SNAL 10-Q
Snail, Inc. (SNAL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (IRS Employer |
(Address of principal executive offices) (zip code)
+1 (
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
☒ | Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class of Common Stock |
| Outstanding Shares as of December 14, 2022 |
Class A Common Stock, par value $0.0001 per share | ||
Class B Common Stock, par value $0.0001 per share |
SNAIL, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 2022
Table of Contents
| Page | ||
PART I. FINANCIAL INFORMATION | |||
2 | |||
2 | |||
Snail, Inc. Notes to Condensed Consolidated Statements (Unaudited) | 3 | ||
4 | |||
5 | |||
6 | |||
7 | |||
8 | |||
Management’s Discussion and Analysis of the Results of Operations | 23 | ||
36 | |||
36 | |||
37 | |||
37 | |||
38 | |||
39 | |||
39 | |||
39 | |||
40 | |||
41 | |||
Item 1. Consolidated Financial Statements (Unaudited).
Financial Statements Introductory Note
Snail, Inc. is an entity incorporated under the laws of Delaware in January 2022 and trades on the Nasdaq Capital Market under the symbol “SNAL.” Snail, Inc. is a holding company with its principal asset consisting of all the shares of common stock of Snail Games USA Inc. (“Snail Games USA”) and, in turn, controls the business and affairs of Snail Games USA and its subsidiaries. Snail, Inc. closed its initial public offering (“IPO”) on November 14, 2022. Concurrently with the IPO, the stockholders of Snail Games USA collectively exchanged 500,000 shares of Snail Games USA common stock for 6,251,420 shares of Class A common stock and 28,748,580 shares of Class B common stock of Snail, Inc. Unless otherwise indicated or the context otherwise requires, all references to “Snail, Inc.,” (the “Parent”) refer to Snail, Inc., and “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Snail Games USA, together with its consolidated subsidiaries. As Snail, Inc. had no substantial assets or activities as of September 30, 2022, and for the three and nine month periods then ended and the reorganization had not been completed as of such date, we have presented the consolidated financial statements and related disclosures of Snail Games USA and its consolidated subsidiaries separate from Snail, Inc. Presented for Snail, Inc. is the balance sheet as of September 30, 2022. There were no operating activities for Snail, Inc. for the three and nine month periods ended September 30, 2022.
Snail, Inc. Unaudited Balance Sheet
| September 30, 2022 | ||
ASSETS |
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Current Assets: |
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Cash | $ | | |
Total current assets |
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Total assets | $ | | |
STOCKHOLDER’S EQUITY |
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Common stock, $ | $ | — | |
Additional paid-in capital |
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Total stockholder’s equity | $ | | |
See accompanying notes to condensed consolidated financial statements (unaudited).
2
Snail, Inc. Notes to Condensed Consolidated Statements (Unaudited)
NOTE 1ORGANIZATION
Snail, Inc. was incorporated under the laws of Delaware in January 2022. The Registrant’s fiscal year end is December 31. The Registrant was formed for the purpose of completing an initial public offering (“IPO”) and related transactions to carry on the business of Snail Games USA and its subsidiaries. On November 14, 2022, in connection with the IPO, Snail, Inc. became the holding company of Snail Games USA and its subsidiaries through the exchange of common stock of Snail Games USA for common stock of Snail, Inc, and will control the business and affairs of Snail Games USA and its subsidiaries.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Separate Statements of Income, Stockholder’s Equity and Cash Flows have not been presented as there have been no operating activities by this entity during the period ended September 30, 2022.
NOTE 3STOCKHOLDER’S EQUITY
Mr. Hai Shi is the Founder and Chairman of the Registrant and was the sole shareholder as of September 30, 2022. He contributed the $
NOTE 4SUBSEQUENT EVENTS
Refer to Note 19 – Subsequent Events, in the Snail Games USA and Subsidiaries condensed consolidated financial statements for information regarding the IPO, reorganization transaction, and other subsequent events.
3
Snail Games USA Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
ASSETS |
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Current Assets: |
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Cash | $ | | $ | | ||
Accounts receivable, net of allowances for doubtful accounts of $ |
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Accounts receivable - related party, net |
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Loan and interest receivable - related party |
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Prepaid expenses - related party, net of long-term portion |
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Prepaid expenses and other current assets |
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Total current assets |
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Restricted cash and cash equivalents |
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Prepaid expenses - related party |
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| — | ||
Property, plant and equipment, net |
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Intangible assets, net - license - related parties |
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Intangible assets, net - license |
| — |
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Intangible assets, net - other |
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Deferred income taxes |
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Other noncurrent assets |
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Operating lease right-of-use assets, net |
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Total assets | $ | | $ | | ||
LIABILITIES, NONCONTROLLING INTERESTS AND EQUITY |
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Current Liabilities: |
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Accounts payable | $ | | $ | | ||
Accounts payable - related party |
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Accrued expenses and other liabilities |
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Loan payable - related parties |
| — |
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Interest payable - related parties |
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Revolving loan |
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Short term note |
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| — | ||
Notes payable |
| — |
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Current portion of long-term debt |
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Current portion of deferred revenue |
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Current portion of operating lease liabilities |
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Total current liabilities |
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Accrued expenses | | — | ||||
Long-term debt, net of current portion |
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Deferred revenue, net of current portion |
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Operating lease liabilities, net of current portion |
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Total liabilities |
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Commitments and contingencies |
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Equity: |
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Common stock, $ |
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Additional paid-in capital |
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Due from shareholder - loan receivable |
| — |
| ( | ||
Due from shareholder - interest receivable |
| — |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Retained earnings (accumulated deficit) |
| ( |
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Total Snail Games USA Inc. equity |
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Noncontrolling interests |
| ( |
| ( | ||
Total equity |
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Total liabilities, noncontrolling interests and equity | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements (unaudited).
4
Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)
| For the |
| For the | |||||||||
three months ended September 30, | nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenues, net | $ | | $ | | $ | | $ | | ||||
Cost of revenues |
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Gross profit |
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Operating expenses: |
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General and administrative |
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Research and development |
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Advertising and marketing |
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Depreciation and amortization |
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Total operating expenses |
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Income (loss) from operations |
| ( |
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Other income (expense): |
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Interest income |
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Interest income - related parties |
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Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest expense - related parties |
| — |
| ( |
| ( |
| ( | ||||
Other income |
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Foreign currency transaction gain (loss) |
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| ( |
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| ( | ||||
Equity in loss of unconsolidated entity |
| — |
| — |
| — |
| ( | ||||
Total other income (expense), net |
| ( |
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Income (loss) before provision for income taxes |
| ( |
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Income tax provision (benefit) |
| ( |
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Net income (loss) |
| ( |
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Net gain (loss) attributable to non-controlling interests |
| ( |
| ( |
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Net income (loss) attributable to Snail Games USA Inc. |
| ( |
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Comprehensive income statement: |
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Other comprehensive income (loss) |
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| ( |
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Total other comprehensive income (loss) | $ | ( | $ | | $ | | $ | | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
5
Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Equity for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)
Due from | ||||||||||||||||||||||||||
Shareholder | Accumulated | Retained | ||||||||||||||||||||||||
Additional | Loan and | Other | Earnings | Snail Games | Non | |||||||||||||||||||||
Common Stock | Paid-In- | Interest | Comprehensive | (Accumulated | USA Inc. | controlling | ||||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Receivable |
| Income (Loss) |
| Deficit) |
| Equity |
| Interests |
| Total Equity | |||||||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
Loan to shareholder |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Foreign currency translation |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( |
| — |
| ( | ||||||||
Net income | — | — | — | — | — | | | ( | | |||||||||||||||||
Balance at March 31, 2022 | | | | ( | ( | | | ( | | |||||||||||||||||
Loan to shareholder | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||
Dividend distribution | — | — | ( | | — | ( | ( | — | ( | |||||||||||||||||
Foreign currency translation | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||
Net income (loss) |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( |
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| ( | ||||||||
Balance at June 30, 2022 |
| | | | — | ( | ( | | ( | | ||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| — |
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| — |
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| — |
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( |
| ( |
| ( | ||||||||
Balance at September 30, 2022 |
| | $ | | $ | | $ | — | $ | ( | $ | ( | $ | | $ | ( | $ | | ||||||||
Due from | ||||||||||||||||||||||||||
Shareholder | Accumulated | |||||||||||||||||||||||||
Additional | Loan and | Other | Snail Games | Non | ||||||||||||||||||||||
Common Stock | Paid-In- | Interest | Comprehensive | Retained | USA Inc. | controlling | ||||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Receivable |
| Income (Loss) |
| Earnings |
| Equity |
| Interests |
| Total Equity | |||||||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
Loan to shareholder |
| |
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| ( |
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| ( |
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| ( | ||||||||
Foreign currency translation |
| — |
| — |
| — |
| — |
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| — |
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| — |
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| ( |
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Balance at March 31, 2021 |
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| ( |
| ( |
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| ( |
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Loan to shareholder | | | | ( | | | ( | | ( | |||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| — |
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Dissolution of subsidiary |
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| — |
| — |
| — |
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| ( |
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Balance at June 30, 2021 |
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| ( |
| ( |
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| ( |
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Loan to shareholder | | | | ( | | | ( | | ( | |||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| — |
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| — |
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| — |
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| ( |
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Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
6
Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2022 and 2021 (Unaudited)
Nine months ended September 30, |
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Amortization - intangible assets - license |
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Amortization - intangible assets - license, related parties |
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Amortization - intangible assets - other |
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Amortization - loan origination fees |
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Depreciation and amortization - property and equipment |
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Gain on lease termination |
| ( |
| — | ||
Gain on paycheck protection program and economic injury disaster loan forgiveness |
| ( |
| ( | ||
Gain on disposal of fixed assets |
| ( |
| — | ||
Interest income from shareholder loan |
| ( |
| ( | ||
Deferred taxes |
| — |
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Decrease in non-controlling interest - dissolution of subsidiary |
| — |
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Changes in assets and liabilities: |
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Accounts receivable |
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Accounts receivable - related party |
| ( |
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Prepaid expenses - related party |
| ( |
| — | ||
Prepaid expenses and other current assets |
| ( |
| ( | ||
Other noncurrent assets |
| ( |
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Accounts payable |
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| ( | ||
Accounts payable - related party |
| ( |
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Accrued expenses |
| ( |
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Interest payable - related parties |
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Lease liabilities |
| ( |
| ( | ||
Deferred revenue |
| ( |
| ( | ||
Net cash (used in) provided by operating activities |
| ( |
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Cash flows from investing activities: |
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Loan provided to related party |
| — |
| ( | ||
Repayment on loan provided by related party | ( | — | ||||
Acquisition of license rights - related party |
| — |
| ( | ||
Purchases of property and equipment |
| ( |
| ( | ||
Proceeds from sale of property and equipment | | — | ||||
Repayment on Pound Sand note |
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Investment at cost |
| — |
| ( | ||
Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Repayments on long-term debt |
| ( |
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Repayments on short-term note |
| ( |
| — | ||
Borrowings on long-term debt |
| — |
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Borrowings on short-term note |
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| — | ||
Payments on paycheck protection program and economic injury disaster loan |
| ( |
| — | ||
Refund of payments on paycheck protection program and economic injury disaster loan |
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| — | ||
Borrowings on revolving loan |
| — |
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Cash dividend declared and paid |
| ( |
| — | ||
Net cash (used in) provided by financing activities |
| ( |
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Effect of currency translation on cash and cash equivalents |
| ( |
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Net decrease in cash, and restricted cash and cash equivalents |
| ( |
| ( | ||
Cash, and restricted cash and cash equivalents - beginning of period |
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Cash, and restricted cash and cash equivalents - end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information |
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Cash paid during the period for: |
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Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
Noncash transactions during the period for: |
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Loan and interest payable - related parties | $ | | $ | — | ||
Loan and interest receivable - related parties | $ | ( | $ | — | ||
Loan and interest from shareholder | $ | | $ | — | ||
Dividend distribution | $ | ( | $ | — | ||
Noncash financing activity during the period: |
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Gain on paycheck protection program and economic injury disaster loan forgiveness | $ | ( | $ | ( | ||
See accompanying notes to condensed consolidated financial statements (unaudited).
