Skillz Inc.SKLZ
Skillz Inc. Goodwill & Intangibles Disclosure
Goodwill and Intangible Assets
Goodwill
The Company observed continued market volatility including declines in its market capitalization and revised its financial outlook in August 2022, which was identified as a potential indicator of impairment. As a result, the Company performed an interim quantitative goodwill impairment evaluation as of August 31, 2022, and determined the fair value of its reporting unit was greater than its carrying value and did not record a goodwill impairment charge.
During the fiscal year 2022 annual impairment test on November 1, 2022, the Company performed a qualitative assessment of these factors to determine whether it was more likely than not that the fair value of the reporting unit was less than the carrying amount. As of November 1, 2022, it was determined that it was not more likely than not that the fair value of the Skillz reporting unit was less than its carrying amount.
Management determined that an additional interim goodwill impairment test was necessary as of December 31, 2022, due to the sharp decline in Skillz stock price and market capitalization from November 1, 2022 to December 31, 2022. As a result, the Company performed a quantitative goodwill impairment evaluation as of December 31, 2022. As the Company’s estimated enterprise value was significantly below its carrying value, the Company’s quantitative assessment was based on the net asset value method. Under this method, the impairment was based on a comparison of the estimated fair value of the Company’s net assets (excluding goodwill) to the carrying value of its stockholders’ equity. Certain adjustments were required to the carrying value of assets and liabilities to estimate their fair value, the most significant of which related to the Company’s long-term debt, for which the fair value of the long-term debt was estimated based on secondary market quotes, as described in Note 10. Based on the results of the net asset approach, the Company recorded an impairment loss for the total carrying value of goodwill of $85.5 million. The impairment was recorded within Impairment of goodwill and long-lived assets in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2022. There was no goodwill impairment recorded for the year ended December 31, 2021.
The following table presents details of changes to the Company’s goodwill balance for the year ended December 31, 2022:
Goodwill | |||||
| (As Restated) | |||||
| Balance as of December 31, 2021 | $ | 85,872 | |||
Adjustment (1) | (409) | ||||
| Impairment | (85,463) | ||||
| Balance as of December 31, 2022 | $ | — | |||
(1) During the first quarter of 2022, the Company recorded a measurement period adjustment to increase the carrying value of the identifiable net assets acquired as a result of the Aarki acquisition, with a corresponding decrease to goodwill. See Note 4, Business Combinations, for more details.
Intangible Assets, Net
Intangible assets consist of purchased intangible assets, including developed technology, customer relationships, trademarks and tradenames. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
During 2022, the Company identified indicators of impairment related to the Aarki asset group, which is primarily composed of intangible assets. In August 2022, the Company revised its 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, resulting in unrealized cost-saving synergies, which the Company identified as an indicator of impairment related to the Aarki asset group. Additionally, during the fourth quarter of 2022, additional indicators of impairment were identified, most notably sharp declines in the Company’s stock price and overall market capitalization near the end of 2022, and secondarily, a downward revision to the Aarki business forecast and related expected cash flows attributable to the Aarki asset group. As a result of these indicators of impairment, in the third quarter and in the fourth quarter of 2022, the Company reviewed the undiscounted future cash flows for the Aarki asset group, and the results of the analysis in each case indicated the carrying amount of the asset group was not expected to be recovered. As a result, the Company performed analyses to estimate the fair value of the long-lived asset group. In each quarter, the fair value of the Aarki asset group was estimated using an income approach. Under the income approach, a long-lived asset group’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset group. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. Significant factors considered in the calculation of the fair value of the long-lived asset group were projected revenue, gross margins, operating expenses, the remaining economic life of the overall long-lived asset group based on the primary asset of the group, which was determined to be the developed technology, along with the discount rates used to derive the estimated present values of future cash flows. The Company applied judgment which involved the use of significant assumptions with respect to its income forecast such as the level and timing of future cash flows.
As of December 31, 2022, the Company determined the Aarki asset group had no remaining fair value and recorded impairment charges totaling $66.7 million related to intangible assets during the year ended December 31, 2022.
The components of intangible assets consisted of the following as of December 31, 2022:
| Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | ||||||||||||||||||||
| Developed technology | $ | 60,400 | $ | (9,249) | $ | (51,151) | $ | — | |||||||||||||||
| Customer relationships | 26,200 | (10,699) | (15,501) | — | |||||||||||||||||||
| Intangible assets, net | $ | 86,600 | $ | (19,948) | $ | (66,652) | $ | — | |||||||||||||||
The components of intangible assets consisted of the following as of December 31, 2021:
Weighted Average Remaining Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||
Developed technology | 7.58 | $ | 60,400 | $ | (3,460) | $ | 56,940 | ||||||||||||||||||||||||||||||||||
Customer relationships | 2.58 | 26,200 | (4,003) | 22,197 | |||||||||||||||||||||||||||||||||||||
Trademark and trade name | — | 200 | (200) | — | |||||||||||||||||||||||||||||||||||||
Intangible assets, net | $ | 86,800 | $ | (7,663) | $ | 79,137 | |||||||||||||||||||||||||||||||||||
The following table sets forth the activity related to finite-lived intangible assets:
| Year Ended December 31, | |||||
| 2022 | |||||
| Beginning balance at December 31, 2021 | $ | 79,137 | |||
| Amortization | (12,485) | ||||
| Impairment | (66,652) | ||||
| Ending balance at December 31, 2022 | $ | — | |||
The following table summarizes amortization expense associated with finite-lived intangible assets recognized in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022 and 2021 as follows:
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of revenue | $ | 5,789 | $ | 3,460 | |||||||
| Sales and marketing | 6,696 | 4,003 | |||||||||
| General and administrative | — | 200 | |||||||||
| Total amortization expense | $ | 12,485 | $ | 7,663 | |||||||
About Goodwill & Intangibles Disclosures
Goodwill and intangible asset disclosures reveal the premium paid in acquisitions and how management assesses whether that premium retains its value. Since goodwill is no longer amortized under US GAAP, the annual impairment test is the only mechanism that adjusts carrying values downward — making the assumptions behind that test critically important for investors.
Key signals: a history of goodwill impairments suggests management consistently overpays for acquisitions. Watch the gap between reporting unit fair value and carrying amount — when fair value exceeds carrying amount by less than 10-20%, a small decline in business performance could trigger a write-down. For finite-lived intangibles, examine useful life assumptions across customer relationships, technology, and trade names; aggressive estimates inflate near-term earnings. Compare total intangibles-to-total-assets ratios against peers to assess acquisition dependency. Rising goodwill as a percentage of equity can signal balance sheet fragility.