk sales growth and the company’s inclusion in Cathie Wood’s flagship ARK Innovation Fund influenced bulls. Does the current low value offer a chance or just another promise that is likely to be broken?

The $217 million market value of Skillz serves as the benchmark for returns in 2023. The corporation has a Sisyphean task to stop revenue under a persistent decrease and to reduce net losses against a shrinking liquidity position even though expectations are being developed from a low base. While attempting to reestablish compliance with the NYSE minimum stock listing requirement, this is being done. It would be accurate to say that once-euphoric hopes for a firm that was once included in CNBC’s list of 2019 disruptors have been replaced with fear and an almost somber acceptance of failure.

Increasing Net Losses, Declining Sales, and Poor Liquidity

Game designers can incorporate and host casual esports competitions for mobile gamers using Skillz. The platform supports competitive games like Blackout Bingo, Solitaire Cube, and Dominoes Gold at the moment and aids in player matching depending on ability levels.

Declining sales, accompanied by disproportionate net losses and cash burn, are the company’s main problem. Since the beginning of its fiscal 2022, revenue has been declining, with sales for the most recently reported quarter of $60.3 million being a reduction in revenue for a third straight quarter. The management claims that the macroeconomic environment is difficult for mobile gaming, which has contributed to this ongoing decrease. This has led to a low retention rate for its more experienced players while cheating and fraudulent behavior by new users in some non-US areas has disrupted revenue. The misuse of system discounts and rewards, like their friend referral scheme, was detected by Skillz.

With the latter, users have the option to receive rewards without actually referring to actual members. With management being aggressive in their drive to cut expenses and stop a cash burn position that threatens their future, the company’s reduction in its marketing expenditure has also had an impact. The third quarter of Skillz’s fiscal 2022 ended with a net loss of $78.5 million, an increase from the second quarter’s loss of $60.6 million and a significant decline from the comparable period’s wide non-cash profit of $50.8 million. With net losses accounting for 130% of revenue for the quarter, revenue decreased by 41% from the comparable period a year before. The one-time severance payment associated with a series of employment layoffs that were implemented to eliminate $10 million from their annual wage bull, however, meant that net losses during the quarter would have been excessive.

Requiem for a Dream Gone By

By the end of the following week, the company is expected to release its fourth-quarter results. It is anticipated that revenue will total around $48.72 million, a 55% decrease from the same period last year. A third-quarter negative EPS of $0.19 is expected to increase sequentially to a negative GAAP EPS of $0.14.

As a result of net losses, the company’s cash and equivalents decreased from a peak of $692 million in the summer of 2021 to $465 million at the end of the third quarter. Importantly, the cash burn from operations for the quarter was $21.8 million, a significant decrease from $61.6 million in the previous quarter and $38.3 in the comparable period a year earlier.

The bulls’ medium- to long-term hope is formed by this. Although I anticipate negative cash flow for the upcoming quarters, this is quickly turning around thanks to cost-cutting measures. As a result, the company has a cash runway of more than 25 quarters, or almost six years, versus a liquidity position that increased to $558 million when marketable securities were included. As it works through the rightsizing of its operational cost footprint, Skillz could now take the initiative to start a reverse stock split in order to remain in line with the NYSE minimum listing standards.

The corporation holds a net cash position of about $270 million after accounting for a total debt of $288.7 million. Skillz is currently trading at less than cash on its balance sheet with a tangible book value of $325.6 million because this accounts for 125% of its market cap. Even in light of the company’s dismal revenue positioning, it is difficult to advise selling it. Although the company’s near-term prospects may be unknown and may still be disappointing, its strong liquidity position has given it time to stabilize its revenue while also acting as a hedge against the danger of it continuing to operate as a going concern. The corporation is also in the process of restating its financial statements, with the most significant errors being an increase in end-user tax liabilities, indirect tax liabilities in foreign countries, and the impairment of a few long-lived assets. It is unlikely that these modifications will have a positive effect on net cash position and cash burn.

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