美國
證券和交易委員會
華盛頓特區 20549
表格
（標記一）
| 根據1934年證券交易法第13或15（d）節提交的季度報告書 |
截至季度結束日期的財務報告
或者
| 根據1934年證券交易法第13或15(d)條的規定，向過渡時期報告 |
委員會文件號
（符合其憲章規定的準確名稱）
（註冊地或組織所在管轄區） 文件號碼） |
（美國國稅局僱主號碼） (主要 執行人員之地址) |
| (主要 執行人員之地址) | (郵政編碼) |
註冊人的
電話號碼，包括區號：+1
根據法案第12(b)節註冊的證券:
| 每一類別的名稱 | 普通股，面值0.001美元 | 在每個交易所註冊的名稱 | ||
(納斯達克資本市場) |
根據該法第12(g)條登記的證券： 無
請勾選如果註冊人不需要根據《法案》第13或15(d)條提交報告。是 ☐ 否 ☒
請在複選框中表明註冊者是否：（1）在過去的12個月內（或更短的時間段，註冊者應當提交此類報告）已經提交所有根據證券交易所法第13或第15（d）款所需提交的報告；並且（2）在過去的90天內一直受到這類提交要求的影響。 ☒ 否 ☐
請用勾號表示，註冊者在過去12個月內（或者註冊者需要提交這些文件的更短期限內）是否已根據《S-t規定第405條》要求提交了每個互動數據文件。 ☒ 否 ☐
請勾選是否申報人是大型加速存款, 加速存款, 非加速存款, 較小型報告公司, 或新興成長公司。請查看《交易所法》第120億章節中對「大型加速存款,」 「加速存款,」 「較小型報告公司,」 和 「新興成長公司」的定義。
| 大型加速文件提交人 | ☐ | 加速文件提交人 | ☐ |
| ☒ | 小型報告公司 | ||
| 新興成長公司 |
如果是新興成長型企業，請勾選此項，以指示申報人已選擇不使用擴展過渡期符合任何新的或修訂的財務會計準則，依據證交法第13(a)條提供。
如果證券是根據本法案第12 (b)條註冊的，則請勾選以下項目，以確認註冊人的財務報表是否反映了在原先已發佈的財務報表中對差錯的更正。☐
√請勾選表示錯誤更正中任何一個是需要根據§240.10D-1(b)規定，在恢復期內進行激勵報酬回收分析的重述。
請通過勾選來表示註冊申請者是否爲殼公司（根據《交易所法》第120億.2條定義）。是 ☐ 否
請指示申報人的每種普通股的流通股數，截至最新可行日期。
| 普通股類別 | 2024年11月8日的優先股份 | |
| A類普通股，每股面值$。 | ||
| B類普通股，每股面值$ 每股 |
SNAIL，INC.及其子公司
表格 10-Q
2024年9月30日結束的季度
目錄
| 頁面 | ||
| 聲明 | ii | |
| 第一部分 財務信息 | ||
| 項目 1. | 基本報表（未經審計） | F-1 |
| Snail公司及其子公司2024年9月30日和2023年12月31日簡明合併資產負債表 | F-1 | |
| Snail公司及其子公司2024年9月30日和2023年三個月及九個月的簡明合併損益表和綜合收益表 | F-2 | |
| Snail公司及其子公司2024年9月30日和2023年三個月及九個月的簡明合併權益表 | F-3 | |
| Snail, Inc.及其子公司2024年9月30日和2023年止之簡明綜合現金流量表 | F-4 | |
| Snail, Inc.及其子公司基本報表附註 | F-5 | |
| 項目 2. | 分銷計劃 | 28 |
| 項目 3. | 有關市場風險的定量和定性披露 | 45 |
| 項目 4. | 控制和程序 | 45 |
| 第二部分.其他信息 | ||
| 項目 1. | 法律訴訟 | 45 |
| Interest expense, net | 風險因素 | 45 |
| 項目 2. | 未註冊的股票股權銷售和籌款用途 | 51 |
| 項目 3. | 對優先證券的違約 | 52 |
| 項目 4. | 礦山安全披露 | 52 |
| 項目5。 | 其他信息 | 52 |
| 項目 6. | 展示資料 | 52 |
| 簽名 | 53 | |
| i |
關於前瞻性聲明的警示性聲明
本季度報告的表格10-Q（以下簡稱"季度報告"）包含構成前瞻性聲明的聲明。本季度報告中許多前瞻性聲明可通過使用前瞻性詞語（如"預計"，"相信"，"可能"，"期望"，"應該"，"計劃"，"打算"，"可能"，"預測"，"持續"，"估計"和"潛在"）或這些術語的否定形式或其他類似表達來識別。
前瞻性 聲明出現在本季度報告的多個地方，包括但不限於我們意圖、信念或當前期望的聲明。這些前瞻性聲明包括有關我們業務、財務控件、經營結果、流動性、計劃和目標的可能或假設的未來結果的信息。前瞻性聲明是基於我們管理層的信念和假設，以及目前可用的信息。這些聲明受到風險和不確定性的影響，實際結果可能會因各種因素而與前瞻性聲明中表達或暗示的結果存在重大差異，包括但不限於在本季度報告的「第II部分，第1A項——風險因素」中描述的因素。我們就以下事項所做的陳述本質上是前瞻性的：
| ● | 我們重新建立有盈利能力的業務、籌集額外資本或重新談判我們的債務安排的能力; | |
| ● | 我們的增長前景和策略; | |
| ● | 推出新遊戲和爲商業上成功的遊戲添加新功能; | |
| ● | 我們關於未來增長的主要推動因素的預期; | |
| ● | 我們未能遵守或恢復符合納斯達克資本市場的持續上市要求； | |
| ● | 我們保留和增加玩家群體，開發新的電子遊戲並完善我們現有遊戲的能力； | |
| ● | 來自多個行業中公司的競爭，包括其他休閒遊戲開發商和發行商以及大大小小的公共及私人多媒體公司的競爭； | |
| ● | 在控制我們的勞動成本的同時吸引並留住合格的管理團隊和其他團隊成員的能力； | |
| ● | 我們與Xbox Live、遊戲Pass、PlayStation Network、Steam、Epic Games Store、蘋果應用商店、Google Play商店、My Nintendo商店和亞馬遜應用商店等第三方平台的業務關係； | |
| ● | 成功進入新市場並管理我們的國際擴張能力； | |
| ● | 保護和發展我們的品牌和知識產權組合； | |
| ● | 維護知識產權侵權和其他索賠所產生的成本； | |
| ● | 我們未來的業務發展、運營結果和財務狀況； | |
| ● | 法院或其他政府機構的裁決； | |
| ● | 我們的回購計劃（如下所定義），包括關於在回購計劃下進行回購的時間和方式的預期； | |
| ● | 我們追求併成功整合戰略收購的計劃； | |
| ● | 本季度報告中描述的其他風險和不確定因素，包括第II部分第1A項「風險因素」中描述的那些； 和 | |
| ● | 上述任何假設的基礎。 |
有關風險、不確定性及其他可能影響我們財務結果的因素的進一步信息，已包含在我們不時向美國證券交易委員會（"SEC"）提交的文件中，包括本季度報告第二部分第一項A中 "風險因素 "以及在Form 10-K和10-Q中已提交或將要提交給SEC的其他定期報告中。您不應依賴這些前瞻性陳述，因爲實際結果和結果可能因這些風險和不確定性而與前瞻性陳述中所表達或暗示的結果存在重大差異。本季度報告中的所有前瞻性陳述均基於管理層的信念和假設，以及截至本報告提交日期我們當前可得的信息，我們不承擔任何義務更新所提供的前瞻性陳述，以反映在它們作出後的事件或情況。
| ii |
第一部分
條款 1. 精簡合併財務報表（未經審計）
Snail, Inc.及其子公司
簡化版 合併資產負債表截至2024年9月30日和2023年12月31日
| 2024年9月30日 | 2023年12月31日 | |||||||
| 資產 | ||||||||
| 流動資產： | ||||||||
| 現金及現金等價物 | $ | $ | ||||||
| 應收賬款，減去$的信貸損失 | ||||||||
| 應收賬款 - 關聯方 | ||||||||
| 貸款及應計利息-關聯方 | ||||||||
| 預付費用 - 相關方 | ||||||||
| 預付費用及其他流動資產 | ||||||||
| 預繳稅款 | ||||||||
| 總流動資產 | ||||||||
| 限制性現金及現金等價物 | ||||||||
| 應收賬款-關聯方，減去當前部分 | ||||||||
| 預付費-關聯方，淨額 | ||||||||
| 房地產和設備，淨額 | ||||||||
| 無形資產-其他, 淨值 | ||||||||
| 遞延所得稅 | ||||||||
| 其他非流動資產 | ||||||||
| 經營租賃使用權資產，淨值 | ||||||||
| 總資產 | $ | $ | ||||||
| 負債、非控股權益和股東權益 | ||||||||
| 流動負債: | ||||||||
| 應付賬款 | $ | $ | ||||||
| 應付賬款-關聯方 | ||||||||
| 應計費用和其他負債 | ||||||||
| 應付利息-關聯方 | ||||||||
| 循環貸款 | ||||||||
| 應付票據 | ||||||||
| 可轉換票據，扣除貼現後淨額 | ||||||||
| 長期應付票據的短期部分 | ||||||||
| 遞延營收的當前部分 | ||||||||
| 經營租賃負債流動部分 | ||||||||
| 流動負債合計 | ||||||||
| 應計費用 | ||||||||
| 遞延收入，減去當前部分淨額 | ||||||||
| 經營租賃負債，淨值超過流動資產 | ||||||||
| 總負債 | ||||||||
| 承諾和 contingencies | ||||||||
| 股東權益： | ||||||||
| A類普通股，$0.0005股，截至2024年4月30日和2024年1月31日，授權股票0.0005股； 面值， 授權股份； 發行的股份和 2024年9月30日的股份未發行和 已發行股份數和 截至2023年12月31日，股本總數爲 | ||||||||
| B類普通股，$0.00003 面值， 已授權股份數; 截至2024年9月30日和2023年12月31日，已發行並流通的股份 | ||||||||
| 其他資本公積 | ||||||||
| 其他綜合收益累計 | ( | ) | ( | ) | ||||
| 累積赤字 | ( | ) | ( | ) | ||||
| 截至2021年9月30日，公司持有的庫藏股爲（ 2024年9月30日和2023年12月31日的股份 | ( | ) | ( | ) | ||||
| Snail公司股本總額 | ||||||||
| 非控制權益 | ( | ) | ( | ) | ||||
| 股東權益總額 | ||||||||
| 總負債、非控股權益和股東權益 | $ | $ | ||||||
請參閱簡明綜合財務報表（未經審計）附註
| F-1 |
Snail, Inc.及其子公司
截至2024年9月30日和2023年9月30日三個月和九個月的收入（損失）及綜合收入（損失）的簡明綜合報表
| 截至9月30日的三個月 | 截至9月30日九個月 | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 營業收入，淨額 | $ | $ | $ | $ | ||||||||||||
| 成本支出 | ||||||||||||||||
| 毛利潤（損失） | ( | ) | ||||||||||||||
| 營業費用： | ||||||||||||||||
| General and administrative | ||||||||||||||||
| 研發費用 | ||||||||||||||||
| 廣告和營銷 | ||||||||||||||||
| 折舊和攤銷 | ||||||||||||||||
| 總運營費用 | ||||||||||||||||
| 經營活動收入（損失） | ( | ) | ( | ) | ||||||||||||
| 其他收入（費用）： | ||||||||||||||||
| 利息收入 | ||||||||||||||||
| 利息收入-關聯方 | ||||||||||||||||
| 利息支出 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 其他收益 | ||||||||||||||||
| 外幣交易損失 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 總其他收入(費用)，淨額 | ( | ) | ( | ) | ( | ) | ||||||||||
| 所得稅前利潤（損失） | ( | ) | ( | ) | ||||||||||||
| 所得稅的準備金（福利） | ( | ) | ( | ) | ||||||||||||
| 淨利潤(損失) | ( | ) | ( | ) | ||||||||||||
| 歸屬於少數股東的淨虧損 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Snail，Inc.可歸屬於淨利潤 | ( | ) | ( | ) | ||||||||||||
| 綜合收益（損失）表： | ||||||||||||||||
| 淨利潤（虧損） | ( | ) | ( | ) | ||||||||||||
| 與貨幣翻譯調整相關的其他綜合收益（虧損），稅後淨額 | ( | ) | ||||||||||||||