7
Snail Games USA Inc. and Subsidiaries Notes to Condensed Consolidated Statements (Unaudited)
NOTE 1 – PRESENTATION AND NATURE OF OPERATIONS
Snail Games USA Inc. is devoted to researching, developing, marketing, publishing, and distributing games, content and support that can be played on a variety of platforms including game consoles, PCs, mobile phones and tablets. The terms “Snail Games USA,” “we,” “our” and the “Company” are used to refer collectively to Snail Games USA Inc. and its subsidiaries. The Company is a global developer and publisher of interactive entertainment content and support on video game consoles, personal computers, mobile devices, and other platforms.
The Company was founded in 2009 as a wholly owned subsidiary of Suzhou Snail Digital Technology Co., Ltd. (“Suzhou Snail”) located in Suzhou, China. On July 13, 2022, Suzhou Snail transferred all of its right, title, and interest to all of the
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“U.S.GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited condensed consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto for the year ended December 31, 2021.
In the opinion of management, all adjustments considered necessary for the fair presentation of the Company’s financial position and its results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements.
Certain comparative amounts have been reclassified to conform with the current period presentation.
The condensed consolidated financial statements include the accounts of Snail Games USA Inc. and the following subsidiaries:
| Equity % |
| |
Subsidiary Name | Owned |
| |
Snail Innovation Institute |
| | % |
Frostkeep Studios, Inc. |
| | % |
Eminence Corp |
| | % |
Wandering Wizard, LLC |
| | % |
Donkey Crew Limited Liability Company |
| | % |
Interactive Films, LLC |
| | % |
Project AWK Productions, LLC |
| | % |
BTBX.IO, LLC |
| | % |
Elephant Snail, LLC (through April 15, 2021) |
| | % |
All intercompany accounts, transactions, and profits have been eliminated upon consolidation.
8
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Such estimates include revenue recognition, provisions for doubtful accounts, deferred income tax assets and associated valuation allowances, deferred revenue, income taxes, valuation of intangibles, including those with related parties and impairment of intangible assets. These estimates generally involve complex issues and require management to make judgments, involve analysis of historical and future trends that can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from estimates.
Segment Reporting
The Company has
COVID-19
Since the start of the coronavirus pandemic early in 2020, the Company has made sustained efforts to ensure the health and safety of the workforce while ensuring continuity of the business. In the workplace, the Company has designed and implemented protocols for social distancing, made provisions for the workforce to work remotely where possible, and established quarantine policies for those who present COVID-like symptoms or may have been in contact with those who have. Further, the Company keeps current with local, state, federal and international laws and restrictions that could affect the business and provide real-time information to the workforce. The Company has its own policies relating to health and is committed to compliance with COVID-19 policies.
As has been the case with many other employers, since the start of 2021, the Company has encouraged its workforce to receive vaccinations against COVID-19 through various means, including incentive programs. However, new variants, particularly the Delta and Omicron variants, have engendered a resurgence of the virus in many regions particularly among the unvaccinated. In-the-midst of changing conditions, the Company has nevertheless been able to manage its business with minimal impact during the three and nine month periods ended September 30, 2022 and 2021.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company’s revenue includes the publishing of software games delivered digitally and through physical discs (e.g., packaged goods). The Company’s digital games may include additional downloadable content that are new feature releases to digital full-game downloads. Revenue also includes sales of mobile in-app purchases that require the Company’s hosting support in order to utilize the game or related content. Such games include virtual goods that can be purchased by the end users, as desired. When control of the promised products and services is transferred to the customers, the Company recognizes revenue in the amount that reflects the consideration it expects to receive in exchange for these products and services. Revenue from delivery of products is recognized at a point in time when the end consumers download the games and the control of the license is transferred to them.
The Company recognizes revenue using the following five steps as provided by ASC Topic 606 Revenue from Contracts with Customers: 1) identify the contract(s) with the customer; 2) identify the performance obligations in each contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company’s terms and conditions vary by customers and typically provide net 30 to 75 days terms or 45 days after each quarter ends.
9
Principal vs Agent Consideration
The Company offers certain software products via third-party digital storefronts, such as Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, Apple’s App Store, the Google Play Store, and retail distributor. For sales of our software products via third-party digital storefronts and retail distributor, we determine whether or not we are acting as the principal in the sale to the end user, which we consider in determining if revenue should be reported based on the gross transaction price to the end user or based on the transaction price net of fees retained by the third-party digital storefront. An entity is the principal if it controls a good or service before it is transferred to the customer. Key indicators that we use in evaluating these sales transactions include, but are not limited to, the following:
| ● | The underlying contract terms and conditions between the various parties to the transaction; |
| ● | Which party is primarily responsible for fulfilling the promise to provide the specified good or service; and |
| ● | Which party has discretion in establishing the price for the specified good or service. |
Based on our evaluation of the above indicators, for sales arrangements via Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, and retail distributor, the digital platforms and distributors have discretion in establishing the price for the specified good or service and we have determined we are the agent in the sales transaction to the end user and therefore we report revenue on a net basis based on the consideration received from the digital storefront. For sales arrangements via Apple’s App Store and the Google Play Store, we have discretion in establishing the price for the specified good or service and we have determined that we are the principal to the end user and thus report revenue on a gross basis and mobile platform fees charged by these digital storefronts are expensed as incurred and reported within cost of revenues.
Contract Balance
The Company records deferred revenue when cash payments are received or due in advance of its performance, even if amounts are refundable.
Deferred revenue is comprised of the transaction price allocable to the Company’s performance obligation on technical support and the sale of virtual goods available for in-app purchases, and payments received from customers prior to launching the games on the platforms. The Company categorizes the virtual goods as either “consumable” or “durable.” Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, the Company recognizes revenues from the sale of consumable virtual goods as the goods are consumed and the performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the players over an extended period of time; accordingly, the Company recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player and the performance obligation is satisfied, which is generally the estimated service period.
The Company also has a long-term title license agreement with a platform for a period of
In November 2021, the Company entered an agreement with a platform to make ARK 1 available on the platform for a period of
The Company entered into a non-exclusive license agreement with a platform in February 2020 to make ARK 1 available on the platform, exclusive of all available DLC, for a period of
10
Estimated Service Period
For certain performance obligations satisfied over time, we have determined that the estimated service period is the time period in which an average user plays our software products (“user life”) which most faithfully depicts the timing of satisfying our performance obligation. We consider a variety of data points when determining and subsequently reassessing the estimated service period for players of our software products. Primarily, we review the weighted average number of days between players’ first and last days played online. When a new game is launched and no history of online player data is available, we consider other factors to determine the user life, such as the estimated service period of other games actively being sold with similar characteristics. We also consider known online trends, the service periods of our previously released software products, and, to the extent publicly available, the service periods of our competitors’ software products that are similar in nature to ours.
We believe this provides a reasonable depiction of the use of games by our customers, as it is the best representation of the period during which our customers play our software products. Determining the estimated service period is subjective and requires significant management judgment and estimates. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service periods for virtual goods are generally approximately
Shipping and Handling
The distributor, as the principal, is responsible for the shipping of the game discs to the retail stores and incurring the shipping costs. The Company is paid the net sales amount after deducting shipping costs and other related expenses by the distributor.
Cost of Revenues
Cost of revenues include software license royalty fees, merchant fees, server and database center costs, game localization costs, game licenses and amortization costs. Cost of revenues for the three and nine month periods ended September 30, 2022 and 2021 were comprised of the following:
Three months ended | Nine months ended | |||||||||||
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Software license royalties - related parties | $ | | $ | | $ | | $ | | ||||
Software license royalties | | — | | — | ||||||||
License and amortization - related parties |
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License and amortization |
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Game localization |
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Merchant fees |
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Engine fees |
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Internet, server and data center |
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Costs related to advertising revenue | | — | | — | ||||||||
Total: | $ | | $ | | $ | | $ | | ||||
Advertising and Marketing Costs
The Company expenses advertising costs as incurred. For the three months ended September 30, 2022 and 2021, advertising expense totaled $
Research and Development
Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to research and development activities. Research and development costs for the three months ended September 30, 2022 and 2021 were $
11
Non-controlling Interests
Non-controlling interests on the condensed consolidated balance sheets and condensed consolidated statements of operations and comprehensive income (loss) include the equity allocated to non-controlling interest holders.
Subsidiary Name |
| Equity % Owned |
| Non-Controlling % |
|
Snail Innovative Institute |
| | % | | % |
BTBX.IO, LLC |
| | % | | % |
Donkey Crew, LLC |
| | % | | % |
Fair Value Measurements
The Company follows FASB ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial instruments measured at fair value.
