Snail(SNAL) - 2023 Q3 - Quarterly Report

FORM 10-Q Filing Information Filing Details Snail, Inc. provides its Form 10-Q filing details, confirming its status as a non-accelerated, smaller reporting, and emerging growth company - Snail, Inc. filed its Quarterly Report on Form 10-Q for the period ended September 30, 2023[2] - The company is incorporated in Delaware with its principal executive offices in Culver City, CA[2][3] Registrant Status | Status | Indication | | :---------------------- | :--------- | | Large accelerated filer | ☐ | | Accelerated filer | ☐ | | Non-accelerated filer | ☒ | | Smaller reporting company | ☒ | | Emerging growth company | ☒ | Outstanding Shares As of November 13, 2023, Snail, Inc. reported 7,901,145 shares of Class A Common Stock and 28,748,580 shares of Class B Common Stock outstanding Outstanding Shares as of November 13, 2023 | Class of Common Stock | Outstanding Shares as of November 13, 2023 | | :-------------------- | :----------------------------------------- | | Class A Common Stock | 7,901,145 | | Class B Common Stock | 28,748,580 | Table of Contents Report Structure The Table of Contents outlines the Form 10-Q's structure, dividing it into Part I (Financial Information) and Part II (Other Information) - The report is structured into two main parts: Part I. Financial Information and Part II. Other Information[8] - Part I includes Condensed Consolidated Financial Statements, Management's Discussion and Analysis of Results of Operations, Quantitative and Qualitative Disclosures about Market Risk, and Controls and Procedures[8] - Part II covers Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities and Use of Proceeds, Defaults Upon Senior Securities, Mine Safety Disclosures, Other Information, and Exhibits[8] Cautionary Statement Regarding Forward-Looking Statements Forward-Looking Statements This section warns that the report contains forward-looking statements based on management's beliefs, subject to risks and uncertainties that may cause actual results to differ materially - The report contains forward-looking statements identifiable by words like 'anticipate,' 'believe,' 'expect,' and 'plan'[9] - These statements are based on management's beliefs and assumptions and are subject to risks and uncertainties, which could cause actual results to differ materially[10] - Key forward-looking matters include profitability, capital raising, new game launches, user base growth, competition, third-party platform relationships, international expansion, intellectual property protection, and strategic acquisitions[12] PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Snail, Inc.'s unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, Equity, and Cash Flows, with accompanying notes Condensed Consolidated Balance Sheets Total assets decreased from $72.8 million at December 31, 2022, to $61.4 million at September 30, 2023, primarily due to reduced cash, while total stockholders' equity significantly declined Condensed Consolidated Balance Sheet Highlights | Metric | Sep 30, 2023 ($) | Dec 31, 2022 ($) | Change ($) | Change (%) | | :-------------------------------- | :--------------- | :--------------- | :--------- | :--------- | | Cash and cash equivalents | 4,948,832 | 12,863,817 | (7,914,985) | -61.53% | | Restricted cash and cash equivalents | 1,115,084 | 6,374,368 | (5,259,284) | -82.51% | | Total current assets | 35,754,721 | 42,636,723 | (6,882,002) | -16.14% | | Total assets | 61,435,942 | 72,772,571 | (11,336,629) | -15.58% | | Total current liabilities | 53,484,215 | 51,582,329 | 1,901,886 | 3.69% | | Total liabilities | 61,290,892 | 63,407,887 | (1,116,995) | -1.76% | | Total stockholders' equity | 145,050 | 9,364,684 | (9,219,634) | -98.45% | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The statements show a 45.3% year-over-year decrease in net revenue for the nine months ended September 30, 2023, resulting in a net loss of $11.5 million compared to a net income of $3.3 million in the prior year Condensed Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :------------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Revenues, net | 8,981,135 | 15,614,171 | 32,331,876 | 59,132,284 | | Cost of revenues | 9,463,086 | 12,424,067 | 29,659,788 | 40,397,396 | | Gross profit, (loss) | (481,951) | 3,190,104 | 2,672,088 | 18,734,888 | | Total operating expenses | 5,097,932 | 4,922,484 | 16,641,567 | 15,009,402 | | (Loss) income from operations | (5,579,883) | (1,732,380) | (13,969,479) | 3,725,486 | | Net (loss) income | (4,434,171) | (1,545,566) | (11,490,663) | 3,274,370 | | Basic (Loss) income per share (Class A and B) | (0.12) | (0.04) | (0.31) | 0.09 | - Net revenue decreased by 42.5% for the three months and 45.3% for the nine months ended September 30, 2023, compared to the same periods in 2022[18] - The company reported a net loss of $11.5 million for the nine months ended September 30, 2023, a significant decline from a net income of $3.3 million in the prior year[18] Condensed Consolidated Statements of Equity Total stockholders' equity decreased substantially from $9.4 million at December 31, 2022, to $0.1 million at September 30, 2023, primarily due to accumulated deficit and treasury stock repurchases Condensed Consolidated Statements of Equity Highlights | Metric | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------- | :--------------- | :--------------- | | Class A common stock | 925 | 925 | | Class B common stock | 2,875 | 2,875 | | Additional paid-in capital | 25,945,549 | 23,436,942 | | Accumulated deficit | (16,346,691) | (4,863,250) | | Treasury stock at cost | (3,671,806) | (3,414,713) | | Total Snail, Inc. equity | 5,643,167 | 14,855,579 | | Total stockholders' equity | 145,050 | 9,364,684 | - Accumulated deficit increased significantly from $(4.86) million at December 31, 2022, to $(16.35) million at September 30, 2023, reflecting the net losses incurred[15][24] - The company repurchased 152,626 shares of common stock for $257,093 during the nine months ended September 30, 2023, increasing treasury stock[22] Condensed Consolidated Statements of Cash Flows Cash used in operating activities increased substantially from $0.7 million in 2022 to $10.8 million in 2023, leading to a $13.2 million net decrease in cash and equivalents for the nine months ended September 30, 2023 Condensed Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :------------------------------------ | :------------------------------ | :------------------------------ | | Net cash used in operating activities | (10,794,759) | (665,737) | | Net cash provided by investing activities | - | 1,210,307 | | Net cash used in financing activities | (2,399,900) | (1,633,193) | | Net decrease in cash and cash equivalents, and restricted cash and cash equivalents | (13,174,269) | (1,141,433) | | Cash and cash equivalents, and restricted cash and cash equivalents – end of period | 6,063,916 | 15,412,682 | - The significant increase in cash used in operating activities is primarily due to the net loss incurred and changes in working capital[26] - Financing activities included repayments on promissory notes and revolving loans, partially offset by borrowings on notes payable and proceeds from convertible notes[26] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and breakdowns of the condensed consolidated financial statements, covering operations, accounting policies, revenue, assets, liabilities, debt, equity, and contingencies NOTE 1 – PRESENTATION AND NATURE OF OPERATIONS This note describes Snail, Inc.'s business as an interactive entertainment developer and publisher, its IPO, and raises substantial doubt about its ability to continue as a going concern due to net losses and debt - Snail, Inc. was incorporated in January 2022, becoming the parent of Snail Games USA Inc. after an IPO in November 2022[30][32] - The company is a global developer and publisher of interactive entertainment content for various platforms[30] - Management has identified substantial doubt about the company's ability to continue as a going concern due to a net loss of $11.5 million and negative cash flows of $13.2 million for the nine months ended September 30, 2023, and $13.7 million in current debt[43][48] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's key accounting policies, including revenue recognition, cost of revenues, operating expenses, non-controlling interests, cash, receivables, fair value, intangible assets, income taxes, and the share repurchase program - Revenue is primarily derived from digital and physical game sales, including DLCs and mobile in-app purchases, recognized when control is transferred to customers[50] - The company acts as an agent for sales via Xbox Live, PlayStation Network, Steam, Epic