| 總綜合收益（損失） | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 歸屬於A類普通股股東的淨利潤（虧損）： | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 歸屬於B類普通股股東的淨利潤（虧損）： | ||||||||||||||||
| 基本 | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 稀釋 | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 歸屬於A類和B類普通股股東的每股收入（虧損）： | ||||||||||||||||
| 基本 | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 稀釋 | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 用於計算歸屬於A類普通股股東的每股收益（損失）的加權平均股數： | ||||||||||||||||
| 基本 | ||||||||||||||||
| 稀釋 | ||||||||||||||||
| 用於計算歸屬於B類普通股股東的每股收益（損失）的加權平均股數： | ||||||||||||||||
| 基本 | ||||||||||||||||
| 稀釋 | ||||||||||||||||
請參閱簡明綜合財務報表（未經審計）附註
| F-2 |
Snail, Inc.及其子公司
截至2024年和2023年9月30日的三個月和九個月的精煉合併權益報表
A股 普通股 | B類股 普通股 | 額外支付的資本- | 累積 其他 綜合 | 累計 | 庫藏股 | 蝸牛公司股權 | 非 控制 | 總股本 | ||||||||||||||||||||||||||||||||||||||||
| 股份 | 金額 | 股份 | 金額 | 資本 | 損失 | 虧損 | 股份 | 金額 | (虧損) | 利息 | (虧損) | |||||||||||||||||||||||||||||||||||||
| 2022年12月31日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票基礎補償 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 回購普通股 | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| 外幣轉換 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 淨損失 | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| 2023年3月31日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 股息分配稅扣繳支付的回報 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票基礎補償 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 外幣翻譯 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 淨虧損 | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| 2023年6月30日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票基礎補償 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 外幣翻譯 | - | - | ( | ) | - | ( | ) | ( | ||||||||||||||||||||||||||||||||||||||||
| 淨虧損 | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| 2023年9月30日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
A股 普通股 | B類股 普通股 | 額外實收資本 | 累積 其他 綜合 | 累計 | 庫藏股 | 蝸牛公司股票 | 非 控制 | 總股本 | ||||||||||||||||||||||||||||||||||||||||
| 股份 | 金額 | 股份 | 金額 | 資本 | 虧損 | 赤字 | 股份 | 金額 | (赤字) | 利益 | (赤字) | |||||||||||||||||||||||||||||||||||||
| 2023年12月31日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 應付票據的轉換 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票薪酬 | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| 爲服務發行的普通股 | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||||
| 外幣轉換 | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| 淨損失 | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| 2024年3月31日結存餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票補償 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 爲服務發行的普通股 | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||||
| 外幣翻譯 | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| 淨利潤（虧損） | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| 2024年6月30日餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 與限制性股票單位相關的股票補償 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 用於服務的普通股 | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||||
| 外幣轉換 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 淨利潤（損失） | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| 2024年9月30日的餘額 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
請參閱簡明綜合財務報表（未經審計）附註
| F-3 |
Snail, Inc.及其子公司
截至2024年9月30日和2023年9月30日的九個月濃縮合並現金流量表
| 2024 | 2023 | |||||||
| 經營活動現金流量： | ||||||||
| 淨利潤（虧損） | $ | $ | ( | ) | ||||
| 調整爲符合經營活動提供的淨現金流的淨利潤（虧損）： | ||||||||
| 攤銷 - 無形資產 - 許可證，關聯方 | ||||||||
| 攤銷 - 無形資產 - 其他 | ||||||||
| 攤銷 - 貸款發放費和債務折扣 | ||||||||
| 增值 – 可轉換債券 | ||||||||
| 折舊和攤銷 - 資產 - 物業和設備 | ||||||||
| 基於股票的補償費用（收入） | ( | ) | ||||||
| 來自受限定託存款的利息收入 | ( | ) | ||||||
| 遞延稅款，淨額 | ( | ) | ( | ) | ||||
| 資產和負債變動： | ||||||||
| 應收賬款 | ||||||||
| 應收賬款 - 關聯方 | ( | ) | ||||||
| 預付費用 - 相關方 | ( | ) | ( | ) | ||||
| 預付費用及其他流動資產 | ( | ) | ||||||
| 預繳稅款 | ( | ) | ||||||
| 其他非流動資產 | ( | ) | ( | ) | ||||
| 應付賬款 | ( | ) | ||||||
| 應付賬款-關聯方 | ( | ) | ( | ) | ||||
| 應計費用和其他負債 | ( | ) | ||||||
| 關聯方應收利息 | ( | ) | ( | ) | ||||
| 租賃負債 | ( | ) | ( | ) | ||||
| 遞延營收 | ( | ) | ||||||
| 經營活動產生的淨現金流量 | ( | ) | ||||||
| 籌集資金的現金流量： | ||||||||
| 債務票據償還 | ( | ) | ( | ) | ||||
| 償還應付票據 | ( | ) | ( | ) | ||||
| 可轉換票據償還 | ( | ) | ||||||
| 循環貸款償還 | ( | ) | ( | ) | ||||
| 應付票據借款 | ||||||||
| 發行可轉換債券所得款項 | ||||||||
| 退還股利扣繳稅過多部分 | ||||||||
| 購買庫存 | ( | ) | ||||||
| 資本化發行成本支付 | ( | ) | ||||||
| 應付賬款中發行成本支付 | ( | ) | ||||||
| 籌集資金淨額 | ( | ) | ( | ) | ||||
| 現金及現金等價物的外幣折算影響 | ||||||||
| 現金及現金等價物以及受限制的現金及現金等價物的淨減少 | ( | ) | ( | ) | ||||
| 現金及現金等價物，以及受限制的現金及現金等價物 - 本期的開始 | ||||||||
| 現金及現金等價物，以及受限制的現金及現金等價物 - 本期的結束 | $ | $ | ||||||
| 現金流補充資料披露 | ||||||||
| 期間支付的現金用於： | ||||||||
| 利息 | $ | $ | ||||||
| 所得稅 | $ | $ | ||||||
| 本期間的非現金交易包括： | ||||||||
| 與股權信用額度相關的warrants的發行 | $ | $ | ( | ) | ||||
| 債務轉換爲權益 | $ | ( | ) | $ | ||||
| 爲了租賃負債而獲得的使用權資產 | $ | ( | ) | $ | ||||
參見 簡明合併財務報表附註（未經審計）
| F-4 |
蝸牛 公司及其子公司
基本報表註釋
注意 1 - 報告與業務性質介紹
Snail, Inc. 於2022年1月在特拉華州註冊成立。「Snail, Inc」、「Snail Games」、「我們的」以及「公司」這幾個術語用來 collectively 指代 Snail, Inc. 及其子公司。公司的財政年度結束於12月31日。公司成立的目的是爲了完成首次公開募股（「IPO」）及相關交易，以繼續開展 Snail Games 美國有限公司及其子公司的業務。Snail Games 美國有限公司成立於2009年，是蘇州 Snail 數字科技有限公司（「蘇州 Snail」）的全資子公司，位於中國蘇州，是在 IPO 後繼續運營的實體。Snail Games 美國有限公司致力於研究、開發、市場營銷、出版和分發遊戲、內容和支持，這些內容可以在包括遊戲機、個人電腦、手機和平板電腦在內的各種平台上進行播放。
其餘外匯翻譯和交易詳情請參考原文
附帶的簡明合併基本報表已根據美國證券交易委員會（SEC）的規則和規定及一般公認會計原則（"U.S. GAAP"）爲中期報告而編制。 因此，某些通常由U.S. GAAP要求的附註或其他信息如果在實質上重複了我們年度審計合併基本報表中的披露，則已被簡化或省略。此外，年末的簡明合併資產負債表數據來源於經過審計的合併基本報表，但未包含U.S. GAAP要求的所有披露。因此，未經審計的簡明合併基本報表應與經審計的合併基本報表及其附註一同閱讀，後者包括截至2023年12月31日的年度報告，已於2024年4月1日向SEC提交。任何中期的簡明合併經營結果不一定能代表全年或任何其他未來年度或中期的預期結果。
據管理層意見，已經將基本報表中爲了按照美國通用會計準則公允呈現公司的財務狀況和經營成果而認爲必要的所有調整（包括正常循環調整）納入了附帶的未經審計的簡明綜合財務報表中。
| F-5 |
蝸牛 公司及其子公司
基本報表註釋
壓縮綜合財務報表包括蝸牛公司及以下子公司的賬目：
| 股權百分比 | ||||
| 子公司類型： | 已擁有 | |||
| 蝸牛遊戲美國公司 | % | |||
| 蝸牛創新研究所 | % | |||
| Frostkeep工作室公司 | % | |||
| Eminence公司 | % | |||
| Wandering Wizard有限責任公司 | % | |||
| 驢隊,有限責任公司 | % | |||
| 互動影視,有限責任公司 | % | |||
| AWk項目製作,有限責任公司 | % | |||
| BTBX.IO,有限責任公司 | % | |||