The three levels of inputs are as follows:
| ● | Level 1: Quoted prices in active markets for identical assets or liabilities that the Company has an ability to access as of the measurement date. |
| ● | Level 2: Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. |
| ● | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments include cash and cash equivalents, restricted cash and cash equivalents, short-term financial instruments, short-term loans, accounts receivable, accounts payable and current liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us for a similar duration with the exception of the Company’s promissory note which has a fixed rate for
Concentration of Credit Risk and Significant Customers
The Company maintains cash balances at several major financial institutions. While the Company attempts to limit credit exposure with any single institution, balances often exceed insurable amounts. As of September 30, 2022 and December 31, 2021, the Company had deposits of $
12
The Company extends credit to various digital resellers and partners. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. The Company performs ongoing credit evaluations of customers and maintains reserves for potentially uncollectible accounts. At September 30, 2022 and December 31, 2021, the Company had
In January 2022, the Company received approximately $
Leases
The Company has several leases relating primarily to office facilities. The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the right-of-use asset value is derived from the calculation of the lease liability. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, and termination penalties. Variable lease payments are recognized as lease expenses as incurred, and generally relate to variable payments made based on the level of services provided by the landlords of our leases. For leased assets with similar lease terms and asset types, we applied a portfolio approach in determining a single incremental borrowing rate for the leased assets. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments because the Company does not have the information necessary to determine the rate implicit in the lease. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company’s lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant factors. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term. Operating leases are included in operating lease right-of-use assets, net, current portion of operating lease liabilities, and operating lease liabilities, net of current portion on the consolidated balance sheets.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that requires the reflection of expected credit losses and also requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. For most financial instruments, the standard requires the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which generally results in the earlier recognition of credit losses on financial instruments. The Company expects to adopt ASC 2016-13 on January 1, 2023. The impact of adopting the new standard is not anticipated to have a material impact on the Company’s condensed consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance, to provide guidance on the disclosures of forgivable loan transactions with a government that are accounted for by applying a grant or contribution accounting model, by analogy. It seeks to provide increased transparency for financial statement users to better assess the nature of the transactions, the related accounting policies used to account for the transactions, the effect of the transaction on an entities financial statements and significant terms and conditions of the transactions. The Company adopted this standard beginning on January 1, 2022. The adoption of the standard affected the disclosures of the Paycheck Protection Program (“PPP”) loan and related loan forgiveness in the Company’s condensed consolidated financial statements. Please see Note 15 – Revolving Loan, Short Term Note and Long-Term Debt for more information.
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Earnings Per Share
The Company analyzed the calculation of net income (loss) per share for the three and nine month periods ended September 30, 2022, and 2021 and determined that it resulted in values that would not be meaningful to the users of these condensed consolidated financial statements given the impact of the exchange of shares in connection with the IPO, see Note 19 – Subsequent Events. Therefore, net income (loss) per share information has not been presented for the three and nine months presented.
CARES Act
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property, the Company did not result in a material cash benefit as a result of these provision.
The CARES Act is a stimulus package that provides various forms of relief through, among other things, grants, loans and tax incentives to certain businesses and individuals. In particular, the CARES Act created an emergency lending facility known as the PPP, which is administered by the U.S. Small Business Administration (“SBA”) and provides federally insured and, in some cases, forgivable loans to certain eligible businesses so that those businesses can continue to cover certain of their near-term operating expenses and retain employees. See Note 15 – Revolving Loan, Short Term Note, and Long-Term Debt for additional information.
Dividend Restrictions
Our ability to pay cash dividends is currently restricted by the terms of our credit facilities.
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of revenue
Geography
We attribute net revenue to geographic regions based on customer location. Net revenue by geographic region for the three and nine month periods ended September 30, 2022 and 2021 were as follows:
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United States | $ | | $ | | $ | | $ | | ||||
International |
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Total revenue from contracts with customers: | $ | | $ | | $ | | $ | | ||||
Platform
Net revenue by platform for the three and nine month periods ended September 30, 2022 and 2021 were as follows:
| Three months ended |
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Console | $ | | $ | | $ | | $ | | ||||
PC |
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Total revenue from contracts with customers: | $ | | $ | | $ | | $ | | ||||
14
Distribution channel
Our products are delivered through digital online services (digital download, online platforms, and cloud streaming), mobile, and retail distribution and other. Net revenue by distribution channel for the three and nine month periods ended September 30, 2022 and 2021 was as follows:
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Digital | $ | | $ | | $ | | $ | | ||||
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Physical retail and other |
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Total revenue from contracts with customers: | $ | | $ | | $ | | $ | | ||||
Deferred Revenue
The Company records deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations; reductions to deferred revenue balance were due primarily to the recognition of revenue upon fulfillment of our performance obligations, which were in the ordinary course of business. Activities in the Company’s deferred revenue as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
Deferred revenue, beginning balance in advance of revenue recognition billing | $ | | $ | | ||
Revenue recognized |
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Deferred revenue, ending balance |
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Less: short term portion |
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Deferred revenue, long term | $ | | $ | | ||
NOTE 4 – CASH, AND RESTRICTED CASH AND CASH EQUIVALENTS
Cash equivalents are valued using quoted market prices or other readily available market information. The Company has $
| 2022 |
| 2021 | |||
Cash | $ | | $ | | ||
Restricted cash and cash equivalents | |
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Cash, and restricted cash and cash equivalents | $ | | $ | | ||
NOTE 5 – ACCOUNTS RECEIVABLE – RELATED PARTY
Accounts receivable — related party represents receivables in the ordinary course of business attributable to certain mobile game revenues that, for administrative reasons, are collected by a related party and that the related party has not remitted back to the Company. The accounts receivable is offset by payables due to the related party for royalties, internet data center (“IDC”) and marketing costs. Accounts receivable — related party is non-interest bearing and due on demand. The related party is
| 2022 |
| 2021 | |||
Accounts receivable - related party | $ | | $ | | ||
Less: Accounts payable - related party |
| ( |
| ( | ||
Accounts receivable - related party, net | $ | | $ | | ||
15
NOTE 6 – DUE FROM SHAREHOLDER
Other receivables from related party consisted of monies that the Company lent to the Company’s Founder and Chairman, who is also the majority shareholder of Suzhou Snail. The loan bore
NOTE 7 – DIVIDEND DISTRIBUTION
On April 26, 2022, the Company declared an in-kind dividend of $
NOTE 8 – PREPAID EXPENSES - RELATED PARTY
During the nine month period ended September 30, 2022 the Company prepaid $
| 2022 |
| 2021 | |||
Prepaid royalties | $ | | $ | | ||
Prepaid licenses |
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Prepaid expenses - related party, ending balance |
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Less: short-term portion |
| ( |
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Total prepaid expenses - related party, long-term | $ | | $ | — | ||
NOTE 9 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
In January 2022, the Company received $
Prepaid expenses and other current assets consisted of the following as of September 30, 2022 and December 31, 2021:
| 2022 |
| 2021 | |||
Prepaid income taxes | $ | | $ | | ||
Other prepaids |
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Other current assets |
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Total prepaid expenses and other current assets | $ | | $ | | ||
16
NOTE 10 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of September 30, 2022 and December 31, 2021:
| 2022 |
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Building | $ | | $ | | ||
Land |
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Building improvements |
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Leasehold improvements |
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Autos and trucks |
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Furniture and fixtures |
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Accumulated depreciation |
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Property, plant and equipment, net | $ | | $ | | ||
Depreciation and amortization expense was $
NOTE 11 – INTANGIBLE ASSETS
Intangible assets of trademark and technology consist of game license software underlying intellectual property rights, game trademark name, logo, and other branding items. The Company amortizes the intangible assets over its useful life.
During 2021, the Company impaired the Atlas license right due to delay in launching the game in several platforms. The Company recognized $
| September 30, 2022 | |||||||||||||
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Amount | Amortization | Loss | Value | Useful Life | ||||||||||
License rights from related parties | $ | | $ | ( | $ | — | $ | |
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License rights | $ | | $ | ( | $ | — | $ | — |
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Intangible assets - other: |
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Software | $ | | $ | ( | $ | — | $ | — |
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In-progress patent |
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Total: | $ | | $ | ( | $ | — | $ | |
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| December 31, 2021 | |||||||||||||
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Amount | Amortization | Loss | Value | Useful Life | ||||||||||
License rights from related parties | $ | | $ | ( | $ | ( | $ | |
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License rights | $ | | $ | ( | $ | — | $ | |
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Intangible assets - other: |
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Software | $ | | $ | ( | $ | — | $ | |
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Trademark |
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In-progress patent |
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Total: | $ | | $ | ( | $ | — | $ | |
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17
Amortization expense was $
Years ending December 31, |
| Amount | |
Remainder of 2022 | $ | | |
2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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$ | | ||
NOTE 12 – ACCOUNTS PAYABLE — RELATED PARTY
Accounts payable to related party represents payables in the ordinary course of business primarily for purchases of game distribution licenses and also the royalties due to Suzhou Snail. As of September 30, 2022 and December 31, 2021, the Company had $
NOTE 13 – LOAN AND INTEREST RECEIVABLE — RELATED PARTY
In February 2021, the Company lent $
NOTE 14 – LOAN PAYABLE AND INTEREST PAYABLE — RELATED PARTIES
The Company had a loan amount due to related parties of $
18
NOTE 15 – REVOLVING LOAN, SHORT TERM NOTE AND LONG-TERM DEBT
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
PPP Promissory Note - In April 2020, the Company applied for and received $ | $ | — | $ | | ||
2021 Revolving Loan - On June 17, 2021, the Company amended its revolving loan agreement (“amended revolver”) and increased the maximum balance to $ |
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2021 Promissory Note - On June 17, 2021, the Company amended its loan agreement to reduce the principal amount with financial institution for |
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2022 Short Term Note - On January 26, 2022, the Company amended its revolving loan and long-term debt agreements to obtain an additional note with a principal balance of $ |
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Total |
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Less: current portion |
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Total long-term debt | $ | | $ | | ||
Total interest expense for the above debt and revolver loan amounted to $
The following table provides future minimum payments of its long-term debt as of December 31:
Years ending December 31, |
| Amount | |
Remainder of 2022 | $ | | |
2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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$ | | ||
19
NOTE 16 – INCOME TAXES
The Company and its subsidiaries currently file tax returns in the United States (federal and state) and Poland. The statute of limitations for its consolidated federal income tax returns are open for tax years ended December 31, 2018 and after. The statute of limitations for its consolidated California income tax returns are open for tax years ended December 31, 2017 and after. All tax periods for its Polish subsidiary are currently subject to examination since its inception in 2018.
The Company recognized an income tax benefit of $
NOTE 17 – OPERATING LEASE RIGHT-OF-USE ASSETS
The Company’s right-of-use assets represent arrangements related primarily to office facilities used in the ordinary business operations of the Company and its subsidiaries. In April, 2018, a commercial bank issued an irrevocable standby letter of credit on behalf of the Company to the landlord for $
Right of Use | Accumulated | Lease Liability | Gain on | ||||||||||||
| Asset |
| Amortization |
| Current |
| Long Term |
| Termination | ||||||
Lease Terminations | $ | ( | $ | | $ | | $ | | $ | | |||||
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to claims and contingencies related to lawsuits and other matters arising out of the normal course of business. In addition, we may receive notifications alleging infringement of patent or other intellectual property rights. The Company has elected to expense legal costs associated with legal contingencies as incurred. As of December 31, 2021, the Company had an estimated accrual of $
On December 1, 2021, the Company and Studio Wildcard sent a notice of claimed infringement (the “DCMA Takedown Notice”) to Valve Corporation, which operates the Steam platform, pursuant to the Digital Millennium Copyright Act (“DCMA”). The DCMA Takedown Notice concerns a videogame titled Myth of Empires, which was developed by Suzhou Angela Online Game Technology Co., Ltd. (“Angela Game”) and published by Imperium Interactive Entertainment Limited (“Imperium”). The DCMA Takedown Notice alleges that Angela Game and Imperium misappropriated the copyrighted source code of ARK: Survival Evolved and used it to develop the game Myth of Empires. The DCMA Takedown Notice requested that Steam cease distributing Myth of Empires and remove the game from the Steam platform. Steam complied with the DCMA Takedown Notice and removed Myth of Empires from its platform. The DCMA Takedown Notice was also sent to Tencent Cloud LLC (“Tencent”), which hosts the United States servers for users who downloaded the game before it was removed from Steam, but Tencent has not complied with the DCMA Takedown Notice.