Games Store, My Nintendo Store, and retail distributors (net revenue basis), and as a principal for Apple App Store and Google Play Store sales (gross revenue basis)[55] Cost of Revenues Components (9 Months Ended Sep 30) | Component | 2023 ($) | 2022 ($) | | :------------------------------------ | :------- | :------- | | Software license royalties – related parties | 6,878,563 | 13,314,258 | | License and amortization – related parties | 14,753,623 | 19,052,938 | | Internet, server and data center | 4,929,631 | 4,155,164 | | Total | 29,659,788 | 40,397,396 | - Stock-based compensation expense for the nine months ended September 30, 2023, was $622,007, with no such expense in the prior year[66][68][98][189] - The company repurchased 1,350,275 shares of Class A common stock for approximately $3.7 million under its Share Repurchase Program as of September 30, 2023[102] NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS This note disaggregates revenue by geographic region, platform, and distribution channel, showing a significant decline in total net revenue for both the three and nine months ended September 30, 2023, compared to 2022 Net Revenue by Geographic Region (9 Months Ended Sep 30) | Geographic Region | 2023 ($) | 2022 ($) | | :---------------- | :------- | :------- | | United States | 28,757,507 | 55,025,810 | | International | 3,574,369 | 4,106,474 | | Total | 32,331,876 | 59,132,284 | Net Revenue by Platform (9 Months Ended Sep 30) | Platform | 2023 ($) | 2022 ($) | | :------- | :------- | :------- | | Console | 13,262,988 | 27,157,380 | | PC | 12,097,176 | 22,943,193 | | Mobile | 4,626,820 | 7,346,822 | | Other | 2,344,892 | 1,684,889 | | Total | 32,331,876 | 59,132,284 | Net Revenue by Distribution Channel (9 Months Ended Sep 30) | Distribution Channel | 2023 ($) | 2022 ($) | | :------------------- | :------- | :------- | | Digital | 25,360,164 | 50,100,573 | | Mobile | 4,626,820 | 7,346,822 | | Physical retail and other | 2,344,892 | 1,684,889 | | Total | 32,331,876 | 59,132,284 | - Deferred revenue balance as of September 30, 2023, was $11.5 million, with $5.8 million expected to be recognized as current revenue and $5.7 million as long-term revenue[110] NOTE 4 – CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AND CASH EQUIVALENTS Total cash and equivalents decreased significantly from $15.4 million at September 30, 2022, to $6.1 million at September 30, 2023, primarily due to the release of restricted cash and overall cash burn Cash and Restricted Cash and Cash Equivalents | Category | Sep 30, 2023 ($) | Sep 30, 2022 ($) | | :-------------------------------------------------- | :--------------- | :--------------- | | Cash and cash equivalents | 4,948,832 | 9,044,666 | | Restricted cash and cash equivalents | 1,115,084 | 6,368,016 | | Total cash and cash equivalents, and restricted cash | 6,063,916 | 15,412,682 | - Restricted cash is held to secure standby letters of credit with landlords[71][111] - On June 21, 2023, $5,273,391 of restricted cash was released following an amendment to the revolving loan[111] NOTE 5 – ACCOUNTS RECEIVABLE – RELATED PARTY Accounts receivable from related parties, primarily mobile game revenues collected by SDE Inc., increased slightly from $11.3 million at December 31, 2022, to $11.6 million at September 30, 2023 - Accounts receivable – related party represents mobile game revenues collected by SDE Inc., a related party, on behalf of the Company[112] Net Accounts Receivable – Related Party | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------------- | :--------------- | :--------------- | | Accounts receivable – related party | 13,578,520 | 13,519,409 | | Less: Accounts payable – related party | (1,979,291) | (2,175,225) | | Net accounts receivable – related party | 11,599,229 | 11,344,184 | - The related party is 100% owned and controlled by the wife of the Company's Founder, Chief Strategy Officer, and Chairman[112] NOTE 6 – DUE FROM SHAREHOLDER A $94.9 million loan to the Company's Founder was assigned to Suzhou Snail and settled as an in-kind dividend in April 2022, resulting in no outstanding balance as of December 31, 2022 - A $94.9 million loan to the Company's Founder was assigned to Suzhou Snail and settled as an in-kind dividend on April 26, 2022[114][115] - No outstanding balance for 'other receivable from related party' as of December 