所有板塊 公司間帳戶、交易和利潤在合併時已被清零。
使用估計值
根據美國通用會計準則編制的合併財務報表需要公司進行估計和假設，這些估計和假設會影響我們合併財務報表及相關附註中報告的金額。這些估計包括營業收入確認，見附註2 - 收入確認信貸損失準備、遞延所得稅資產及相關估值準備、遞延收入、基於股票的補償以及warrants的公允價值。這些估計通常涉及複雜問題，需要管理層做出判斷，並涉及對歷史和未來趨勢的分析，這可能需要較長時間來解決，並且可能因期間而異。在所有情況下，實際結果可能與估計的結果存在重大差異。
分部報告
普通股股份爲$的
| F-6 |
蝸牛 公司及其子公司
基本報表註釋
注意 2 - 重要會計政策摘要
收入確認
公司的營業收入主要來自於出版數字銷售的軟件遊戲和通過實體光盤（例如，包裝品）出版的軟件遊戲，以及發佈獨立的可下載內容，這些內容是現有數字完整遊戲下載的新功能版本，通過數字銷售，以及玩家在其免費移動遊戲中使用的虛擬商品的應用內購買。當公司將承諾的產品和服務的控制權轉移給最終用戶時，公司會確認相應的預期收入，以換取這些產品和服務。產品交付的收入是在最終消費者購買遊戲時的某個時間點確認的，許可證的控制權也隨之轉移給他們。
公司銷售給我們免費玩家的虛擬商品，包括虛擬貨幣或遊戲內購買額外遊戲功能。對於虛擬商品，我們的履約義務滿足取決於購買的虛擬商品的性質，因此，公司將其虛擬商品分類如下：
| ● | 可消耗品: c可消耗的虛擬物品代表玩家可以通過特定的操作消耗的物品。 可消耗的虛擬物品不會直接使玩家保留或在消費後提供任何持續的利益，它們通常使玩家立即執行遊戲中的操作。對於可消耗的虛擬物品的銷售，公司在物品被消耗時確認營業收入（即，隨時間）. | |
| ● | 耐用品: d耐用的虛擬物品代表玩家可以在較長時間內訪問的物品。公司按比例分期確認耐用虛擬物品的銷售收入，以適用遊戲的預計服務期間來分期償還（即，隨時間），這代表了我們對於耐用虛擬物品平均壽命的最佳估計。 |
2021年9月30日結束的ARK：生存進化 和 鮑勃的離奇故事 在與可以下載內容（「dlc」）捆綁銷售的遊戲尚未推出並在簡明綜合資產負債表中報告營業收入的情況下，公司已使用根據ASC 606-10-32-34進行的調整市場評估方法，爲公司剩餘的履約義務分配價值。公司在制定履約義務的獨立銷售價格時使用以下合理可獲得的信息：
| ● | 合理可用的數據點，包括第三方或行業定價，以及合同規定的價格。 | |
| ● | 市場條件，如市場需求，競爭，市場限制，對產品的認知和市場趨勢。 | |
| ● | 實體特定因素，包括定價策略和目標，市場份額和捆綁安排的定價實踐。 |
公司根據會計準則Codification（「ASC」）主題606提供的以下五個步驟來確認營業收入 與客戶簽訂合同的營業收入1）識別與客戶的合同；2）確定每份合同中的履約義務；3）判斷交易價格；4）將交易價格分配給履約義務；5）在實體滿足履約義務時或隨之確認營業收入。公司的條款和條件因客戶而異，通常提供淨支付條款
主體 與代理商考慮
公司通過第三方數字商店提供某些軟件產品，例如微軟的Xbox Live、索尼的PlayStation Network、Valve的Steam、Epic Games Store、My Nintendo Store、蘋果的App Store、Google Play Store和零售分銷商。 對於通過第三方數字商店和零售分銷商銷售的軟件產品，公司確定其是否在向最終用戶銷售中作爲主要方，這一判斷將影響收入是否根據最終用戶的總交易價格報告，或根據第三方數字商店保留費用後的交易價格報告。 如果一個實體在將商品或服務轉移給客戶之前控制該商品或服務，則該實體就是主要方。公司在評估這些銷售交易時使用的關鍵因子包括但不限於以下內容：
| ● | 交易各方之間的基礎合同條款和條件； | |
| ● | 哪個方是主要負責履行提供指定商品或服務的承諾；和 | |
| ● | 哪個方在制定指定商品或服務的價格時有自主權。 |
| F-7 |
蝸牛 公司及其子公司
基本報表註釋
根據我們對上述因子的評估，對於通過微軟的Xbox Live、索尼的PlayStation Network、Valve的Steam、Epic Games Store、我的Nintendo Store以及我們的零售分銷商進行的銷售安排，數字平台和分銷商在設定指定商品或服務的價格方面有自主權，公司已確定其在銷售交易中作爲終端用戶的代理，因此公司根據從數字商店收到的對價按淨額報告營業收入。對於通過蘋果的App Store和Google Play Store進行的銷售安排，公司在設定指定商品或服務的價格方面有自主權，並已確定公司作爲終端用戶的主要方，因此按總額報告營業收入，並且這些數字商店收取的移動平台費用在發生時作爲費用支出，並在營業收入成本中報告。
合同 餘額
公司在收到或應收現金付款時會記錄遞延營業收入，即使金額可退還。
延遲 營業收入包括分配給公司在技術支持履行義務和應用內購買的虛擬商品銷售中的交易價格，以及在遊戲平台上發佈遊戲之前從客戶收到的付款。公司從虛擬商品銷售中按照其估計的服務期間按比例確認收入。對於我們當前軟件遊戲的玩家，公司估計的服務期限通常爲購買日期後的30至100天。
該
公司與一個平台簽訂了長期的許可協議，使得 ARk 1
在該平台上永久提供，並且將 ARk II 在發行後爲期三年在該平台上提供。公司在截至2022年12月31日的年度內確認了$
2023年7月，公司與零售分銷合作伙伴簽訂了分銷協議，用於分銷 ARK：生存進化 和 ARK II。 最初期限爲兩年，每年續簽，除非取消。
簽訂分銷協議後，公司收到了預付版稅$
Estimated Service Period
For certain performance obligations satisfied over time, the Company has determined that the estimated service period is the time period in which an average user plays our software games (“user life”) which most faithfully depicts the timing of satisfying our performance obligation. The Company considers a variety of data points when determining and subsequently reassessing the estimated service period for players of our software games. Primarily, the Company reviews the weighted average number of days between players’ first and last day playing online or the subscription trend. The Company also considers publicly available online trends.
The Company believes this provides a reasonable depiction of the transfer of our game related services to our players, as it is the best representation of the period during which our players play our software games. 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 players of our current software games are generally between 30 and 100 days depending on the software games.
Shipping, Handling and Value Added Taxes (“VAT”)
The distributor, as the principal, is responsible for the shipping of the game discs to retail stores and incurring the shipping and VAT costs. The Company is paid the net sales amount after deducting shipping costs, VAT and other related expenses by the distributor.
| F-8 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Cost of Revenues
Cost of revenues include software license royalty fees, merchant fees, server and database center costs, game localization costs, game licenses, engine fees and amortization costs. Cost of revenues for the three and nine months ended September 30, 2024 and 2023 were comprised of the following:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Software license royalties – related parties | $ | $ | $ | $ | ||||||||||||
| Software license royalties | ||||||||||||||||
| License and amortization – related parties | ||||||||||||||||
| License and amortization | ||||||||||||||||
| Merchant fees | ||||||||||||||||
| Engine fees | ||||||||||||||||
| Internet, server and data center | ||||||||||||||||
| Costs related to advertising revenue | ||||||||||||||||
| Total: | $ | $ | $ | $ | ||||||||||||
General and Administrative Costs
一般及行政成本包括租金、工資、以股票爲基礎的補償、法律和專業費用、公開交易公司相關費用、行政互聯網和服務器、承包商費用、保險費用、許可證和許可證、其他稅費和旅行費用。這些成本在發生時支出。$的以股票爲基礎的補償費用和$分別發生在2024年和2023年截至9月30日的三個月內。以股票爲基礎的補償費用 分別發生在2024年和2023年截至9月30日的九個月內。$在2024年和2023年截至9月30日的九個月內分別發生了$
廣告和營銷成本
公司在發生時會計入廣告和市場營銷費用。
研究和開發費用會在發生時計入運營成本。研發費用的主要組成部分包括工資、顧問、外部服務和用品。
研究和發展成本一經發生就會立即支出。 研究和發展成本包括出差、工資和其他與研究和開發活動相關的一般費用。 股票補償費用爲$ 和$ 分別在2024年和2023年9月結束的三個月內發生了股票補償費用。 股票補償費用爲 和$ 分別在2024年和2023年9月結束的九個月內發生了股票補償費用。 股票補償費用爲
非控制權益
在簡明綜合資產負債表和簡明綜合利潤表中列示的非控股權益 包括分配給非控股權益持有人的股權。截至2024年9月30日和2023年12月31日，存在以下子公司的非控股權益：
| 子公司類型： | 股權持有百分比 | 非控股百分比 | ||||||
| 蝸牛創新研究所 | % | % | ||||||
| BTBX.IO,有限責任公司 | % | % | ||||||
| 驢隊,有限責任公司 | % | % | ||||||
| F-9 |
蝸牛 公司及其子公司
簡明綜合財務報表注
現金 及現金等價物及受限現金和現金等價物
現金 可用於當前的運營或其他活動，如資本支出和業務合併。受限現金 和現金等價物是定期存款，目前作爲備用信用證提供給房東。公司的政策 決定某項資產是否被視爲現金或現金等價物，是基於其原始到期時間、流動性和風險特徵。 到期三個月或更短的投資被視爲現金等價物，因爲它們具有高度流動性且風險微小。
限制 託管存款
Our restricted deposits held in escrow are to provide a source of funding for certain indemnification obligations of Snail, Inc. to our underwriters in connection with our IPO. The deposit and related interest earnings were restricted for one year from the IPO date and were released from restrictions in November 2023.