20
On December 9, 2021, Angela Game and Imperium filed a complaint against the Company and Studio Wildcard in the United States District Court for the Central District of California in response to the DCMA Takedown Notice. The lawsuit seeks a declaratory judgment on non-liability for copyright infringement and non-liability for trade secret misappropriation, as well as unspecified damages for alleged misrepresentations in the DCMA Takedown Notice. Angela Game and Imperium also filed an application for a temporary restraining order asking the court to order us and Studio Wildcard to rescind the DCMA Takedown Notice so that Steam could once again reinstate Myth of Empires for download. On December 20, 2021, the Company and Studio Wildcard filed an answer to the complaint, which included counterclaims against Angela Game and Imperium and a third-party complaint against Tencent seeking unspecified damages resulting from the alleged copyright infringement and misappropriation of trade secrets in connection with the ARK: Survival Evolved source code. On December 23, 2021 the court denied the application for a temporary restraining order and issued an order to show cause as to why a preliminary injunction should not be issued. On January 31, 2022, a hearing was held on the order to show cause, and the court issued an order denying the preliminary injunction.
On February 3, 2022 Angela Game and Imperium appealed the order to the Ninth Circuit Court of Appeals (“Ninth Circuit”), claiming that the district court judge abused her discretion in denying the injunction. On October 6, 2022, the Ninth Circuit issued an order affirming the district court’s denial of the injunction.
Meanwhile, the district court has appointed a neutral expert to compare the parties’ computer code and issue a report about the extent of similarities. The parties have also retained their own experts to compare the code. The district court has set no discovery deadlines or a trial date.
At this time, we are unable to quantify the magnitude of the potential loss should the plaintiffs’ lawsuit succeed. The Company has not recorded any accrual as the legal costs are borne by Studio Wildcard.
21
NOTE 19 – SUBSEQUENT EVENTS
| ● | On September 16, 2022, the Company’s parent, Snail, Inc., filed a Form S-1 Registration Statement with the United States Securities and Exchange Commission in connection with its IPO. On November 9, 2022, effective with the IPO pricing, the Company’s existing shareholders transferred their |
| ● | The Company’s 2022 Omnibus Incentive Plan (the “2022 Plan”) became effective upon the consummation of the IPO. The 2022 Plan is administered by the compensation committee of the board of directors. The maximum number of shares available for issuance under the 2022 Plan is |
| ● | In November 2022, the Company received a $ |
| ● | On November 10, 2022, the Snail, Inc. board of directors approved and established a new share repurchase program (the “Share Repurchase Program”) to reacquire shares of Snail, Inc.’s Class A common stock. The maximum aggregate value of the shares repurchased shall not exceed $ |
| ● | In December 2022, the Company extended the maturity of its term loan from January 26, 2023 to January 26, 2024 for the remaining balance outstanding at the time of the extension, which was $ |
| ● | In December 2022, the Company amended its exclusive license agreement relating to ARK 1. The license fee has been restructured so that the Company will pay |
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). This discussion and analysis may contain forward-looking statements based upon our current expectation, estimates and projections that involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” in Part II, Item 1A of this Quarterly Report.
Overview
Our mission is to provide high-quality entertainment experiences to audiences around the world. We are a leading, global independent developer and publisher of interactive digital entertainment for consumers around the world. We have built a premier portfolio of premium games designed for use on a variety of platforms, including consoles, PCs, and mobile devices. For four of the last six years ended December 2021, most recently in 2020, ARK: Survival Evolved was a top-25 seller on the Steam platform across all game genres. Our expertise in technology, in-game ecosystems and monetization of online multiplayer games has enabled us to assemble a broad portfolio of intellectual property across multiple media formats and technology platforms. Our flagship franchise from which we generate the substantial majority of our revenues, ARK: Survival Evolved, is a leader within the sandbox survival genre with over 83.2 million console and PC installs through September 30, 2022. See “— Key Performance Metrics and Non-GAAP Measures.” In the three and nine month period ended September 30, 2022, ARK: Survival Evolved averaged a total of 328,583 and 446,640 daily active users (“DAUs”) on the Steam and Epic platforms, respectively, and we experienced a peak of approximately 755,000 DAUs in June 2020. We define “daily active users” as the number of unique users who play any given game on any given day. For the nine months ended September 30, 2022 and 2021, we generated 91.7% and 91.0%, respectively, of our revenues from ARK: Survival Evolved. For the three months ended September 30, 2022 and 2021 we generated 89.6% and 90.9%, respectively, of our revenues from ARK: Survival Evolved.
Our dedication to provide audiences with high-quality entertainment experiences utilizing the latest gaming technology has produced strong user engagement, continued revenue growth, and increased cash flows. Through September 30, 2022, our ARK franchise game has been played for more than 2.9 billion hours with an average playing time per user of more than 159 hours and with the top 21% of all players spending over 100 hours in the game, according to data related to the Steam platform. For the nine months ended September 30, 2022 and 2021, our net revenue was $59.1 million and $83.2 million, respectively. For the three months ended September 30, 2022 and 2021, our net revenue was $15.6 million and $24.4 million, respectively. We have maintained a diversified revenue base across platforms. During the nine months ended September 30, 2022, approximately 45.9% of our revenue came from consoles, 38.8% from PC and 12.4% from mobile platforms. During the nine months ended September 30, 2021, approximately 43.8% of our revenue came from consoles, 41.6% from PC and 12.1% from mobile platforms. During the three months ended September 30, 2022, approximately 24.0% of our revenue came from consoles, 59.7% from PC and 13.8% from mobile platforms. During the three months ended September 30, 2021, approximately 36.9% of our revenue came from consoles, 48.8% PC and 12.8% from mobile platforms. We had net income of $3.2 million for the nine months ended September 30, 2022, as compared to net income of $17.0 million for the nine months ended September 30, 2021; and a loss of $1.5 million for the three months ended September 30, 2022, as compared to net income of $3.8 million for the three months ended September 30, 2021.
Key Factors Affecting Our Business
There are a number of factors that affect the performance of our business and the comparability of our results from period to period, including:
Investments in our content strategy
We continuously evaluate and invest in content strategy to improve and innovate our games and features and to develop current technological platforms. We are currently actively investing in expanding our gaming pipeline as well as developing media and eSports content related to our gaming intellectual property. We also continue to invest to grow our micro-influencer platform, NOIZ, by attracting new influencers and brand customers.
23
Growth of user base
We have experienced significant growth in our number of downloads over the last several years. We have sold 34.6 million units between January 1, 2016 and September 30, 2022. During the nine months ended September 30, 2022, we sold 4.2 million units compared to 5.4 million during the nine months ended September 30, 2021. During the three months ended September 30, 2022, we sold 1.2 million units compared to 1.3 million during the 3 months ended September 30, 2021. Our video games provide highly engaging, differentiated entertainment experiences where the combination of challenge and progress drives player engagement, high average player times, and long-term franchise value. The success of our franchise hinges on our ability to keep our current players engaged while also growing our user base by innovating our platform and monetizing on new offerings. The degree to which gamers are willing to engage with our platform is driven by our ability to create interactive and unique content that will enhance the game-play experience. We sell DLCs which are supplementary to our master games and expand the gaming universe to continuously evolve the game and retain players.
While we believe we have a significant opportunity to grow our install base, we anticipate that our overall install growth rate will fluctuate over time as we continue to release new master games and companion DLCs. Download rates and user engagement may increase or decrease based on other factors such as growth in console, PC and mobile games, ability to release content, and market effectively and distribute to users.
Investments in our technology platform
We are focused on innovation and technology leadership in order to maintain our competitive advantage. We spend a portion of our capital on our research and development platform to continuously improve our technological offerings and gaming platform. Our proprietary video game technology includes a versatile game engine, development pipeline tools, advanced rendering technology and advanced server and network operations. Continued investment in improving the technology behind our existing gaming platforms as well as developing new software tools for new product offerings is important to maintaining our strategic goals, developer and creator talent, and financial objectives. For us to continue providing cutting-edge technology to our users to bring digital interactive entertainment to market, we must also continue to invest in developmental and creative resources. For our users, we regularly invest in user-friendly features and enhance user experience in our games and platforms. As our industry moves towards increased use of cloud gaming and gaming as a service technology, our ability to bring interactive technologies to market will be an increasingly important part of our business.
Ability to release content, market effectively through cross media and expand the gaming group
Establishing and maintaining a loyal network of players for our premium games is vital for our business and drives revenue growth. To grow and maintain our player base, we invest in developing new games to attract and engage players, and in providing existing audiences with proven content in the form of new DLCs. In the near-term, we may increase spending on original content creation with new studios, and on sales and marketing as a percentage of revenue to grow our player network. The scale of our player base is determined by a number of factors, including our ability to strengthen player engagement by producing content that players play regularly and our effectiveness in attracting new players, both of which may in turn affect our financial performance.
Strategic relationship with developers, Studio Wildcard & Suzhou Snail
We have grown and expect to continue to grow our business by collaborating with game studios that we believe can benefit from our team’s decades of experience developing successful games. We have strategic relationships with many developer studios that create original content for us. The relationships allow for valuable knowledge sharing between Suzhou Snail, a related party, and the developer studios. We enjoy a long-term relationship with Studio Wildcard, which develops our ARK franchise. We have an exclusive license with Studio Wildcard for rights to ARK, and we work with them and our other studio developer partners to provide ongoing support across numerous aspects of game development. Our financial results may be affected by our relationship with game studios, including Studio Wildcard, and our ability to create self-developed titles.
Relationship with third party distribution platforms
We derive nearly all of our revenue from third-party distribution platforms, such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, Google Stadia, the Apple App Store, the Google Play Store and the Amazon Appstore. These digital distribution platforms have policies that may impact our reachability to our potential audience, including the discretion to amend their terms of service, which could affect our current operations and our financial performance. As we expand to new markets, we anticipate similar relationships with additional distribution partners that could similarly impact our performance.
24
Seasonality
We experience fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles, variations in sales of titles developed for particular platforms, market acceptance of our titles, development and promotional activities relating to the introduction of new titles, releases of expansion packs and DLCs, and to coincide with the global holiday season in the fourth and first quarters of each year. Seasonality in our revenue also tends to coincide with promotional cycles on platforms, typically on a quarterly basis.