31, 2022, and no interest accrued in the nine months ended September 30, 2023[114] NOTE 7 – DIVIDEND DISTRIBUTION In April 2022, the Company declared an in-kind dividend of $94.9 million and a cash dividend of $8.2 million, with a $1.9 million withholding tax refund received in August 2023 - In April 2022, the Company declared an in-kind dividend of $94.9 million and a cash dividend of $8.2 million[115] - A refund of $1,886,600 for dividend withholding taxes was recognized in April 2023 and received in August 2023[115] NOTE 8 – PREPAID EXPENSES - RELATED PARTY Prepaid expenses to related parties, primarily for ARK franchise license rights, increased from $5.6 million at December 31, 2022, to $8.1 million at September 30, 2023, due to a $2.5 million prepayment for an ARK 1 DLC - The Company amended its exclusive software license agreement with SDE for the ARK franchise in March 2023[116] - A $2.5 million prepayment was made for exclusive license rights for an ARK 1 DLC to SDE during the nine months ended September 30, 2023[117] Prepaid Expenses – Related Party | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :--------------- | :--------------- | :--------------- | | Prepaid royalties | 582,500 | 582,500 | | Prepaid licenses | 7,500,000 | 5,000,000 | | Total | 8,082,500 | 5,582,500 | NOTE 9 – PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets increased from $10.6 million at December 31, 2022, to $11.5 million at September 30, 2023, driven by a new litigation receivable and deferred offering costs Prepaid Expenses and Other Current Assets | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------------- | :--------------- | :--------------- | | Prepaid income taxes | 9,655,160 | 9,822,603 | | Other receivable | 1,500,000 | — | | Deferred offering costs | 105,411 | — | | Total | 11,482,303 | 10,565,141 | - A new litigation receivable of $1.5 million was recorded as of September 30, 2023, which was received in October 2023[118] NOTE 10 – PROPERTY, PLANT AND EQUIPMENT, NET Property, plant, and equipment, net, decreased from $5.1 million at December 31, 2022, to $4.8 million at September 30, 2023, primarily due to depreciation and amortization expense Property, Plant and Equipment, Net | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------- | :--------------- | :--------------- | | Total gross amount | 9,534,357 | 9,534,357 | | Accumulated depreciation | (4,765,642) | (4,419,558) | | Property, plant and equipment, net | 4,768,715 | 5,114,799 | - Depreciation and amortization expense was $346,084 for the nine months ended September 30, 2023[120] NOTE 11 – INTANGIBLE ASSETS Net intangible assets decreased from $1.38 million at December 31, 2022, to $0.13 million at September 30, 2023, mainly due to amortization of license rights, with a weighted average remaining useful life of 0.3 years Intangible Assets, Net | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------- | :--------------- | :--------------- | | License rights from related parties | 130,435 | 1,384,058 | | Intangible assets - other | 271,918 | 272,521 | | Total | 402,353 | 1,656,579 | - Amortization expense for intangible assets was $1,254,226 for the nine months ended September 30, 2023, a significant decrease from $5,803,610 in the prior year[123] - The weighted average remaining useful life for amortization of intangible assets is 0.3 years as of September 30, 2023[123] NOTE 12 – ACCOUNTS PAYABLE — RELATED PARTY Accounts payable to related parties, primarily Suzhou Snail, decreased slightly from $19.9 million at December 31, 2022, to $19.7 million at September 30, 2023, with reduced license costs incurred - Accounts payable to related parties, mainly Suzhou Snail, totaled $19,669,868 as of September 30, 2023[124] - License costs incurred from Suzhou Snail decreased from $316,869 in the nine months ended September 30, 2022, to $201,609 in the same period of 2023[124] NOTE 13 – LOAN AND INTEREST RECEIVABLE — RELATED PARTY The outstanding balance of loan and interest receivable from related parties increased slightly from $101,753 at December 31, 2022, to $103,249 at September 30, 2023, with minimal interest income - A $200,000 loan to a Suzhou Snail subsidiary was assumed by Suzhou Snail in February 2022[125] Loan and Interest Receivable – Related Party | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------------- | :--------------- | :--------------- | | Loan