Accounts Receivable
The Company generally records a receivable related to revenue when it has an unconditional right to invoice and receive payment. Accounts receivable are carried at original invoice amount less an allowance made for credit losses. The Company uses a combination of quantitative and qualitative risk factors to estimate the allowance, including an analysis of the customers’ creditworthiness, historical experience, age of current accounts receivable balances, changes in financial condition or payment terms of our customers, and reasonable forecasts of the collectability of the accounts receivable. The Company evaluates the allowance for credit losses on a periodic basis and adjusts it as necessary based on the risk factors mentioned above. Any increase in the provision for credit losses is recorded as a charge to general and administrative expense in the current period. Any amounts deemed uncollectible are written off against the allowance for credit losses. Management judgment is required to estimate our allowance for credit losses in any accounting period. The amount and timing of our credit losses and cash collection could change significantly because of a change in any of the risk factors mentioned above. There were no credit losses recognized during the three and nine months ended September 30, 2024 and 2023.
Film Costs, net
The
Company capitalizes costs to produce short videos in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic
926, including direct production costs, production overhead, interest, acquisition costs and development costs. The Company will account
for each episodic series as a unit for which capitalized film costs will be amortized by the Company using the individual-film forecast-computation
method. Each reporting period the Company will reassess its estimate of ultimate revenues used to determine the amortization rate for
each episodic series. If the estimate is revised, the Company will account for the change prospectively. The Company will then remeasure
the amortization based on the portion of ultimate revenues that have been recognized and that are yet to be recognized. Unamortized film
costs shall be tested for impairment whenever events or changes in circumstances indicate that fair value of the film may be less than
its unamortized film costs. If the fair value of an episodic series is less than its unamortized film costs, the Company will write off
the excess amount. The Company groups its film and content rights by monetization strategy. As of September 30, 2024 and December 31,
2023, $
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. |
| F-10 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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 and accounts payable. The carrying values of these financial instruments
approximate their fair value due to their short maturities or economic substance. The carrying amount of our revolving loan and notes
payable 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. The fair value of the Company’s promissory note which has a fixed rate for
Amortizable Intangibles and Other Long-lived Assets
The Company’s long-lived assets and other assets consisting of property and equipment and purchased intangible assets, are reviewed for impairment in accordance with the guidance of FASB Topic ASC 360, Property and Equipment. Intangible assets subject to amortization are carried at cost less accumulated amortization and amortized over the estimated useful life in proportion to the economic benefits received. The Company evaluates the recoverability of definite-lived intangible assets and other long-lived assets in accordance with ASC Subtopic 360-10, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. The Company considers certain events and circumstances in determining whether the carrying value of identifiable intangible assets and other long-lived assets, other than indefinite lived intangible assets, may not be recoverable including, but not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. If the Company determines that the carrying value may not be recoverable, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of the asset group to determine whether an impairment exists. If an impairment is indicated based on a comparison of the asset groups’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our consolidated reporting results and financial positions.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and consisted of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial statement and income tax purposes.
The Company follows FASB Topic ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
FASB
ASC 740-10-25 provides criteria for the recognition, measurement, presentation, and disclosure of uncertain tax positions. The Company
must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated
financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. The Company recognizes liabilities for uncertain tax positions pursuant to FASB ASC 740-10-25. Such amounts
are included in the long-term accrued expenses on the accompanying condensed consolidated balance sheets in the amount of $
| F-11 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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, 2024 and December 31, 2023, the Company had deposits
of $
公司向各種數字分銷商和合作夥伴提供信貸。應收賬款的收集可能受到經濟或其他行業條件變化的影響，因此可能會影響我們的整體信貸風險。公司不要求抵押品或其他安防-半導體來支持面臨信貸風險的金融工具。公司對客戶進行持續的信用評估，併爲可能無法收回的帳戶保留儲備。截至2024年9月30日和2023年12月31日，公司有四名客戶，這些客戶大約佔
截至2024年9月30日，公司有兩個供應商分別佔據了約
公司有一個供應商SDE，屬於關聯方，佔公司合併收入和營業費用的
最近採納的會計準則
在 2020年8月，FASB發佈了ASU 2020-06， 實體自有權益的合同（子主題815-40）– 可轉換工具和實體自有權益合同的會計處理 ，旨在簡化某些具有負債和權益特徵的金融工具的GAAP應用。FASB決定刪除某些會計模型，簡化可轉換工具的會計處理，減少準備者和從業者的複雜性，並提高提供給基本報表用戶的信息的決策有用性和相關性。FASB還修改了衍生品範圍例外的指導，對實體自有權益合同以減少基於形式而非內容的會計結論，並修訂相關每股收益的指導。公司已於2024年1月1日採納此標準，且未對公司的基本報表產生重大影響。
最近發佈的會計準則
2023年10月，FASB發佈了ASU 2023-06，基本報表修訂以回應SEC的披露更新和簡化倡議。 對各種話題的披露和呈現要求進行澄清或改進。某些修訂代表了對現行要求的澄清或技術更正。許多修訂允許用戶更容易地比較受SEC現有披露要求約束和以前未受SEC要求約束的實體。 ASU 2023-06適用於受SEC披露要求約束的公司。每項修訂的有效日期將是SEC從《S-X條例》或《S-K條例》中刪除相關披露的日期。對所有其他實體，修訂將在兩年後生效。公司預計實施該標準將需要修改某些披露，我們不認爲該標準會對公司的財務報表產生實質影響。
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosure (Topic 280), to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities. The update does not change how a public entity identifies its operating segments, aggregates those operating segments, or applied the quantitative thresholds to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The Company is evaluating the impact of adopting the new standard.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to improve the transparency of income tax disclosures requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments in the update requires that public business entities, on an annual basis, disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The amendments in this update are effective for annual periods beginning after December 15, 2024. The Company is evaluating the impact of adopting the new standard.
In March 2024, the FASB issued ASU 2024-02, Codification Improvements to amend a variety of topics in the accounting codification by removing references to various FASB concept statements. This accounting standard is effective for fiscal years beginning after December 15, 2024, and early adoption is permitted. The Company is evaluating the impact of adopting the new standard.
| F-12 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Employee Savings Plans
The
Company maintains a 401(k) for its United States based employees. The plan is offered to all eligible employees to make voluntary contributions.
Employer contributions to the plan are reported under general and administrative costs in the amounts of $
Stock-Based Compensation
The Company recognizes compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. The Company accounts for forfeitures as they occur. The Company did not issue any restricted stock units (“Restricted Stock Units” or “restricted stock units”) during the three and nine months ended September 30, 2024, and 2023. The fair value of Restricted Stock Units is determined based on the quoted market price of our common stock on the date of grant.
The Company’s 2022 Omnibus Incentive Plan (the “2022 Plan”) became effective upon the consummation of the IPO. The 2022 Omnibus Incentive allows us to grant options to purchase our common stock and to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards and other cash-based awards and other stock-based awards to our employees, officers, and directors, up to a maximum of shares. Stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than the fair market value on the date of grant. The number of shares of common stock available for issuance under the 2022 Plan will be increased annually on the first day of each fiscal year during the term of the 2022 Plan, beginning with the 2023 fiscal year, by an amount equal to the lesser of (a) shares, (b) % of the shares of the Company’s Class B common stock outstanding (on a fully diluted basis) on the final day of the immediately preceding calendar year or (c) such smaller number of shares as determined by the Company’s board of directors. As of September 30, 2024 there were shares reserved for issuance under the 2022 Plan.
Restricted Stock Units
The Company granted restricted stock units under our 2022 Omnibus Incentive Plan to employees and directors. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent to the number of restricted stock units is typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions.
Warrants
The Company accounts for Warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the Warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the Warrants meet all of the requirements for equity classification under ASC 815, including whether the Warrants are indexed to the Company’s own shares of Class A common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the Warrants are outstanding.
For issued or modified Warrants that meet all of the criteria for equity classification, the Warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified Warrants that do not meet all the criteria for equity classification, the Warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the Warrants are recognized as a non-cash gain or loss on the statements of operations.
Share Repurchase Program
On November 10, 2022, the Company’s board of directors authorized a share repurchase program under which the Company may repurchase up to $ million of outstanding shares of Class A common stock of the Company, subject to ongoing compliance with the Nasdaq listing rules. The program does not have a fixed expiration date. Repurchased shares are accounted for at cost and reported as a reduction of equity in the condensed consolidated balance sheets under treasury stock. treasury stock was sold during the three or nine months ended September 30, 2024 and 2023. As of September 30, 2024 and December 31, 2023, shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately $ million. The average price paid per share was $ and approximately $ million aggregate amount of shares of Class A common stock remain available for repurchase under the Share Repurchase Program.
| F-13 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Earnings (loss) per share (“EPS”) is calculated by dividing the net income (loss) that is applicable to the common stockholders for the period by the weighted average number of shares of common stock during that period. The diluted EPS for the period is calculated by dividing the net earnings (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The Company’s common stock equivalents are measured using the treasury stock method and represent unvested restricted stock units and warrants. The Company issues two classes of common stock with differing voting rights, and as such, reports EPS using the dual class method. For more information see Note 15 –Earnings (Loss) Per Share.