COVID-19
Since March 2020, the COVID-19 pandemic has caused major disruption to all aspects of the global economy and daily life, particularly as quarantine and stay-at-home orders have been imposed by all levels of government. We have followed guidance by U.S. and other applicable foreign and local governments to protect our employees and operations during the pandemic and have implemented a remote environment for our business.
Despite the challenges we have faced in light of the COVID-19 pandemic, our revenues and number of installs have increased while the stay-at-home orders were at their peak across the United States. As individuals spent more time at home, we observed an increase in time spent with digital entertainment, including casual gaming and games involving socially interactive experiences. For example, primarily during the second quarter of 2020, we saw increased sales and revenues relative to our quarterly forecasts and historic trends. However, beginning in the third quarter of 2020, sales and revenues returned to levels more consistent with historical periods.
We cannot predict the potential future impact the COVID-19 pandemic may have on our business or operations. See “Risk Factors — Risks Related to Our Business — The COVID-19 pandemic and containment efforts across the globe have materially altered how individuals interact with each other and have materially affected how we and our business partners are operating, and the extent to which this situation will impact our future results of operations and overall financial performance remains uncertain” included in our Prospectus as filed by us with the SEC on November 10, 2022 pursuant to Rule 424(b)(4) under the Securities Act, relating to our registration statement on Form S-1, as amended, for more information.
In 2020, we applied for, and received, funds under the Paycheck Protection Program (“PPP”) in the amount of $0.8 million. In December 2020, $0.1 million of the PPP loan was forgiven by the U.S. Small Business Administration (the “SBA”). In March 2021, an additional $0.4 million principal amount of the PPP loan balance was forgiven by the SBA and, as of April 2022, all outstanding amounts under the PPP loan had been repaid or forgiven.
We will continue to evaluate the nature and extent of the potential impact of the COVID-19 pandemic on our business, results of operations and liquidity.
Key Performance Metrics and Non-GAAP Measures
Units Sold
We monitor Units Sold as a key performance metric in evaluating the performance of our console and PC game business. We define Units Sold as the number of game titles purchased through digital channels by an individual end user. Under this metric, the purchase of a standalone game, DLC, Season Pass or bundle on a specific platform are individually counted as a unit. For example, an individual who purchases a standalone game and DLC on one platform, a Season Pass on another platform, and a bundle on a third platform would count as four Units Sold. Similarly, an individual who purchases three standalone game titles on the same platform would count as three Units Sold.
Units Sold may be impacted by several factors that could cause fluctuations on a quarterly basis, such as game releases, our promotional activities, which most often coincide with the global holiday season in the fourth and first quarters of each year, promotional sales on digital platforms, console release cycles and new digital platforms. Future growth in Units Sold will depend on our ability to launch new games and features and the effectiveness of marketing strategies.
Three Months ended September 30, | Nine months ended September 30, |
| |||||||||||||||
| 2022 |
| 2021 |
| Change |
| % Change |
| 2022 |
| 2021 |
| Change |
| % Change |
| |
| (in millions) | ||||||||||||||||
Units Sold |
| 1.2 |
| 1.3 |
| (0.1) |
| (7.7) | % | 4.2 |
| 5.4 |
| (1.2) |
| (22.2) | % |
25
Bookings & EBITDA
In addition to our financial results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe Bookings and EBITDA, as non-GAAP measures, are useful in evaluating our operating performance. Bookings and EBITDA, as used in this Quarterly Report, are non-GAAP financial measures that are presented as supplemental disclosures and should not be construed as alternatives to net income (loss) or revenue as indicators of operating performance, nor as alternatives to cash flow provided by operating activities as measures of liquidity, both as determined in accordance with GAAP.
We supplementally present Bookings and EBITDA because they are key operating measures used by our management to assess our financial performance. Bookings adjusts for the impact of deferrals and, we believe, provides a useful indicator of sales in a given period. EBITDA adjusts for items that we believe do not reflect the ongoing operating performance of our business, such as certain non-cash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. Management believes Bookings and EBITDA are useful to investors and analysts in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Bookings and EBITDA to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against other peer companies using similar measures. We evaluate Bookings and EBITDA in conjunction with our results according to GAAP because we believe it provides investors and analysts a more complete understanding of factors and trends affecting our business than GAAP measures alone. Bookings and EBITDA should not be considered as alternatives to net income (loss), as measures of financial performance or any other performance measure derived in accordance with GAAP.
Bookings
Below is a reconciliation of total net revenue to Bookings, the closest GAAP financial measure.
Bookings is defined as the net amount of products and services sold digitally or physically in the period. Bookings is equal to revenues excluding the impact from deferrals.
Three Months ended | Nine months ended |
| |||||||||||||||||||||
September 30, | September 30, |
| |||||||||||||||||||||
2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change |
| |||||||||||||||
| (in millions) | ||||||||||||||||||||||
Total net revenue |
| $ | 15.6 |
| $ | 24.4 |
| $ | (8.8) |
| (36.1) | % | $ | 59.1 |
| $ | 83.2 |
| $ | (24.1) |
| (29.0) | % |
Change in deferred net revenue |
| (4.3) |
| (6.2) |
| 1.9 |
| (30.6) | % |
| (7.3) |
| (11.4) |
| 4.1 |
| (36.0) | % | |||||
Bookings | $ | 11.3 | $ | 18.2 | $ | (6.9) |
| (37.9) | % | $ | 51.8 | $ | 71.8 | $ | (20.0) |
| (27.9) | % | |||||
For the three months ended September 30, 2022, bookings decreased by $6.9 million, or 37.9%, compared to the three months ended September 30, 2021, primarily as a result of a decline in ARK-related revenues. On June 3, 2021 we had also launched our Genesis II DLC resulting in elevated bookings during the three month period ended September 30, 2021.
For the nine months ended September 30, 2022, bookings decreased by $20.0 million, or 27.9%, compared to the nine months ended September 30, 2021, primarily as a result of a decline in ARK-related revenues.
EBITDA
Below is a reconciliation of net income (loss) to EBITDA, the closest GAAP financial measure. We define EBITDA as net income (loss) before (i) interest expense, (ii) interest income, (iii) income tax provision (benefit) and (iv) depreciation and amortization expense.
26
EBITDA as calculated herein may not be comparable to similarly titled measures reported by other companies within the industry and is not determined in accordance with GAAP. Our presentation of EBITDA should not be construed as an inference that our future results will be unaffected by unusual or unexpected items. We may also incur expenses that are the same, or similar to, some of the adjustments in this presentation.
Three Months ended | Nine months ended |
| |||||||||||||||||||||
September 30, | September 30, |
| |||||||||||||||||||||
2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change |
| |||||||||||||||
(in millions) |
| ||||||||||||||||||||||
Net income (loss) |
| $ | (1.5) |
| $ | 3.8 |
| $ | (5.3) |
| (139) | % | $ | 3.2 |
| $ | 17.0 |
| $ | (13.8) |
| (81) | % |
Interest income and interest income – related parties |
| — |
| (0.4) |
| 0.4 |
| (100) | % |
| (0.6) |
| (1.1) |
| 0.5 |
| (45) | % | |||||
Interest expense and interest expense – related parties |
| 0.3 |
| 0.1 |
| 0.2 |
| 200 | % |
| 0.6 |
| 0.3 |
| 0.3 |
| 100 | % | |||||
Income tax provision (benefit) |
| (0.4) |
| 0.9 |
| (1.3) |
| (144) | % |
| 0.8 |
| 4.2 |
| (3.4) |
| (81) | % | |||||
Depreciation and amortization expense |
| 0.1 |
| 0.2 |
| (0.1) |
| (50) | % |
| 0.4 |
| 0.6 |
| (0.2) |
| (33) | % | |||||
EBITDA | $ | (1.5) | $ | 4.6 | $ | (6.1) |
| (133) | % | $ | 4.4 | $ | 21.0 | $ | (16.6) |
| (79) | % | |||||
Components of Results of Operations
Revenues
We primarily derive revenue from the sale of our games through various gaming platforms. Through these platforms, users can download our games and, for certain games, purchase virtual items to enhance their game-playing experience. We offer certain software products through third-party digital storefronts, such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, Google Stadia, the Apple App Store, the Google Play Store and the Amazon Appstore, and certain retail distributors. For sales arrangements through Xbox Live and Game Pass, PlayStation Network, Steam, Epic Game Stores, Google Stadia and retail distributors, the digital platforms and distributors have discretion in establishing the price for the specified good or service, and we have determined we are the agent in the sales transaction to the end user and therefore report revenue on a net basis based on the consideration received from the digital storefront. For sales arrangements through the Apple App Store and the Google Play Store, we have discretion in establishing the price for the specified good or service and have determined that we are the principal to the end user and therefore report revenue on a gross basis. Mobile platform fees charged by these digital storefronts are expensed as incurred and reported within cost of revenue as merchant fees.
We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations. Deferred revenue is comprised of the transaction price allocable to our performance obligation on technical support and the sale of virtual goods available for in-app purchases, and payments received from customers prior to launching the games on the platforms. We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations.
Our net revenues through our top platform providers as a proportion of our total net revenue for the three months ended September 30, 2022 and 2021 and the nine months ended September 30, 2022 and 2021 were as follows:
Three Months ended September 30, | Nine months ended September 30, |
| |||||||||||||||||||||
| 2022 |
| 2021 |
| $ Change |
| % Change |
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||||||
(in millions) |
| ||||||||||||||||||||||
Valve Corporation (Steam) |
| $ | 5.1 | $ | 6.7 | $ | (1.6) | (23.9) | % | $ | 17.9 | $ | 27.7 | $ | (9.8) | (35.4) | % | ||||||
Microsoft Corporation |
| 1.6 |
| 5.0 |
| (3.4) |
| (68.0) | % |
| 15.2 |
| 17.7 |
| (2.5) |
| (14.1) | % | |||||
Sony Interactive Entertainment LLC |
| 1.1 |
| 1.9 |
| (0.8) |
| (42.1) | % |
| 7.7 |
| 9.5 |
| (1.8) |
| (18.9) | % | |||||
Sony Interactive Entertainment Europe |
| 0.7 |
| 1.7 |
| (1.0) |
| (58.8) | % |
| 3.2 |
| 8.0 |
| (4.8) |
| (60.0) | % | |||||
All Other Revenue |
| 7.1 |
| 9.1 |
| (2.0) |
| (22.0) | % |
| 15.1 |
| 20.3 |
| (5.2) |
| (25.6) | % | |||||
Total | $ | 15.6 | $ | 24.4 | $ | (8.8) |
| (36.1) | % | $ | 59.1 | $ | 83.2 | $ | (24.1) |
| (29.0) | % | |||||
27
We expect changes in revenue to correlate with trends in the use and purchase of our games.
Cost of revenue
Cost of revenue includes license royalty fees, merchant fees, engine fees, server and database cost centers, game licenses and license right amortization. For a description of our licensing arrangements, please see Note 2 – Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Quarterly Report. We generally expect cost of revenue to fluctuate proportionately with revenues.