and interest receivable – related parties | 103,249 | 101,753 | - Interest earned on related party loans receivable was $1,496 for the nine months ended September 30, 2023[125] NOTE 14 – LOAN PAYABLE AND INTEREST PAYABLE — RELATED PARTIES The Company's $400,000 loan payable to related parties was fully paid off by July 2022, with $527,770 in unpaid interest remaining as of September 30, 2023, and no interest expense incurred in 2023 - The Company's loan payable to related parties was fully paid off by July 2022[126] - Total unpaid interest amounted to $527,770 as of September 30, 2023 and December 31, 2022[128] - No interest expense was incurred for loans payable to related parties during the three and nine months ended September 30, 2023[128] NOTE 15 – REVOLVING LOAN, SHORT TERM NOTES AND LONG - TERM DEBT Total debt, net of discount, decreased from $17.7 million at December 31, 2022, to $13.7 million at September 30, 2023, with the company receiving waivers for non-compliance with debt covenants Debt Balances (Sep 30, 2023 vs. Dec 31, 2022) | Debt Instrument | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------------- | :--------------- | :--------------- | | 2021 Revolving Loan | 6,000,000 | 9,000,000 | | 2021 Promissory Note | 2,832,231 | 2,891,820 | | 2022 Short Term Note | 2,083,333 | 5,833,333 | | 2023 Convertible Notes | 515,217 | - | | 2023 Note Payable | 2,275,000 | - | | Total debt, net of discount | 13,705,781 | 17,725,153 | - The Company was not in compliance with debt service coverage ratios for the 2021 Revolving Loan and 2022 Short Term Note for the twelve months ended September 30, 2023, but received waivers from the lender[129] - Future minimum payments for long-term debt include $9.97 million for the remainder of 2023 and $1.58 million for 2024[132] NOTE 16 – INCOME TAXES For the nine months ended September 30, 2023, the company recognized an income tax benefit of $3.0 million (effective tax rate of 21%), compared to an expense of $0.8 million in 2022, with no additional valuation allowance against deferred tax assets - The Company recognized an income tax benefit of $3,044,380 for the nine months ended September 30, 2023, compared to an income tax expense of $803,305 in the prior year[133] - The effective tax rate was 21% for the nine months ended September 30, 2023, consistent with the federal statutory rate[133] - No additional valuation allowance was recorded against deferred tax assets, contingent on future taxable income from new game releases[134] NOTE 17 – OPERATING LEASE RIGHT-OF-USE ASSETS Operating lease right-of-use assets decreased from $3.6 million at December 31, 2022, to $2.7 million at September 30, 2023, with $1.2 million in operating lease costs incurred and $3.46 million in future undiscounted lease payments Operating Lease Right-of-Use Assets, Net | Category | Sep 30, 2023 ($) | Dec 31, 2022 ($) | | :-------------------------------- | :--------------- | :--------------- | | Net operating lease right-of-use assets | 2,738,554 | 3,606,398 | - Operating lease costs were $1,198,467 for the nine months ended September 30, 2023[138] Future Undiscounted Lease Payments | Years ending December 31, | Amount ($) | | :------------------------ | :--------- | | Remainder of 2023 | 393,129 | | 2024 | 1,610,844 | | 2025 | 1,453,785 | | Total | 3,457,758 | NOTE 18 – COMMITMENTS AND CONTINGENCIES This note discusses legal proceedings, including a settled copyright infringement lawsuit with an upfront payment and an ongoing breach of contract lawsuit for over $3 million where recovery is unlikely due to an affiliate's bankruptcy - The Company settled a copyright infringement lawsuit with Angela Game in September 2023, receiving an upfront payment recorded as deferred revenue and other income[143] - A lawsuit for breach of contract related to a commercial lease seeks damages exceeding $3 million against Snail Games USA Inc[144] - INDIEV, an affiliate responsible for the lease obligations, filed for bankruptcy in October 2023, making cost recovery unlikely for the Company[146] NOTE 19 – EARNINGS (LOSS) PER SHARE For the nine months ended September 30, 2023, the company reported a basic and diluted loss per share of $(0.31), a significant decline from an income per share of $0.09 in the prior year - The Company uses the two-class method for EPS calculation, distinguishing