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
Timing of recognition
The Company recognizes revenue at a point in time for performance obligations that are met at the time of sale or at the time of a release. The Company recognizes revenue over a period based on the estimated service period of the product and additional performance obligations met over time for technical support. Net revenue by timing of recognition during the three and nine months ended September 30, 2024 and 2023 were as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Over time | $ | $ | $ | $ | ||||||||||||
| Point in time | ||||||||||||||||
| Total revenue from contracts with customers: | $ | $ | $ | $ | ||||||||||||
Geography
The Company attributes net revenue to geographic regions based on customer location. Net revenue by geographic region for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total revenue from contracts with customers: | $ | $ | $ | $ | ||||||||||||
Platform
Net revenue by platform for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Console | $ | $ | $ | $ | ||||||||||||
| PC | ||||||||||||||||
| Mobile | ||||||||||||||||
| Other | ||||||||||||||||
| Total revenue from contracts with customers: | $ | $ | $ | $ | ||||||||||||
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 months ended September 30, 2024 and 2023 was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Digital | $ | $ | $ | $ | ||||||||||||
| Mobile | ||||||||||||||||
| Physical retail and other | ||||||||||||||||
| Total revenue from contracts with customers: | $ | $ | $ | $ | ||||||||||||
Other Revenues
As
discussed in Note 14, the Company recognized the $
| F-14 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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 primarily due to the recognition of revenue upon fulfillment of its
performance obligations, which were in the ordinary course of business. As of September 30, 2024, the balance of deferred revenue
was $
| 2024 | 2023 | |||||||
| Deferred revenue, beginning balance in advance of revenue recognition billing | $ | $ | ||||||
| Revenue recognized | ( | ) | ( | ) | ||||
| Revenue deferred | ||||||||
| Deferred revenue, ending balance | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Deferred revenue, long term | $ | $ | ||||||
NOTE 4 – CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AND CASH EQUIVALENTS
Cash
equivalents are valued using quoted market prices or other readily available market information. The Company has restricted cash and
cash equivalents of $
| 2024 | 2023 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Cash and cash equivalents, and restricted cash and cash equivalents | $ | $ | ||||||
NOTE 5 – ACCOUNTS RECEIVABLE (PAYABLE) – RELATED PARTY
Accounts
receivable — related party represents receivables in the ordinary course of business attributable to certain mobile game revenues
that, for administrative reasons, were collected by a related party and that the related party has not yet remitted back to the Company.
Accounts receivable — related party is non-interest bearing and due on demand. The related party, SDE Inc. (“SDE”),
is
| 2024 | 2023 | |||||||
| Accounts receivable – related party | $ | $ | ||||||
| Less: accounts payable – related party – SDE | ( | ) | ( | ) | ||||
| Net accounts receivable, related party - SDE | ||||||||
| Less: accounts receivable – related party, net of current portion | ||||||||
| Net accounts receivable (payable), related party, current - SDE | $ | $ | ( | ) | ||||
| F-15 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 6 – PREPAID EXPENSES - RELATED PARTY
On
March 10, 2023, the Company amended its exclusive software license agreement with SDE relating to the ARK franchise. For DLC’s,
the Company plans to release during the term of the agreement, the Company has the option to pay the $
During
the nine months ended September 30, 2024, the Company made $
| 2024 | 2023 | |||||||
| Prepaid royalties | $ | $ | ||||||
| Prepaid licenses | ||||||||
| Other prepaids | ||||||||
| Prepaid expenses - related party, ending balance | ||||||||
| Less: short-term portion | ( | ) | ( | ) | ||||
| Total prepaid expenses - related party, long-term | $ | $ | ||||||
The amount classified as short-term, as of September 30, 2024, and December 31, 2023, includes prepaid royalties for ARK: Survival Ascended DLC’s which have not yet been released and various operational software licenses obtained through SDE.
NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following as of September 30, 2024 and December 31, 2023:
| 2024 | 2023 | |||||||
| Other receivables | $ | $ | ||||||
| Deferred offering costs | ||||||||
| Other prepaids | ||||||||
| Other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
Other receivables consist of receivables related to Myth of Empires and our ARK animated series.
| F-16 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following as of September 30, 2024 and December 31, 2023:
| 2024 | 2023 | |||||||
| Building | $ | $ | ||||||
| Land | ||||||||
| Building improvements | ||||||||
| Leasehold improvements | ||||||||
| Autos and trucks | ||||||||
| Computer and equipment | ||||||||
| Furniture and fixtures | ||||||||
| Property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
and amortization expense was $
| F-17 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 9 – ACCOUNTS PAYABLE — RELATED PARTIES
Accounts
payable due to related parties represents payables in the ordinary course of business primarily for purchases of game distribution
licenses, research and development costs and also the royalties due to Suzhou Snail and SDE. As of September 30, 2024 and December
31, 2023, the Company had $
| 2024 | 2023 | |||||||
| Accounts payable - Suzhou | $ | $ | ||||||
| Less: accounts receivable - Suzhou | ( | ) | ( | ) | ||||
| Accounts payable - SDE | ||||||||
| Total accounts payable – related parties | $ | $ | ||||||
NOTE 10 – LOAN AND INTEREST RECEIVABLE — RELATED PARTY
In
February 2021, the Company loaned $
| F-18 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 11 – REVOLVING LOAN, SHORT TERM NOTES AND LONG - TERM DEBT
| September 30, 2024 | December 31, 2023 | |||||||
| 2021 Revolving
Loan - On June 21, 2023, the Company amended its revolving loan agreement (“amended revolver”)
and decreased the maximum balance from $ | $ | $ | ||||||
| 2021 Promissory Note
– On June 17, 2021, the Company amended its loan agreement to reduce the principal amount
with financial institution for | ||||||||
| 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 $ | ||||||||
| 2023 Convertible Notes
– On August 24, 2023, the Company issued convertible notes at a | ||||||||
| 2023
Note Payable – In July 2023, the Company entered into a cooperation agreement with its
internet, server and datacenter vendor. The Company agreed to make the vendor the official server host of Ark: Survival Evolved and
future iterations and sequels of the game for a period of | ||||||||
| Total debt | ||||||||
| Less: discount on convertible notes | ||||||||
| Less: current portion of promissory note | ||||||||
| Less: revolving loan | ||||||||
| Less: notes payable | ||||||||
| Less: convertible notes, net of discount | ||||||||
| Total long-term debt | $ | $ | ||||||
Total
interest expense for the above debt and revolver loan amounted to $
| F-19 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The following table provides future minimum payments of its long-term debt based on contractual payments, as of September 30, 2024:
| Years ending December 31, | Amount | |||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
NOTE 12 – INCOME TAXES
The
Company recognized an income tax expense of $
The Company has assessed all available positive and negative evidence of whether sufficient future taxable income will be generated to realize the deferred tax assets, including the results of recent operations, continued release of games and DLC’s, and projections of future taxable income. After evaluating the positive and negative evidence, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. In the event that negative evidence outweighs positive evidence in future periods, the Company may need to record additional valuation allowance, which could have a material impact on our financial position. The Company continues to maintain a valuation allowance against certain deferred tax assets that are not more likely than not to be realized.
In the Company’s ordinary course of business the Internal Revenue Service (“IRS”) and other taxing authorities may examine various years of the Company’s tax filings. The Company’s 2022 fiscal year is currently under examination by the IRS. During the examination the Company may receive proposed adjustments that could be material. There are currently no settlements that the Company believes will be more likely than not to require settlement and thus no liability has been accrued.
| F-20 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 13 – 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 $
Operating lease costs included in the general and administrative expenses in our condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023, are as follows:
For the three months | For
the nine months | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease costs | $ | $ | $ | $ | ||||||||||||
Supplemental information related to operating leases for lease liabilities as of September 30, 2024 and September 30, 2023, is as follows:
| 2024 | 2023 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
Future undiscounted lease payments for operating leases and a reconciliation of these payments to our operating lease liabilities as of September 30, 2024 are as follows:
| Years ending December 31, | Future lease payments | Imputed Interest Amount | Lease Liabilities | |||||||||
| Remainder of 2024 | $ | $ | $ | |||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| Thereafter | ||||||||||||
| Total future lease payments | $ | $ | $ | |||||||||
NOTE 14 – 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, the Company 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.
| F-21 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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 concerned 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”).
On December 9, 2021, Angela Game and Imperium sued the Company and Studio Wildcard in the United States District Court for the Central District of California (the “District Court”) in response to the DCMA Takedown Notice. The lawsuit sought 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 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
September 8, 2023, the Company entered into a settlement agreement with Angela Game. The settlement agreement includes an upfront payment
from Angela Game to the Company plus ongoing payments. The upfront payment of $
On
March 14, 2023, Bel Air Soto, LLC (“Plaintiff”) filed suit in the Superior Court of California, County of Los Angeles, against
Snail Games USA Inc. and INDIEV, an affiliate company that is owned by Mr. Hai Shi, the Company’s Founder, Co-Chief Executive Officer,
Chief Strategy Officer, and Chairman, for breach of contract and related claims arising out of a commercial lease for premises located
in Los Angeles County. Plaintiff alleges that the defendants exercised an option to extend the lease and was harmed when defendants instead
terminated the lease and vacated the premises. The complaint seeks damages in excess of $
On April 21, 2023, Snail Games USA Inc. entered into an indemnity and reimbursement agreement with INDIEV, dated as of April 1, 2023, pursuant to which INDIEV agrees to assume all obligations and liabilities pursuant to the lease and indemnify and reimburse Snail Games USA Inc. for any amounts, damages, expenses, costs or other liability incurred by Snail Games USA Inc. arising under or pursuant to the lease or relating to the premises.
In October 2023, INDIEV has filed for bankruptcy and the Company does not expect to recover its costs from INDIEV. Accordingly, it is uncertain whether INDIEV would be able to indemnify the Company due to its bankruptcy. At this time, the Company is unable to quantify the magnitude of the potential loss should the plaintiffs’ lawsuit succeed and accordingly no accrual for loss has been recorded in the accompanying financial statements.
| F-22 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The Company uses the two class method to compute its basic earnings (loss) per share (“Basic EPS”) and diluted earnings (loss) per share (“Diluted EPS”). The following table summarizes the computations of basic EPS and diluted EPS. The allocation of earnings between Class A and Class B shares is based on their respective economic rights to the undistributed earnings of the Company. Basic EPS is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur using the treasury stock and if-converted methods. The following table provides a reconciliation of the weighted average number of shares used in the calculation of Basic and Diluted EPS.