General and administrative
General and administrative expenses include rent expense, outsourced professional services such as consulting, legal and accounting services, taxes and dues, insurance premiums, and costs associated with maintaining our property and infrastructure. General and administrative expenses also include salaries and wages, which consist of compensation we pay to our employees. We expect salaries and wages to increase in a manner that is proportional with the added expenses and expertise of operating as a public company. We also expect salaries and wages to increase as we increase headcount as we expand our product offerings. Future stock-based compensation will be recorded within general and administrative expense. We also record legal settlement expenses as components of general and administrative expenses. We expect general and administrative expenses will increase in absolute dollars due to the additional administrative and regulatory burden of becoming and operating as a public company.
Research and development
Research and development consists primarily of consulting expenses and salaries and wages devoted towards the development of new games and related technologies. We do not fund or enter into arrangements relating to the research and development activities from third-party developers from whom we license games. We expect our research and development to increase as we develop new content, games or technologies.
Advertising and marketing
Advertising and marketing consists of costs related to advertising and user acquisition efforts, including payments to third-party marketing agencies. We occasionally offer our early access trial, through which we sell our games that are in development and testing. The early access trial allows us to both monetize and receive feedback on how to improve our games over time. We plan to continue to invest in advertising and marketing to retain and acquire players. However, sales and marketing expenses may fluctuate as a percentage of revenues depending on the timing and efficiency of our marketing efforts.
Interest expense and other, net
Interest expense consists of interest incurred under our Term Loans, Revolver and Promissory Notes (each as defined herein). We expect to continue to incur interest expense under our debt instruments, although with respect to certain instruments, our interest expense will fluctuate based upon the underlying variable interest rates and level of debt outstanding.
Provision for income taxes
The provision for income taxes consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, as well as deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under current U.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our effective tax rate of 19.7% was lower than the federal statutory rate of 21% primarily due to the impact of foreign taxes.
28
Results of Operations
Comparison of the three months ended September 30, 2022 versus the three months ended September 30, 2021
Three Months ended September 30, |
| |||||||||||
2022 | 2021 | $ Change | % Change |
| ||||||||
(in millions) |
| |||||||||||
Revenues, net |
| $ | 15.6 |
| $ | 24.4 |
| $ | (8.8) |
| (36.1) | % |
Cost of revenues |
| 11.5 |
| 15.5 |
| (4.0) |
| (25.8) | % | |||
Gross profit |
| 4.1 |
| 8.9 |
| (4.8) |
| (53.9) | % | |||
Operating expenses: |
|
|
|
| ||||||||
General and administrative |
| 5.4 |
| 4.0 |
| 1.4 |
| 35.0 | % | |||
Research and development |
| 0.1 |
| 0.2 |
| (0.1) |
| (50.0) | % | |||
Advertising and marketing |
| 0.2 |
| 0.2 |
| — |
| 0.0 | % | |||
Depreciation and amortization |
| 0.1 |
| 0.2 |
| (0.1) |
| (50.0) | % | |||
Total operating expenses |
| 5.8 |
| 4.6 |
| 1.2 |
| 26.1 | % | |||
Income (loss) from operations | $ | (1.7) | $ | 4.3 | $ | (6.0) |
| (139.5) | % | |||
Revenues
Net revenues for the three months ended September 30, 2022 decreased by $8.8 million, or 36.1%, compared to the three months ended September 30, 2021. The decrease in net revenue was due to a decrease in ARK Units Sold, milestone payments and a higher amount of deferred revenue recognized as revenue in 2021. Total ARK related revenues decreased by $8.5 million during the three months ended September 30, 2022 as compared to the three month period ended September 30, 2021. $5.2 million of the ARK 1 decrease was attributable to both the age of the game and sales normalizing in 2022 after the initial release of Genesis II in June 2021, $2.3 million of the decrease is due to reduced deferred revenue recognized in 2022 and $1.0 million of the decrease is due to a milestone payment related to the launch of ARK on a platform during the three months ended September 30, 2021 that did not occur in 2022.
Cost of revenues
Cost of revenues for the three months ended September 30, 2022 decreased by $4.0 million, or 25.8%, compared to the three months ended September 30, 2021.
Cost of revenues for the three months ended September 30, 2022 and 2021 comprised the following:
| Three months ended September 30, |
|
|
|
|
| ||||||
2022 |
| 2021 |
| $Change |
| % Change |
| |||||
Software license royalties - related parties | $ | 3,428,231 | $ | 4,954,040 | $ | (1,525,809) |
| (30.8) | % | |||
Software license royalties |
| 47,020 |
| — |
| 47,020 |
| 100.0 | % | |||
License and amortization - related parties |
| 6,350,979 |
| 8,483,182 |
| (2,132,203) |
| (25.1) | % | |||
License and amortization |
| 224 |
| 155,701 |
| (155,477) |
| (99.9) | % | |||
Game localization |
| 840 |
| 5,727 |
| (4,887) |
| (85.3) | % | |||
Merchant fees |
| 602,814 |
| 847,610 |
| (244,796) |
| (28.9) | % | |||
Engine fees |
| 359,263 |
| 552,913 |
| (193,650) |
| (35.0) | % | |||
Internet, server and data center |
| 535,399 |
| 479,154 |
| 56,245 |
| 11.7 | % | |||
Costs related to advertising revenue |
| 144,191 |
| — |
| 144,191 |
| 100.0 | % | |||
Total: | $ | 11,468,961 | $ | 15,478,327 | $ | (4,009,366) |
| (25.9) | % | |||
The decrease in cost of revenue for the three months ended September 30, 2022 was due to a decrease in royalties in line with a decrease in revenue and lower amortization costs due to the impairment of the Company’s Atlas license previously in late 2021.
29
General and administrative expenses
General and administrative expenses for the three months ended September 30, 2022 increased by $1.4 million, or 35.0%, compared to the three months ended September 30, 2021. The increase in general and administrative expenses was primarily due to $1.0 million of increased legal and professional expenses that was the result of the Angela Games litigation and financial reporting related costs. Salaries and wages increased by $0.6 million due to the growth of the Company. Compensation and internet and server costs increased by $0.3 million due to inflation pressure of the underlying costs. These were offset by decrease in contractors expenses of $0.4 million due to the decrease in activity for our subsidiary, BTBX.IO, LLC during the three month period ended September 30, 2022,
Research and development expenses
Research and development expenses for the three months ended September 30, 2022 decreased by $0.1 million, or 50.0%, compared to the three months ended September 30, 2021. The decrease in research and development expenses was primarily due to decreased spending on the development of the Agartha game in 2022 as the game development was completed and Agartha released on August 18, 2022.
Advertising and marketing expenses
Advertising and marketing expenses for the three months ended September 30, 2022 remained approximately the same as compared to the three months ended September 30, 2021, due to reduced spending on direct advertising in 2022 as the Company marketed the Genesis II release in 2021 and did not have a release in 2022, offset by the Company’s participation in PAX West in 2022.
Depreciation and amortization expenses
Depreciation and amortization expenses for the three months ended September 30, 2022 decreased by $0.1 million, or 50.0%, compared to the three months ended September 30, 2021. The decrease in depreciation and amortization expenses was primarily due to the termination of a lease which resulted in a lower depreciable base of leasehold improvements.
Other Factors Affecting Net Income (Loss)
Three Months ended September 30, |
| |||||||||||
2022 | 2021 | $ Change | % Change |
| ||||||||
| (in millions) | |||||||||||
Interest income – related parties | $ | — | $ | 0.4 | $ | (0.4) |
| (100.0) | % | |||
Interest expense |
| (0.3) |
| (0.1) |
| (0.2) |
| 200.0 | % | |||
Income tax provision (benefit) |
| (0.4) |
| 0.9 |
| (1.3) |
| (144.4) | % | |||
Interest income
Interest income — related parties stemmed from the interest charged on the Shi Loan (as defined below).
Interest income — related parties was $0.0 million, and $0.4 million for the three months ended September 30, 2022 and 2021, respectively. The decrease was due to the distribution of the Shi Loan to Suzhou Snail in April 2022.
Interest expense
Interest expense primarily related to our outstanding indebtedness with our third-party lenders. Interest expense increased by $0.2 million for the three months ended September 30, 2022 as a result of interest charges on the new short-term note issued in January 2022.
Income tax provision (benefit)
The provision for income tax was a $0.4 million benefit and a $0.9 million provision for the three months ended September 30, 2022 and 2021, respectively, representing a decrease of $1.3 million. Our effective income tax rate was 20.5% and 19.2% for the three months ended September 30, 2022 and 2021, respectively.
30
Comparison for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021.
Nine months ended September 30, |
| |||||||||||
2022 | 2021 | $ Change | % Change |
| ||||||||
(in millions) |
| |||||||||||
Revenues, net |
| $ | 59.1 |
| $ | 83.2 |
| $ | (24.1) |
| (29.0) | % |
Cost of revenues |
| 37.7 |
| 48.4 |
| (10.7) |
| (22.1) | % | |||
Gross profit |
| 21.4 |
| 34.8 |
| (13.4) |
| (38.5) | % | |||
Operating expenses: |
|
|
|
| ||||||||
General and administrative |
| 16.2 |
| 13.0 |
| 3.2 |
| 24.6 | % | |||
Research and development |
| 0.5 |
| 0.6 |
| (0.1) |
| (16.7) | % | |||
Advertising and marketing |
| 0.6 |
| 0.3 |
| 0.3 |
| 100.0 | % | |||
Depreciation and amortization |
| 0.4 |
| 0.6 |
| (0.2) |
| (33.3) | % | |||
Total operating expenses |
| 17.7 |
| 14.5 |
| 3.2 |
| 22.1 | % | |||
Income from operations | $ | 3.7 | $ | 20.3 | $ | (16.6) |
| (81.8) | % | |||
Revenues
Net revenues for the nine months ended September 30, 2022 decreased by $24.1 million, or 29.0%, compared to the nine months ended September 30, 2021. Of the $24.1 million decrease in net revenues, $22.2 million was attributable to ARK 1, $0.8 million to Age of Wushu, $0.5 million to Last Oasis, $0.3 million to PixARK, $0.2 million to Atlas and $0.2 million to Voyage, offset by an increase of $0.2 million due to release of West Hunt during the period. Of the $22.2 million decrease attributable to ARK 1, $24.9 million is due to reduced sales of ARK 1, $4.8 million is due to the decrease in deferred revenue recognized, offset by a $7.5 million increase in one off payments during the nine month period ended September 30, 2022. Despite the decrease in Units Sold, the Company recorded a significant increase in its game installs during the nine months ended September 30, 2022, mainly caused by the free week promotions on the Steam and Epic platforms and a subscription program on a certain platform, as a result of which the Company recorded 34.7 million installs, compared to 5.1 million installs for the nine months ended September 30, 2021.
