Skillz Stock Dips on Warrant Redemption

Shares of Skillz (NYSE: SKLZ) have dipped on Friday after the company announced that it is redeeming all of its public warrants. Skillz, which operates a platform for competitive mobile games, went public by merging with a special purpose acquisition company (SPAC), Flying Eagle Acquisition, last year.

The stock has gained popularity in part due to interest from prominent growth investor Cathie Wood.

On Friday, July 16th, Skillz stock dipped by 5%.

Use it or lose it

Pursuant to the warrant agreement, Skillz has the ability to redeem its outstanding public warrants if the stock price is greater than $18 for 20 trading days within a window of 30 trading days. This requirement was satisfied on July 13, according to Skillz.

SPAC warrants typically allow investors to purchase the underlying stock at an exercise price of $11.50. Once a company opts to redeem the derivatives, warrant holders have 30 days to exercise the security. Investors that do not exercise will only receive $0.01 per warrant, effectively losing all of the value unless they exercise. In Skillz’s case, warrant holders will have until August 16 to exercise.

Warrant redemptions are dilutive events, as the company issues new stock that is delivered upon exercise. That also means the company will raise capital that it can use for general corporate purposes such as funding growth initiatives or other operating expenses. Due to the dilutive nature of warrant redemptions, companies that choose to redeem their warrants usually see their stocks decline.

Why companies prefer redemption

Outstanding warrants can also represent an accounting headache for finance chiefs. Earlier this year, the SEC issued guidance that SPAC warrants should be accounted for as liabilities, with changes in market value being recorded on the income statement. 

Since warrants are volatile derivatives, that can create volatility in reported earnings primarily caused by market fluctuations that are unrelated to the fundamental performance of the underlying business. In some cases, the impacts on reported financial results can be dramatic.

By redeeming warrants, corporate CFOs are able to raise cash to strengthen the balance sheet, streamline reporting, and simplify their capital structures. 

Looking ahead

Skillz is a top holding for Cathie Wood’s ARK Invest thanks to its attractive growth profile. The company recently reported a 92% jump in first quarter revenue, with paying monthly active users (MAUs) reaching 467,000.

Gross marketplace volume (GMV) soared 85% to $566.6 million last quarter. The company also raised its outlook for 2021. Revenue is now forecast to be $375 million this year, up from its previous guidance of $366 million.

The company had $613 million in cash at the end of March. While the warrant redemption is now occurring in the third quarter, the company may provide some detail around how much capital it expects to raise when it reports second quarter earnings on August 3.

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