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Basic Earnings (Loss) Per Share: | ||||||||||||||||
| Net income (loss) attributable to Class A common stockholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) attributable to Class B common stockholders | ( | ) | ( | ) | ||||||||||||
| Total net income (loss) attributable to Snail Inc. | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Class A weighted average shares outstanding - basic | ||||||||||||||||
| Class B weighted average shares outstanding - basic | ||||||||||||||||
| Class A and B basic earnings (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted Earnings (Loss) Per Share: | ||||||||||||||||
| Net income (loss) attributable to Class A common stockholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) attributable to Class B common stockholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Class A weighted average shares outstanding - basic | ||||||||||||||||
| Dilutive effects of common stock equivalents | ||||||||||||||||
| Class A weighted average shares outstanding - diluted | ||||||||||||||||
| Class B weighted average shares outstanding - basic | ||||||||||||||||
| Dilutive effects of common stock equivalents | ||||||||||||||||
| Class B weighted average shares outstanding - diluted | ||||||||||||||||
| Diluted earnings (loss) per Class A share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted earnings (loss) per Class B share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
For the three months ended September 30, | For
the nine months ended | ||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Method | |||||||||||||||
| Excluded Shares: | |||||||||||||||||||
| Restricted stock units outstanding | Treasury | ||||||||||||||||||
| Equity line of credit warrants | Treasury | ||||||||||||||||||
| Underwriters warrants | Treasury | ||||||||||||||||||
| Convertible notes | If-Converted | ||||||||||||||||||
| Convertible notes warrants | Treasury | ||||||||||||||||||
NOTE 16 – EQUITY
The
Company has authorized
In
connection with our IPO, on November 9, 2022, the Company issued to the Underwriters warrants to purchase shares of Class A common stock (the “Underwriters
Warrants”). The Underwriters Warrants may be exercised at a price per share equal to
| F-23 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The Underwriters Warrants are legally detachable and separately exercisable from the Class A common stock; therefore, they meet the definition of freestanding and are not considered embedded in the Firm Shares.
The Underwriters Warrants are considered indexed to the Company’s own stock. Additionally, the Company concludes that the Underwriters Warrants meet all requirements for equity classification. Because the Underwriters Warrants were issued to the Underwriters for their services and can be exercised immediately (subject to certain transfer conditions) they were measured at their fair value on their date of issuance and recorded within stockholders’ equity. As long as the Underwriters Warrants remain classified as equity, they shall not be revalued.
Convertible Debt
In
August 2023, pursuant to a securities purchase agreement (the “SPA”), the Company issued to two accredited investors (the
convertible debt “Investors”) convertible notes with an aggregate principal amount of $
In
connection with the Convertible Notes Financing, the Company also entered into a registration rights agreement with the Investors. So
long as the Company complies with certain conditions set forth in the SPA and the registration rights agreement, the Company will sell
and the Investors will purchase, an additional $
The
Convertible Notes carry an original issue discount of approximately
Subject to certain ownership limitations, starting three months after their issuance, the Convertible Notes could be converted at the option of the holder at any time into shares of the Company’s Class A common, at a conversion price equal to 90% (85% in case of an event of default) of the average of the three the lowest daily volume weighted average price (“VWAP”) of the Class A common stock during the ten (10) trading days period prior the receipt of the notice of conversion. The conversion price may be adjusted if the Company issues a qualifying security at a lower price than the then conversion price.
If, upon receipt of conversion notice, the Company cannot issue shares of Class A common stock for any reason, then it is required to issue as many shares of Class A common stock as it is able to issue and, with respect to the unconverted principle portion, the Noteholder may elect for the Company to pay for each shares of Class A common stock that could not be issued at a price equal to the higher of the then conversion price or the VWAP as of the date of the conversion notice.
The Company determined that the Convertible Notes included features that required bifurcation from the debt host and met the criteria to be accounted for as a derivative liability that is accounted for at fair value. On the date of issuance, the compound derivative had an estimated fair value that was not significant due to the remoteness of the events that would trigger the redemption features. The derivative liability uses level 3 inputs, is to be measured at fair value each reporting date with change in fair value being reported in other income. The change in fair value during the nine months ended September 30, 2024, was not significant and as such, was not recorded.
On the date of issuance, the Company allocated the proceeds between the instruments issued using fair value for the derivative liability with the residual amounts allocated to the convertible notes and warrants using relative fair value as follows:
| Convertible notes | $ | |||
| Derivative liability | ||||
| Warrants | ||||
| Total proceeds | $ |
| F-24 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The
difference of $
The following is a summary of the Convertible Notes as of December 31, 2023:
| Principal | Unamortized debt discount and issuance | Net carrying | Fair value | |||||||||||||||||
| Amount | costs | amount | Amount | Levelling | ||||||||||||||||
| Convertible Notes | $ | $ | ( | ) | $ | $ | Level 3 | |||||||||||||
The
debt discount was amortized to interest expense over the maturity period using the effective interest method at a rate of
During
the nine months ended September 30, 2024, the Company repaid $
Convertible Note Warrants
On August 24, 2023, the Company issued warrants in connection with its convertible debt for the purchase of shares (the “Convertible Note Warrants”). The Convertible Note Warrants are accounted for as liabilities and are included in the accrued expenses and other liabilities in the condensed consolidated balance sheets. The Convertible Note Warrants may require partial cash settlement in the future, include various adjustment provisions, meet the definition of a derivative and are classified as a liability, as such the warrants are measured at fair value in accordance with ASC 815 – “Derivatives and Hedging”.
The
convertible note warrants allow the Investors to purchase an aggregate of shares of the Company’s Class A common stock
at an exercise price of $
The exercise price and the number of shares of the warrants are subject to adjustment for standard anti-dilution provisions and also for subsequent issuance at a price lower than the then exercise price and adjustments to the strike price of other equity-linked instruments to a lower price than the then exercise price.
Due to their adjustment provisions, the warrants are classified as a liability on the condensed consolidated balance sheet. The fair value of the warrants at issuance has been estimated using a Monte-Carlo model as follows:
December 31, 2023 | September 30, 2024 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Contractual term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
Expected volatility is the estimate of the expected volatility of the Company’s Class A common stock, based on the Company’s weekly trading history then reduced by % to % as it is generally accepted that market participants to not pay for the full volatility.
The
warrant liability, which uses level 3 inputs, is to be measured at fair value each reporting period with the change in fair value being
recognized in other income (expense). The measured fair value may be uncertain due to the use of unobservable inputs. At September 30,
2024 and December 31, 2023, the fair value of the warrant liability was $
| F-25 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Equity Line Purchase Agreement
On
August 24, 2023, the Company entered into a common stock purchase agreement (the “Equity Line Purchase Agreement”) and a
registration rights agreement (the “Registration Rights Agreement”) with an investor, pursuant to which the investor has
committed to purchase up to $
Under
the terms of the Equity Line Purchase Agreement, the Company has the right, but not the obligation, to sell to the investor, shares
of Class A common stock over the period commencing on the execution date of the Equity Line Purchase Agreement and ending on the
earlier of (i) December 31, 2025, or (ii) the date on which the investor shall have purchased Securities pursuant to the Equity Line
Purchase Agreement for an aggregate purchase price of the $
The registration statement covering the offer and sale of up shares of Class A common stock was effective on October 10, 2023. The purchase price will be calculated as 92% of the volume weighted average prices of the Company’s common stock during normal trading hours for five business days prior to the closing date with respect of a purchase notice.
Concurrently
with the signing of the Equity Line Purchase Agreement, the Company issued the equity line warrant to purchase
Equity Line Warrants
On August 24, 2023, the Company issued a warrant to an investor (the “Equity Line Warrant”) for the purchase of shares of Class A common stock in consideration of the investor’s commitment to purchase Class A common stock. The fair value of the Equity Line Warrant is recorded as a warrant liability and is included in the accrued expenses and other liabilities in the Company’s condensed consolidated balance sheets. The Equity Line Warrants may require partial cash settlement in the future, include various adjustment provisions, meet the definition of a derivative and are classified as a liability, as such the warrants are measured at fair value in accordance with ASC 815 – “Derivatives and Hedging”.
The Investors warrants allow them to
purchase the shares
of the Company’s Class A common stock for an exercise price of $
The exercise price and the number of shares of the warrants are subject to adjustment for standard anti-dilution provisions, for subsequent common share issuance at a price lower than the then exercise price of the warrants and adjustments to the strike price of other equity-linked instruments to a lower price than the then exercise price of the warrants.
Due to their adjustment provision, the warrants are classified as a liability on the consolidated balance sheet. The fair value of the warrants has been estimated using a Monte-Carlo model as follows:
December 31, 2023 | September 30, 2024 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Contractual term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
Expected volatility is the estimate of the expected volatility of the Company’s Class A common stock, based on the Company’s weekly trading history then reduced by % to %.
The
warrant liability, which uses level 3 inputs, is to be measured at fair value at each reporting period and with the change in fair value
being recognized in earnings. The measured fair value may be uncertain due to the use of unobservable inputs. At September 30, 2024 and
December 31, 2023, the fair value of the warrant liability was $
Restricted Stock Units (“RSUs”)
RSUs granted to directors vest based on the directors’ continued employment with us through each applicable vest date, which is generally over . If the vesting conditions are not met, unvested RSUs will be forfeited. The following table summarizes our RSU units activity with directors for the nine months ended September 30, 2024 and 2023.
Restricted Stock Units | Weighted- Average Grant-Date | |||||||
| Outstanding as of January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited or cancelled | ||||||||
| Outstanding as of September 30, 2024 | $ | |||||||
Restricted Stock Units | Weighted- Average Grant-Date Fair Values | |||||||
| Outstanding as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited or cancelled | ||||||||
| Outstanding as of September 30, 2023 | $ | |||||||
The grant date fair value of RSUs granted to directors is based on the quoted market price of our common stock on the date of grant.
| F-26 |
Snail Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Our RSUs granted to employees vest upon the achievement of pre-determined performance-based milestones as well as service conditions (“PSUs”). The pre-determined performance-based milestones are based on specified percentages of the PSUs that would vest at each of the first five anniversaries of the IPO date if the Company’s average annual growth rate (“AAGR”) is calculated to be at a target percentage or above during the period between the Company’s IPO Date and the annual revenue for each of the anniversary year. If these performance-based milestones are not met but service conditions are met, the PSUs will not vest, in which case any compensation expense the Company has recognized to date will be reversed. Generally, the total aggregate measurement period of our PSUs is years, with awards cliff-vesting after each annual measurement period during the total aggregate measurement period.