Cost of revenues
Cost of revenues for the nine months ended September 30, 2022 decreased by $10.6 million, or 22.0%, compared to the nine months ended September 30, 2021.
Cost of revenues for the nine months ended September 30, 2022 and 2021, respectively, comprised the following:
| Nine months ended September 30, |
|
|
|
|
| ||||||
2022 |
| 2021 |
| $Change |
| % Change |
| |||||
Software license royalties - related parties | $ | 13,314,258 | $ | 17,046,875 | $ | (3,732,617) |
| (21.9) | % | |||
Software license royalties |
| 47,020 |
| — |
| 47,020 |
| 0.0 | % | |||
License and amortization - related parties |
| 19,052,938 |
| 24,169,714 |
| (5,116,776) |
| (21.2) | % | |||
License and amortization |
| 250,672 |
| 456,149 |
| (205,477) |
| (45.0) | % | |||
Game localization |
| 840 |
| 47,100 |
| (46,260) |
| (98.2) | % | |||
Merchant fees |
| 1,856,371 |
| 2,878,020 |
| (1,021,649) |
| (35.5) | % | |||
Engine fees |
| 1,575,942 |
| 2,453,533 |
| (877,591) |
| (35.8) | % | |||
Internet, server and data center |
| 1,502,631 |
| 1,329,670 |
| 172,961 |
| 13.0 | % | |||
Costs related to advertising revenue |
| 144,191 |
| — |
| 144,191 |
| 0.0 | % | |||
Total: | $ | 37,744,863 | $ | 48,381,061 | $ | (10,636,198) |
| (22.0) | % | |||
The decrease in cost of revenue during the nine months ended September 30, 2022 was primarily due to a reduction in software license royalties of $3.7 million, which is in line with the reduced sales during the period, and decreased amortization costs of $5.3 million as a result of the 2021 impairment loss of $16.3 million on the Atlas license, which led to a lower amortizable base in the current period.
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General and administrative expenses
General and administrative expenses for the nine months ended September 30, 2022 increased by $3.2 million, or 24.6%, compared to the nine months ended September 30, 2021. The increase in general and administrative expenses was primarily due to $2.9 million of increased legal expenses as a result of the Angela Game litigation, $0.5 million of increased professional fees as a result of the shareholder loan distribution related tax consultation expenses, $1.1 million of increased salaries and wages and $0.6 million of increased internet and server costs; offset by a $1.7 million reduction in contractor expenses as a result of decreased activity in the Company’s subsidiary, BTBX.IO, LLC, and reduced need for contractors at the subsidiaries Donkey Crew and Eminence.
Research and development expenses
Research and development expenses for the nine months ended September 30, 2022 decreased by $0.1 million, or 16.7%, compared to the nine months ended September 30, 2021. The decrease in research and development expenses was primarily due to lower costs related to the development of Agartha as the game was released in August 2022.
Advertising and marketing expenses
Advertising and marketing expenses for the nine months ended September 30, 2022 increased by $0.3 million, or 100.0%, compared to the nine months ended September 30, 2021 which was due to increased campaigns on NOIZ, $0.1 million increased advertising by Wandering Wizard for the Agartha and West Hunt campaigns and $0.2 million for the Company’s participation at the Gamesbeat Summit and Paxwest in 2022.
Depreciation and amortization expenses
Depreciation and amortization expenses for the nine months ended September 30, 2022 decreased by $0.2 million, or 33.3%, compared to the nine months ended September 30, 2021. The decrease in depreciation and amortization expenses was primarily due to lower depreciable base of leasehold improvements as a result of a lease terminations that occurred in 2022.
Other Factors Affecting Net Income (Loss)
Nine months ended September 30, |
| |||||||||||
2022 | 2021 | $ Change | % Change |
| ||||||||
(in millions) |
| |||||||||||
Interest income |
| $ | — |
| $ | 0.1 |
| $ | (0.1) |
| (100.0) | % |
Interest income – related parties |
| 0.6 |
| 1.1 |
| (0.5) |
| (45.5) | % | |||
Interest expense |
| (0.6) |
| (0.3) |
| (0.3) |
| 100.0 | % | |||
Other income |
| 0.3 |
| 0.5 |
| (0.2) |
| (40.0) | % | |||
Equity in (loss) of unconsolidated entity |
| — |
| (0.3) |
| 0.3 |
| (100.0) | % | |||
Income tax provision |
| 0.8 |
| 4.2 |
| (3.4) |
| (81.0) | % | |||
Interest income
Interest income in the nine months ended September 30, 2022 and 2021 primarily related to our deposits with third-party financial institutions, while interest income — related parties primarily stemmed from the interest charged on the shareholder loan.
Interest income — related parties were $0.6 million and $1.1 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease was driven by the distribution of the shareholder loan to Suzhou Snail in April 2022.
Interest expense
Interest expense primarily related to our outstanding indebtedness with our third-party lenders.
Interest expense increased by $0.3 million for the nine months ended September 30, 2022 primarily as a result of interest charges on the new short-term note issued in January 2022.
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Income tax provision
The provision for income tax was $0.8 million and $4.2 million for the nine months ended September 30, 2022 and 2021, respectively, representing a decrease of $3.4 million. Our effective income tax rate was 19.7% and 19.8% for the nine months ended September 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
Capital spending
We incur capital expenditures in the normal course of business and perform ongoing enhancements and updates to our social and mobile games to maintain their quality standards. Cash used for capital expenditures in the normal course of business is typically made available from cash flows generated by operating activities. We may also pursue acquisition opportunities for additional businesses or games that meet our strategic and return on investment criteria. Capital needs for investment opportunities are evaluated on an individual opportunity basis and may require significant capital commitments.
Liquidity
Our primary sources of liquidity are the cash flows generated from our operations, currently available unrestricted cash and cash equivalents. Our unrestricted cash and cash equivalents were $9.0 million and $19.7 million as of September 30, 2022 and 2021, respectively. Our restricted cash primarily consists of time deposits and is used as security for certain of our debt instruments and to secure standby letters of credit with certain of our landlords.
Cash flows
The following tables present a summary of our cash flows for the periods indicated (in millions):
Nine months ended September 30, |
| |||||||||||
2022 | 2021 | $ Change | % Change |
| ||||||||
(in millions) |
| |||||||||||
Net cash flows provided by (used in) operating activities |
| $ | (0.7) |
| $ | 18.6 |
| $ | (19.3) |
| (103.8) | % |
Net cash flows provided by (used in) investing activities |
| 1.2 |
| (29.5) |
| 30.7 |
| (104.1) | % | |||
Net cash flows provided by (used in) financing activities |
| (1.6) |
| 2.7 |
| (4.3) |
| (159.3) | % | |||
Effect of currency translation on cash and cash equivalents |
| — |
| 0.4 |
| (0.4) |
| (100.0) | % | |||
Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | $ | (1.1) | $ | (7.8) | $ | 6.7 |
| (85.9) | % | |||
Operating activities
Net cash flows used in operating activities for the nine months ended September 30, 2022 decreased $19.3 million as compared to the cash provided by operating activities for the nine months ended September 30, 2021, which resulted primarily from a $0.6 million net decrease in change in net operating assets and liabilities, a period-over-period decrease in net income of $13.8 million and a decrease of $5.0 million in non-cash reconciling items.
Net income was $3.2 million and $17.0 million for the nine months ended September 30, 2022 and 2021, respectively, representing a decrease of $13.8 million. The decrease was primarily due to a decrease in revenue of $24.1 million, an increase in general and administrative expenses of $3.1 million, offset by a decrease in license cost and license right amortization of $9.0 million, a decrease in merchant and engine fees of $1.9 million and a decrease in the Company’s tax provision of $3.4 million.
Non-cash reconciling items were $5.4 million and $10.4 million for the nine months ended September 30, 2022 and 2021, respectively, representing a decrease of $5.0 million. The decrease in the non-cash reconciling items was primarily due to a decrease of $5.3 million in amortization that was the result of an impairment loss recognized at the end of fiscal year 2021.
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The decrease in our net operating assets and liabilities between the nine months ended September 30, 2022 and 2021 of $0.6 million was primarily the result of a net decrease in accounts receivables and accounts receivable — related party of $3.7 million due to timing of receipts and payments from customers and related party, a net decrease in prepaid expenses related party and prepaid expenses and other current assets of $1.4 million primarily driven by timing of payments of federal and state taxes and development costs and the expense of prepaid royalties, a decrease in accrued expenses of $0.8 million primarily driven by larger income tax accruals in 2021, partially offset by an increase in deferred revenue of $4.1 million and a net increase in accounts payable and accounts payable – related party of $1.6 million.
Our accounts receivable — related party represent revenues attributable to certain mobile games that, for administrative reasons, were collected on our behalf by SDE, Inc. (“SDE”), a related party. SDE no longer collects such payments on our behalf; all such payments are received directly from the platforms through which we offer the relevant games. As of September 30, 2022 and December 31, 2021, the net outstanding balance of receivables due from SDE was $12.2 million and $8.4 million, respectively. We expect accounts receivables owed to us by SDE will be repaid within a commercially reasonable period of time. In the event we do not receive timely remittance from SDE, we may hold back amounts owed to SDE from future licensing costs payable to SDE pursuant to our existing contractual relationship. See Note 5 – Accounts Receivable — Related Party to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Investing activities
Cash provided by investing activities for the nine months ended September 30, 2022 increased $30.7 million compared to the nine months ended September 30, 2021 due to payments for the acquisition of license rights relating to the release of Genesis II of $5.0 million in 2021, the additional funding of the Shi Loan of $24.5 million in 2021 and the receipt by the Company of $1.5 million on the Pound Sand note in 2022.
Financing activities
Net cash flows used in financing activities for the nine months ended September 30, 2022 was $1.6 million compared to net cash flows provided by financing activities of $2.7 million for the nine months ended September 30, 2021. Financing activities for the nine months ended September 30, 2022 included $10.0 million in borrowings on a short term note which was offset by $8.2 million in cash dividends that was declared and paid during the period and $3.3 million of repayments on the Company’s short term note. Financing activities for the nine months ended September 30, 2021 included $3.0 million in borrowings under our Term Loan and $6.5 million in borrowings on our revolving loan which was partially offset by $6.7 million in repayments on long term debt.
Registered Offering
In September 2022, we filed a Form S-1 Registration Statement with the United States Securities and Exchange Commission in connection with our IPO. As of the effective date of the Registration Statement, we became the parent company of Snail Games USA and a holding company, with our principal asset consisting of all the shares of common stock of Snail Games USA.
In the IPO, we issued 3,000,000 shares of our Class A common stock and net proceeds from the issuance were distributed to Snail Games USA in November 2022 in the amount of $12.0 million. In connection with the IPO, $1.0 million of the net proceeds were remitted to an escrow account which is held to provide a source of funding for our indemnification obligations to the underwriters. The amount in escrow will be reported as restricted cash for 12 months from the date of the IPO, at which time the restrictions will be removed and the balance will be reverted to unrestricted cash.