between Class A and Class B common stock[149] Basic and Diluted EPS (9 Months Ended Sep 30) | Metric | 2023 ($) | 2022 ($) | | :------------------------------------ | :------- | :------- | | Net (loss) income attributable to Class A common stockholders | (2,477,768) | 3,218,022 | | Net (loss) attributable to Class B common stockholders | (9,005,673) | - | | Total net (loss) income attributable to Snail Inc and Snail Games USA Inc. | (11,483,441) | 3,218,022 | | Class A and B basic earnings per share | (0.31) | 0.09 | | Diluted (loss) earnings per Class A and B share | (0.31) | 0.09 | - Restricted stock units, underwriters warrants, and convertible debt warrants were excluded from diluted EPS calculation for 2023 due to their antidilutive effect[149] NOTE 20 – EQUITY This note details the company's equity structure, including Class A and Class B common stock, warrants, convertible debt, an equity line purchase agreement, and stock-based compensation for RSUs and PSUs - The Company has two classes of common stock: Class A (one vote per share) and Class B (ten votes per share), with Class B convertible to Class A[151] - In August 2023, the Company issued convertible notes with an aggregate principal of $1,080,000 and warrants to purchase 714,285 Class A shares[158] - The Company also entered into an Equity Line Purchase Agreement in August 2023, committing an investor to purchase up to $5,000,000 in Class A common stock, and issued warrants for 367,647 shares as a commitment fee[173][176] - Stock-based compensation expense for RSUs and PSUs totaled $622,007 for the nine months ended September 30, 2023[189] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses the company's financial performance, condition, and liquidity, highlighting significant declines in revenue and net income, and ongoing liquidity challenges Overview Snail, Inc., a global interactive entertainment developer, experienced significant declines in net revenue and shifted to a net loss for the three and nine months ended September 30, 2023, with its ARK franchise generating most revenues - Snail, Inc. is a leading global independent developer and publisher of interactive digital entertainment, with ARK: Survival Evolved as its flagship franchise[193] - The ARK franchise contributed 86.4% and 86.9% of revenues for the three and nine months ended September 30, 2023, respectively[193] Financial Performance Overview (3 & 9 Months Ended Sep 30) | Metric | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :---------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Net revenue | 9.0 million | 15.6 million | 32.3 million | 59.1 million | | Net (loss) income | (4.4) million | (1.5) million | (11.5) million | 3.3 million | Key Factors Affecting Our Business The company's business is influenced by content investment, user base growth, technology innovation, marketing, strategic relationships, reliance on third-party platforms, and seasonality - The company invests in content strategy to improve games, expand its gaming pipeline, and develop media/eSports content[195] - User base growth is crucial, with 42.8 million units sold between January 2016 and September 2023, but overall growth rate is expected to fluctuate[197][198] - Reliance on third-party distribution platforms (e.g., Xbox Live, PlayStation Network, Steam) means their policies and terms can significantly impact operations and financial performance[202] - Seasonality affects operating results, coinciding with new title introductions, DLC releases, and global holiday seasons[203] Key Performance Metrics and Non-GAAP Measures Units Sold decreased by 6.9% for the nine months ended September 30, 2023, while Bookings and EBITDA also saw significant declines, reflecting reduced sales and profitability Units Sold (in millions) | Period | 2023 | 2022 | Change | % Change | | :-------------------------- | :--- | :--- | :----- | :------- | | Three months ended Sep 30 | 1.2 | 1.2 | (0.0) | -0.1% | | Nine months ended Sep 30 | 3.9 | 4.2 | (0.3) | -6.9% | - Units Sold decreased by 0.3 million (6.9%) for the nine months ended September 30, 2023, primarily due to the anticipated release of ARK: Survival Ascended[207] Bookings (in millions) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :--- | :--- | :------- | :------- | | Three months ended Sep 30 | 10.5 | 11.3 | (0.8) | -7.3% | | Nine months ended Sep 30 | 33.1 | 51.8 | (18.7) | -36.1% | EBITDA (in millions) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :--- | :--- | :------- | :------- | | Three months ended Sep 30 | (5.1) | (1.5) | (3.6) | -228.7% | | Nine months ended Sep 30 | (13.3) | 4.5 | (17.8) | -396.0% | Components of Results of Operations This section details revenue recognition, cost of revenues (royalties, merchant fees, server costs), and operating expenses (G&A, R&D, advertising), all of which fluctuate with business growth and public company operations - Revenue is primarily derived from game sales through various gaming platforms, with recognition based on the transfer of control[218] - Cost of revenues includes software license royalty fees, merchant fees, server and database costs, and amortization[221] - General and administrative expenses are expected to increase due to public company operating costs and headcount expansion[222] - Research and development costs are expensed as incurred and are expected to increase with new game and technology development[223] Results of Operations Net revenues and gross profit significantly decreased for both the three and nine months ended September 30, 2023, driven by lower ARK sales, reduced ASPs, and non-recurring contract payments, while R&D expenses substantially increased Comparison of 3 Months Ended Sep 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :--- | :--- | :------- | :------- | | Revenues, net | 9.0 | 15.6 | (6.6) | (42.5)% | | Cost of revenues | 9.5 | 12.4 | (2.9) | (23.8)% | | Gross profit, (loss) | (0.5) | 3.2 | (3.7) | (115.1)% | | Research and development | 1.3 | 0.1 | 1.2 | 1,029.6% | | Loss from operations | (5.6) | (1.7) | (3.9) | (222.1)% | Comparison of 9 Months Ended Sep 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :--- | :--- | :------- | :------- | | Revenues, net | 32.3 | 59.1 | (26.8) | (45.3)% | | Cost of revenues | 29.7 | 40.4 | (10.7) | (26.6)% | | Gross profit | 2.6 | 18.7 | (16.1) | (85.7)% | | Research and development | 3.9 | 0.5 | 3.4 | 711.5% | | (Loss) income from operations | (14.0) | 3.7 | (17.7) | (475.0)% | - The decrease in net revenues for both periods was primarily due to a $4.0 million one-time contract revenue payment in Q3 2022 not recurring in 2023, lower ARK sales due to decreased ASPs, and reduced one-off payments and deferred revenue recognition[229][240] - Research and development expenses increased significantly due to increased personnel and development efforts for titles like Atlas, Last Oasis, and Agartha[234][244] Liquidity and Capital Resources The company faces substantial doubt about its going concern ability due to net losses, negative cash flows, and significant debt maturities, relying on recent financing but needing to re-establish profitability or secure additional funds - Primary liquidity sources are cash flows from operations and increased financing activities[251] - Unrestricted cash decreased from $12.9 million at December 31, 2022, to $4.9 million at September 30, 2023[251] - The 2021 Revolving Loan ($6.0 million) and 2022 Short Term Note ($2.1 million) are due in December 2023 and January 2024, respectively, raising substantial doubt about going concern[253][255] - Net cash used in operating activities increased significantly to $10.8 million for the nine months ended September 30, 2023, from $0.7 million in the prior year[257][258] - Recent capital raises include convertible notes ($1.08 million principal) and an Equity Line Purchase Agreement for up to $5.0 million in Class A common stock[272][273] Critical Accounting Policies and Estimates This section highlights critical accounting policies and estimates, including the valuation and impairment of intangible assets, deferred revenue recognition, and deferred income taxes, all requiring significant management judgment - Valuation and impairment of intangible assets rely on estimates of useful lives and future cash flows, which can vary with market factors[278] - Deferred revenue recognition and classification depend on estimated service periods for software products, which are subjective and can change based on user trends[280][281][282] - Deferred income taxes are based on estimates of future taxable income and tax loss carryforwards, with changes in tax laws or income levels potentially affecting realizability[283] - The company has elected to use the extended transition