Each quarter, the Company updates our assessment of the probability that the performance milestones will be achieved. The Company amortizes the fair values of PSUs over the requisite service period. Each performance-based milestone is weighted evenly and the number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our PSU activity with employees, presented with the maximum number of shares that could potentially vest, for the nine months ended September 30, 2024 and 2023.
Restricted Stock Units | Weighted- Average Grant-Date Fair Values | |||||||
| Outstanding as of January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited or cancelled | ( | ) | ( | ) | ||||
| Outstanding as of September 30, 2024 | $ | |||||||
Restricted Stock Units | Weighted- Average Grant-Date Fair Values | |||||||
| Outstanding as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited or cancelled | ( | ) | ( | ) | ||||
| Outstanding as of September 30, 2023 | $ | |||||||
The grant date fair value of PSUs granted to employees is based on the quoted market price of our common stock on the date of grant.
Repurchase Activity
All
share repurchases settled in the nine months ended September 30, 2023 were open market transactions. As of September 30, 2024,
shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately
$
There
were no share repurchases made during the nine months ended September 30, 2024. During the nine months ended September 30, 2023,
shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately
$
Stock-Based Compensation Expense (Income)
During the nine months ended September 30, 2024, the Company determined that it is probable that the Company will not meet the performance-based milestones required by the RSU’s granted to employees. Accordingly, the Company has reversed the previously recognized compensation expense related to RSU’s. Stock-based compensation expense (income) resulting from RSUs and PSUs of and $ are recorded under general and administrative expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2024 and 2023, respectively. Stock-based compensation expense (income) resulting from PSUs of and $ are recorded under research and development expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024 and 2023, the Company recorded stock-based compensation expense of $ and $ under general and administrative expenses, respectively. For the three months ended September 30, 2024 and 2023, the Company recorded stock-based compensation expense of $ and $ under research and development expenses, respectively.
During
the nine months ended September 30, 2024 and 2023, the Company recognized approximately $ of deferred income tax expense, and
$
As of September 30, 2024, our total unrecognized compensation cost related to RSUs and PSUs was approximately $million and is expected to be recognized over a weighted-average service period of years.
NOTE 17 – SUBSEQUENT EVENTS
| ● | In October, 2024, and of the Equity Line and Convertible Note Warrants were exercised, respectively. | |
| ● | In October, 2024, the Company
entered into a software development, publishing and distribution agreement for a new survival sandbox title. The intellectual property
will be owned by the developer and the Company will have permanent exclusive publishing rights. The Company will pay to the developer
a monthly royalty in addition to milestone payments in the amount of $ |
| F-27 |
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 condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”). This discussion and analysis contains forward-looking statements that involve certain risks and uncertainties. Our actual results could differ materially from those discussed in these statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly under “Risk Factors,” in Part II, Item 1A of this Quarterly Report and Part 1A of the Company’s Form 10-K for the year ended December 31, 2023, and the “Cautionary Statement Regarding Forward-Looking Statements” section 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. ARK: Survival Evolved has been a top-25 selling game on the Steam platform by gross revenue in each year we released an ARK DLC. 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, is a leader within the sandbox survival genre with 93.7 million console and PC installs through September 30, 2024 and repeated releases within the top-25 selling games on the Steam platform. See below for discussion of key performance metrics and non-GAAP measures. In the three and nine months ended September 30, 2024, ARK: Survival Evolved and ARK: Survival Ascended combined for an average total of 210,000 and 212,000 daily active users (“DAUs”) on the Steam and Epic platforms, respectively, as compared to 231,000 and 249,000 in the three and nine months ended September 30, 2023, respectively. We define “daily active users” as the number of unique users who play any given game on any given day. For the three months ended September 30, 2024 and 2023, we generated 88.7% and 86.4%, respectively, of our revenues from the ARK franchise. For the nine months ended September 30, 2024 and 2023, we generated 82.0% and 86.9%, respectively, of our revenues from the ARK franchise.
Our dedication to providing 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, 2024, our ARK franchise game has been played for 3.8 billion hours with an average playing time per user of 162 hours and with the top 21.2% of all players spending over 100 hours in the game, according to data from the Steam platform. For the three months ended September 30, 2024 and 2023, our net revenue was $22.5 million and $9.0 million, respectively. For the nine months ended September 30, 2024 and 2023, our net revenue was $58.3 million and $32.3 million, respectively. During the three months ended September 30, 2024, approximately 44.3% of our revenue came from consoles, 45.6% from PC and 10.1% from mobile and other platforms as compared to 43.5% from consoles, 41.4% from PC and 15.1% from mobile and other platforms during the three months ended September 30, 2023. During the nine months ended September 30, 2024, approximately 41.7% of our revenue came from consoles, 46.7% from PC and 11.6% from mobile and other platforms as compared to 41.1% from consoles, 37.4% from PC and 21.4% from mobile and other platforms during the nine months ended September 30, 2023. We had a net income of $0.2 million and a net loss of $4.4 million, for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 we had a net income of $0.7 million, as compared to net loss of $11.5 million for the nine months ended September 30, 2023.
| 28 |
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. We have established a new division internally under the Interactive Films brand. This division will focus on creating content in the Vertical Short segment of the digital entertainment market.
Growth of user base
We have experienced significant growth in our number of downloads over the last several years. We have sold 48.7 million units between January 1, 2016 and September 30, 2024. During the three months ended September 30, 2024, we sold 1.1 million units compared to 1.2 million in the three months ended September 30, 2023. During the nine months ended September 30, 2024, we sold 3.5 million units compared to 3.9 million in the nine months ended September 30, 2023. 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 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. Our master games are the base versions of a specific title, for example, ARK: Survival Evolved is our master game and ARK: Genesis is a DLC.
While we believe we have a significant opportunity to grow our installed base, we anticipate that our overall user 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, 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 and bringing 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. To accompany our entry into the Vertical Shorts market, we are currently developing a distribution platform. Once launched, users will be able to access the content on demand.
| 29 |
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, a related party, 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, these include but are not limited to, Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, the Apple App Store, the Google Play Store, My Nintendo 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.
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.
Recent Developments
On June 27, 2024, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying us that, for the last thirty (30) consecutive business days (From May 10, 2024 to June 26, 2024), the bid price for our Class A common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq rules, we were provided an initial period of 180 calendar days, or until December 24, 2024 (the “Compliance Date”), to regain compliance with the Bid Price Rule. If, at any time before the Compliance Date, the bid price for the Class A common stock closed at $1.00 or more for a minimum of ten (10) consecutive business days, the Staff would provide written notification to the Company that it complied with the Bid Price Rule and the matter will be closed.
On October 18, 2024, we received a letter from the Staff notifying the Company that our Class A common stock had closed above $1.00 for 10 consecutive business days, from October 4, 2024, to October 17, 2024. Accordingly, the Company has regained compliance with the Bid Price Rule (Listing Rule 5550(a)(2)) and this matter is now closed.
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Key Performance Metrics
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, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | % Change | 2024 | 2023 | Change | % Change | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Units Sold(1) | 1.1 | 1.2 | (0.1 | ) | (13.8 | )% | 3.5 | 3.9 | (0.4 | ) | (11.1 | )% | ||||||||||||||||||||
| (1) | Units include master games, DLCs, season pass and bundles and excludes skins, soundtracks and other items. |
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Units sold decreased during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, by 0.1 million units, or 13.8%. The Company’s units sold decreased due to a decrease in in sales of ARK: Survival Evolved of 0.6 million units, offset by an increase in sales of ARK: Survival Ascended of 0.4 million units and 0.1 million units from sales of Bellwright during the three months ended September 30, 2024. Units sold decreased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, by 0.4 million units, or 11.1%. Units sold of ARK: Survival Evolved decreased by 2.0 million units, partially offset by an increase in ARK: Survival Ascended units sold of 1.3 million and an increase in Bellwright sales of 0.3 million units.
Bookings
Bookings is a key operating metric in assessing our financial performance. Bookings adjusts for the impact of deferrals and, we believe, provides a useful indicator of sales in a given period. It reflects the net amount of products and services sold digitally or physically in a given period, excluding the impact of revenue deferrals. Bookings is used by management to understand sales trends and assess the volume of our sales activity over time. Bookings 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. Below is a reconciliation of total net revenue to Bookings, the closest GAAP financial measure.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Total net revenue | $ | 22.5 | $ | 9.0 | $ | 13.5 | 150.9 | % | $ | 58.3 | $ | 32.3 | $ | 26.0 | 80.2 | % | ||||||||||||||||
| Change in deferred net revenue | (6.4 | ) | 1.5 | (7.9 | ) | (516.3 | )% | 0.4 | 0.8 | (0.4 | ) | (53.3 | )% | |||||||||||||||||||
| Bookings | $ | 16.1 | $ | 10.5 | $ | 5.6 | 53.6 | % | $ | 58.7 | $ | 33.1 | $ | 25.6 | 77.1 | % | ||||||||||||||||
For the three months ended September 30, 2024, bookings increased by $5.6 million, or 53.6%, compared to the three months ended September 30, 2023, because of the release of ARK: Survival Ascended in the fourth quarter of 2023, and the releases of Bobs Tall Tales and Bellwright in the first half of 2024, along with the ARK: Survival Ascended DLC Aberration in September 2024. In addition to increased sales of the aforementioned titles, bookings decreased because the Company recognized deferred revenues of approximately $8.2 million during the three months ended September 30, 2024 for the release of Aberration and part II of Bobs Tall Tales; partially offset by the deferral of $2.6 million in revenues for sales of ARK: Survival Ascended DLC’s and the remaining part of Bobs Tall Tales which have not yet launched. During the three months ended September 30, 2023 the Company deferred $1.8 million in prepaid royalties for ARK: Survival Ascended and ARK II.
For the nine months ended September 30, 2024, bookings increased by $25.6 million, or 77.1%, compared to the nine months ended September 30, 2023, because of the release of ARK: Survival Ascended in the fourth quarter of 2023, and the release of Bobs Tall Tales and Bellwright along with the ARK: Survival Ascended DLCs, Scorched Earth in April 2024 and Aberration in September 2024. In addition to increased sales of the aforementioned titles, additionally, the Company deferred $15.3 million in revenues during the nine months ended September 30, 2024 for the ARK: Survival Ascended DLC’s and parts of Bobs Tall Tales which have not yet released, partially offset by the recognition of $14.4 million from deferred revenue upon the release of Scorched Earth, Aberration and the first two parts of Bobs Tall Tales.