34
Loans to related parties
Snail Games USA was party to a line of credit note with Mr. Hai Shi, our Founder and Chairman, which provided for loans to Mr. Shi up to a maximum aggregate principal amount of $100.0 million (the “shareholder loan” or “Shi Loan”). Interest accrued on outstanding amounts at a rate of 2.00% per year, and all outstanding amounts were due and payable on demand. As of December 31, 2021, outstanding borrowings (including interest receivable) under the line of credit amounted to $94.4 million. In April 2022, Snail Games USA distributed the Shi Loan to Suzhou Snail, Snail Games USA’s former corporate parent, which assumed the loan as creditor. At the time of the distribution, $94.9 million was outstanding, including interest. As a result of this distribution, the total withholding taxes amounted to $8.2 million, which amount was distributed to Suzhou Snail in connection with the distribution of the Shi Loan and subsequently paid on April 29, 2022. As of April 2022, as a result of the distribution, the Shi Loan is no longer reflected on our condensed consolidated balance sheets.
Capital resources
We primarily fund our operations from our net cash flows provided by operating activities. In addition to these cash flows, we have entered into certain debt arrangements to provide additional liquidity and to finance our operations.
Revolving Loan
In December 2018, we entered into a revolving loan and security agreement with a financial institution for a revolving note in the amount of $5.5 million. On June 17, 2021, we amended and restated our revolving loan and security agreement (the “Revolver”) to increase our revolving line of credit to $9.0 million. As amended, the Revolver matures on December 31, 2023 and bears interest at a rate equal to the prime rate less 0.25%. Interest is due and payable under the Revolver on a monthly basis, and borrowings under the revolver are secured by certain deposit accounts. The revolver is secured by the certificate of deposit accounts held with the financial institution, and reported as restricted cash, in the amounts of $5.3 million and $5.2 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, we had borrowings of $9.0 million, outstanding under our Revolver.
Term Loan
In June 2021, we entered into a loan agreement with a financial institution providing for a term loan in an aggregate principal amount of $3.0 million (the “Term Loan”). The Term Loan, which matures in June 2031, bears interest at a fixed rate of 3.5% for the five years and then at a floating rate of the Wall Street Journal prime rate until maturity. The Term Loan is secured by our principal headquarters. The Term Loan replaced and refinanced a previously outstanding $3.0 million promissory note due September 2021.
In January 2022, we amended and restated our Revolver and we executed a promissory note to obtain an additional long-term loan with a principal balance of $10.0 million which matures on January 26, 2023 (the “New Term Loan”). Interest is equal to the higher of 3.75% and the Wall Street Journal prime rate plus 0.50%. The New Term Loan is secured and collateralized by our existing assets. In December 2022, the maturity date was extended to January 26, 2024 and interest rate amended to the higher of the Wall Street Journal Prime Rate less 0.25% or 5.75%, see Note 19 – Subsequent Events to our unaudited condensed consolidated financial statements included in this Quarterly Report.
As of September 30, 2022, we had borrowings of $6.7 million outstanding under the New Term Loan.
Cares Act PPP Loan
In 2020, we applied for, and received, funds under the PPP in the amount of $0.8 million. In December 2020, $0.1 million of the PPP loan was forgiven by the SBA. In March 2021, an additional $0.4 million principal amount of the PPP loan balance was forgiven by the SBA. As of April 2022, all outstanding amounts under the PPP loan have either been repaid or forgiven.
Financial covenants
The Revolver, Term Loan and the New Term Loan require us to maintain quarterly minimum EBITDA of $3.0 million and to satisfy certain financial maintenance ratios, including a current ratio of 1.5 to 1.0, and minimum service coverage ratio of 1.5 to 1.0. We were in compliance with all covenants under our debt facilities as of September 30, 2022 and December 31, 2021.
35
For additional information regarding our indebtedness, see Note 15 — Revolving Loan, Short Term Note and Long-Term Debt to our unaudited condensed consolidated financial statement included in this Quarterly Report.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of September 30, 2022 (in millions):
| Payments Due by Period | ||||||||||||||
Less than | More than | ||||||||||||||
| Total |
| 1 year |
| 1 – 3 years |
| 3 – 5 years |
| 5 years | ||||||
Operating lease obligations | $ | 4.6 | $ | 1.3 | $ | 3.1 | $ | 0.2 | $ | — | |||||
Debt | $ | 18.6 | $ | 15.7 | $ | 0.2 | $ | 0.2 | $ | 2.5 | |||||
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations, financial condition, and liquidity are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available. For additional information on our significant accounting policies, please refer to Note 2 — Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Recently Issued Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Quarterly Report for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. The JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an “emerging growth company” to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
36
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
With respect to the quarter ended September 30, 2022, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2022 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Item 1 of Part I, “Unaudited Consolidated Financial Statements—Note 18—Commitments and Contingencies—Litigation.”
Item 1A. Risk Factors.
As of the date of this Quarterly Report on, there have been no material changes from the risk factors disclosed in our Prospectus as filed by us with the SEC on November 10, 2022 pursuant to Rule 424(b)(4) under the Securities Act, relating to our registration statement on Form S-1 (File No. 333-267483), as amended, except as described below. Any of these factors could result in a significant or material adverse effect on our result of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
We cannot guarantee that our share repurchase program will be fully implemented or it will enhance stockholder value, and share repurchases could affect the price of our Class A common stock.
In November 2022, our board of directors authorized a share repurchase program of up to $5 million of our outstanding Class A common stock, which does not have a fixed expiration date. Share repurchases under the program may be made from time to time through open market transactions, block trades, privately negotiated transactions or otherwise and are subject to market and business conditions, levels of available liquidity, cash requirements for other purposes, regulatory, and other relevant factors., at the discretion of management and in accordance with applicable federal securities laws and other applicable legal requirements and Nasdaq listing rules. The timing, pricing, and size of share repurchases will depend on a number of factors, including, but not limited to, price, corporate and regulatory requirements, and general market and economic conditions. As of December 13, 2022, approximately $1.8 million of the share repurchase program remains available for future repurchases. The share repurchase program does not obligate us to repurchase any dollar amount or number of shares, and the program may be suspended or discontinued at any time, which may result in a decrease in the price of our Class A common stock.
37
Repurchases under our share repurchase program will decrease the number of outstanding shares of our Class A common stock and therefore could affect the price of our Class A common stock and increase its volatility. The existence of our share repurchase program could also cause the price of our Class A common stock to be higher than it would be in the absence of such a program and could reduce the market liquidity for our Class A common stock. Additionally, repurchases under our share repurchase program will diminish our cash reserves, which could impact our ability to further develop our business and service our indebtedness. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our Class A common stock may decline below the levels at which we repurchased such shares. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our Class A common stock price. Although our share repurchase program is intended to enhance long-term stockholder value, short-term price fluctuations could reduce the program’s effectiveness.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
Subsequent to the period covered by this Quarterly Report, we issued the following securities that were not registered under the Securities Act.
On November 14, 2022, concurrently with the IPO and pursuant to the certain reorganization transactions, the pre-IPO stockholders of Snail Games USA Inc. (“SGUSA”) collectively exchanged 500,000 shares of SGUSA common stock for 6,251,420 shares of our Class A common stock and 28,748,580 shares of our Class B common stock.
The foregoing transactions were exempt from registration under the Securities Act of 1933, as amended (the “Act”), in reliance on Section 4(a)(2) of the Act.
Use of Proceeds.
On November 14, 2022, we closed our IPO, in which we issued and sold 3,000,000 shares of our Class A common stock. All of the shares were sold at a price to the public of $5.00 per share for an aggregate offering price of $15.0 million. The underwriters may also exercise their option to purchase up to an additional 450,000 shares of Class A common stock from us (the “Option”), less the underwriting discount, for 45 days after the date of the prospectus (the “Prospectus”) included in our registration statement on Form S-1 (File No. 333-267483) (the “Registration Statement”). As of the date of this Quarterly Report, the underwriters have not exercised the Option.
All of the shares sold were registered under the Act pursuant the Registration Statement, which became effective on November 9, 2022. The representatives of the underwriters for the offering were US Tiger Securities, Inc. EF Hutton, division of Benchmark Investments, LLC.
We received net proceeds of approximately $10.3 million after deducting underwriting discounts and commissions of $975,000 and estimated offering expenses of $3.7 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. In addition to the use of proceeds described in the Prospectus included in the Registration Statement, we intend to use up to $5.0 million of IPO proceeds to repurchase shares of Class A common stock pursuant to the Share Repurchase Program.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None. However, on November 10, 2022, the Snail, Inc. board of directors approved and established the Share Repurchase Program to reacquire shares of Snail, Inc.’s Class A common stock. The maximum aggregate value of the shares repurchased shall not exceed $5.0 million, and there is no fixed expiration date on the Share Repurchase Program. The exact number of shares of Class A common stock and timing and method of the repurchase are at the discretion of the CEO, CFO and Treasurer. As of December 13, 2022, 1,090,877 shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately $3.2 million. The average price paid per share was $2.98 and approximately $1.8 million aggregate amount of shares of Class A common stock remain available for repurchase under the Share Repurchase Program. See Item 1 of Part I, “Unaudited Consolidated Financial Statements—Note 19—Subsequent Events.”
38
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| Incorporated by Reference |
| |||||||||||
Exhibit | Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed Herewith | ||
3.1 | Amended and Restated Certificate of Incorporation of Snail, Inc. | 8-K | 001-41556 | 3.1 | November 15, 2022 | ||||||||
3.2 | 8-K | 001-41556 | 3.2 | November 15, 2022 | |||||||||
10.1 | S-1 | 10.12 | November 4, 2022 | ||||||||||
10.2 | X | ||||||||||||
10.3 | S-1 | 10.5 | November 4, 2022 | ||||||||||
10.4˄ | S-1 | 10.11 | November 4, 2022 | ||||||||||
10.5˄ | Form of RSU Award Agreement (Employee) pursuant to the Snail, Inc. Omnibus Incentive Plan | S-1 | 10.15 | November 4, 2022 | |||||||||
10.6˄ | Form of RSU Award Agreement (Non-Employee) pursuant to the Snail, Inc. Omnibus Incentive Plan | S-1 | 10.16 | November 4, 2022 | |||||||||
31.1 | X | ||||||||||||
31.2 | X | ||||||||||||
32.1* | X | ||||||||||||
32.2* | X | ||||||||||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | ||||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||||||||||
* | The certifications furnished in Exhibit 32 hereto are deemed to accompany this Quarterly Report and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. |
˄ | Indicates management contract or compensatory plan. |
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SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Snail, Inc. | ||
(Registrant) | |||
Date: December 15, 2022 | By: | /s/ Jim S. Tsai | |
Jim S. Tsai | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: December 15, 2022 | By: | /s/ Heidy Chow | |
Heidy Chow | |||
Chief Financial Officer | |||
(Principal Financial Officer) | |||
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