period for complying with new or revised accounting standards as an emerging growth company[286] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Snail, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - Snail, Inc. is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a 'smaller reporting company'[290] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2023, due to material weaknesses in accounting for income taxes, equity, cash flow, operating expenses, and related party transactions, with remediation efforts underway - Disclosure controls and procedures were deemed not effective as of September 30, 2023[292] - Material weaknesses identified include failures in controls related to accounting for income taxes and equity, disclosure controls for cash flow items, classification of operating expenses, and identification of related party transactions and significant unusual transactions[292] - Remediation plans involve enhancing financial reporting close control procedures, hiring additional accounting and finance personnel, and implementing quarterly inquiries for executive management and board members regarding contracts[292][293] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 18 of the Condensed Consolidated Financial Statements for details on legal proceedings, including a settled copyright infringement lawsuit and an ongoing breach of contract claim - Legal proceedings are detailed in Note 18 of the financial statements[294] Item 1A. Risk Factors This section updates risk factors, emphasizing substantial doubt about the company's going concern ability due to net losses, negative cash flows, and debt maturities, alongside dependence on the ARK franchise, third-party platforms, and new financing risks - Substantial doubt exists about the company's ability to continue as a going concern due to a $11.5 million net loss, $10.8 million negative cash flow from operations, and $8.1 million in debt maturing by January 2024[295][298] - The company is highly dependent on the ARK franchise, which contributed 86.9% of net revenue for the nine months ended September 30, 2023[300] - Reliance on third-party licenses (e.g., ARK franchise from SDE) and distribution platforms (e.g., Xbox Live, Steam) poses risks if agreements are not renewed or terms change[301][303] - Identified material weaknesses in internal control over financial reporting could lead to inaccurate financial reporting[316][317] - New risks are associated with convertible notes and equity line credit financing, including potential dilution and management's broad discretion over proceeds[321][322] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds As of September 30, 2023, the company repurchased 1,350,275 shares of Class A common stock for approximately $3.7 million under its $5 million share repurchase program, with $1.3 million remaining available Share Repurchase Activity (January-September 2023) | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share ($) | | :----------- | :-------------------------------------------- | :------------------------------- | | January 2023 | 153 | 1.68 | | Total | 153 | | - As of September 30, 2023, 1,350,275 shares of Class A common stock were repurchased for approximately $3.7 million under the Share Repurchase Program[326] - Approximately $1.3 million remains available for repurchase under the program[326] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[328] Item 4. Mine Safety Disclosures This item is not applicable to Snail, Inc - Mine Safety Disclosures are not applicable to the company[329] Item 5. Other Information. No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023 - No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter[330] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various forms of warrants, purchase agreements, registration rights agreements, and certifications from the CEO and CFO - Exhibits include forms of Warrant, Equity Line Warrant, Note, Purchase Agreement, Registration Rights Agreement, and Equity Line Purchase Agreement[332] - Certifications from the Chief Executive Officer and Principal Financial Officer are also included[332] SIGNATURES Signatures The report was signed by Jim S. Tsai, Chief Executive Officer, and Heidy Chow, Chief Financial Officer, on November 14, 2023 - The report was signed by Jim S. Tsai, CEO, and Heidy Chow, CFO, on November 14, 2023[335]