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Non-GAAP Measures
In addition to our financial results determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”), we believe EBITDA, as a non-GAAP measure, is useful in evaluating our operating performance. EBITDA, as used in this Quarterly Report on Form 10-Q, is a non-GAAP financial measure that is presented as supplemental disclosures and should not be construed as an alternative to net income (loss) or any other GAAP measure as an indicator of operating performance.
We present EBITDA because it is used by management to assess our financial performance, excluding certain expenses that management believes do not reflect the ongoing operating performance of the business. Management uses EBITDA to supplement GAAP measures of performance when evaluating our business strategies, making budgeting decisions and comparing performance against peer companies.
EBITDA
We define EBITDA as net income (loss) before (i) interest income, (ii) interest expense, (iii) (benefit from) provision for income taxes, and (iv) depreciation and amortization expense, property and equipment.
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.
Below is a reconciliation of net income (loss) to EBITDA, the closest GAAP financial measure.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 0.2 | $ | (4.4 | ) | $ | 4.6 | 105.3 | % | $ | 0.7 | $ | (11.5 | ) | $ | 12.2 | 106.2 | % | ||||||||||||||
| Interest income and interest income – related parties | (0.1 | ) | - | (0.1 | ) | 28.4 | % | (0.2 | ) | (0.1 | ) | (0.1 | ) | 126.9 | % | |||||||||||||||||
| Interest expense and interest expense – related parties | 0.1 | 0.4 | (0.3 | ) | (74.1 | )% | 0.6 | 1.0 | (0.4 | ) | (34.0 | )% | ||||||||||||||||||||
| Provision for (benefit from) income taxes | 0.2 | (1.2 | ) | 1.4 | (113.7 | )% | 0.3 | (3.0 | ) | 3.3 | (108.9 | )% | ||||||||||||||||||||
| Depreciation and amortization expense, property and equipment | 0.1 | 0.1 | - | (35.9 | )% | 0.2 | 0.3 | (0.1 | ) | (32.0 | )% | |||||||||||||||||||||
| EBITDA | $ | 0.5 | $ | (5.1 | ) | $ | 5.6 | 109.7 | % | $ | 1.6 | $ | (13.3 | ) | $ | 14.9 | 112.2 | % | ||||||||||||||
For the three months ended September 30, 2024, EBITDA increased by $5.6 million, or 109.7%, compared to the three months ended September 30, 2023, primarily because of an increase in net income of $4.6 million and a decrease in the benefit from income taxes of $1.4 million, partially offset by a decrease in interest expense and interest expense – related parties of $0.3 million.
For the nine months ended September 30, 2024, EBITDA increased by $14.9 million, or 112.2%, compared to the nine months ended September 30, 2023, primarily because of an increase in net income of $12.2 million and a decrease in the benefit from income taxes of $3.3 million, partially offset by a decrease in interest expense and interest expense – related parties of $0.4 million.
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, the Apple App Store, the Google Play Store, My Nintendo Store and the Amazon Appstore, and certain retail distributors. For sales arrangements through Xbox Live and Game Pass, PlayStation Network, Steam, Epic Game Stores, My Nintendo Store 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.
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Our net revenues through our current period top four platform providers as a proportion of our total net revenue for the three and nine months ended September 30, 2024 and 2023 were as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Platform 1 | $ | 10.6 | $ | 3.6 | $ | 7.0 | 197.1 | % | $ | 27.3 | $ | 11.5 | $ | 15.8 | 136.2 | % | ||||||||||||||||
| Platform 2 | 3.3 | 1.8 | 1.5 | 84.5 | % | 8.3 | 5.4 | 2.9 | 54.3 | % | ||||||||||||||||||||||
| Platform 3 | 5.6 | 1.4 | 4.2 | 312.2 | % | 14.0 | 5.3 | 8.7 | 165.2 | % | ||||||||||||||||||||||
| Platform 4 | 0.9 | 0.7 | 0.2 | 26.1 | % | 1.9 | 2.6 | (0.7 | ) | (28.1 | )% | |||||||||||||||||||||
| All Other Revenue | 2.1 | 1.5 | 0.6 | 36.6 | % | 6.8 | 7.5 | (0.7 | ) | (-9.4 | )% | |||||||||||||||||||||
| Total | $ | 22.5 | $ | 9.0 | $ | 13.5 | 150.9 | % | $ | 58.3 | $ | 32.3 | $ | 26.0 | 80.2 | % | ||||||||||||||||
We expect changes in revenue to correlate with trends in the use and purchase of our games. The increase in net revenues of Platforms 1, 2 and 3 during the three and nine months ended September 30, 2024 from 2023 was due to increased sales from the release of ARK: Survival Ascended, Scorched Earth, Aberration, Bobs Tall Tales, Bellwright and Myth of Empires. The decrease in net revenues of Platform 4 during the nine months ended September 30, 2024 from 2023 was due to ARK: Survival Ascended not yet being launched on Platform 4 as of September 30, 2024. The increase in net revenues of Platform 4 during the three months ended September 30, 2024 from 2023 was due to the release of an ARK: Survival Evolved DLC on the platform.
Cost of revenues
Cost of revenues 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 revenues to fluctuate proportionately with revenues.
General and administrative
General and administrative expenses include rent expense, salaries, stock-based compensation, legal and professional expenses, administrative internet and server expenses, contract costs, insurance expenses, license and permits, other taxes and travel expenses. 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. Stock-based compensation will be recorded within research and development and 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 and development costs outsourced through Suzhou Snail. 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.
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Provision for (benefit from) income taxes
The benefit from 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 28% differed from the federal statutory rate of 21% due to permanent differences, foreign withholding taxes and state taxes.
Results of Operations
Comparison of the three months ended September 30, 2024 versus the three months ended September 30, 2023
Three months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Revenues, net | $ | 22.5 | $ | 9.0 | $ | 13.5 | 150.9 | % | ||||||||
| Cost of revenues | 13.8 | 9.5 | 4.3 | 46.1 | % | |||||||||||
| Gross profit (loss) | 8.7 | (0.5 | ) | 9.2 | 1,906.5 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 3.8 | 3.5 | 0.3 | 11.4 | % | |||||||||||
| Research and development | 3.9 | 1.3 | 2.6 | 195.0 | % | |||||||||||
| Advertising and marketing | 0.5 | 0.2 | 0.3 | 130.2 | % | |||||||||||
| Depreciation and amortization | 0.1 | 0.1 | - | (35.9 | )% | |||||||||||
| Total operating expenses | 8.3 | 5.1 | 3.2 | 62.8 | % | |||||||||||
| Income (loss) from operations | $ | 0.4 | $ | (5.6 | ) | $ | 6.0 | 107.3 | % | |||||||
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Revenues
Net revenues for the three months ended September 30, 2024 increased by $13.5 million, or 150.9%, compared to the three months ended September 30, 2023. The increase in net revenues was due to an increase in total Ark sales of $5.9 million, an increase in sales of the Bellwright of $1.0 million, recognition of $8.2 million in revenue from the release of Aberration and part II of Bobs Tall Tales, $1.2 million recognized for meeting the performance obligation of releasing Genesis II and Myth of Empires on certain platforms, partially offset by a decrease in Ark Mobile sales of $0.3 million and an increase in deferred revenues of $2.6 million related to sales of ARK: Survival Ascended and Bobs Tall Tales DLC’s which have not yet been released.
Cost of revenues
Cost of revenues for the three months ended September 30, 2024 increased by $4.3 million, or 46.1%, compared to the three months ended September 30, 2023.
Cost of revenues for the three months ended September 30, 2024 and 2023 comprised the following:
Three months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Software license royalties - related parties | $ | 5.3 | $ | 2.1 | $ | 3.2 | 152.5 | % | ||||||||
| Software license royalties | 0.3 | 0.4 | (0.1 | ) | (27.8 | )% | ||||||||||
| License and amortization - related parties | 6.0 | 4.7 | 1.3 | 27.8 | % | |||||||||||
| Merchant fees | 0.2 | 0.2 | - | 4.6 | % | |||||||||||
| Engine fees | 0.9 | 0.3 | 0.6 | 191.8 | % | |||||||||||
| Internet, server and data center | 1.1 | 1.8 | (0.7 | ) | (37.8 | )% | ||||||||||
| Total: | $ | 13.8 | $ | 9.5 | $ | 4.3 | 46.1 | % | ||||||||
The increase in cost of revenues for the three months ended September 30, 2024 was due to an increase of $3.2 million in software license royalties – related parties, a result of increased ARK sales, an increase of $1.3 million in license and amortization – related parties due to the increased license fee paid to SDE partially offset by a lower depreciable base of intangible assets in 2024, an increase in engine fees of $0.6 million, partially offset by decreased internet, server and data center fees of $0.7 million and a decrease in software license royalties of $0.1million.
General and administrative expenses
General and administrative expenses for the three months ended September 30, 2024 increased by $0.3 million, or 11.4%, compared to the three months ended September 30, 2023. The increase in general and administrative expenses was due to an increase in legal and professional expenses of $0.1 million, an increase in office related expenses of $0.1 million, an increase in travel expenses of $0.1 million, an increase in non-income related taxes of $0.2 million, partially offset by reduced salaries and wages of $0.1 million due to reduced stock-based compensation expenses.
Research and development expenses
Research and development expenses for the three months ended September 30, 2024 increased by $2.6 million, or 195.0%, compared to the three months ended September 30, 2023. The increase in research and development expenses was due to the outsourced development of Hermes and Project Aether paid through Suzhou Snail and an increase in internal research and development salaries as the Company continues to expand its in house development team.
Advertising and marketing expenses
Advertising and marketing expenses for the three months ended September 30, 2024 increased by $0.3 million, or 130.2%, compared to the three months ended September 30, 2023. The increase in advertising and marketing expenses was due to increased advertising campaigns for ARK: Survival Ascended, its DLC release Aberration, add-on content Bobs Tall Tales, and Bellwright.
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Other Factors Affecting Net Income (Loss)
Three months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Interest income | $ | 0.1 | $ | - | $ | 0.1 | 28.7 | % | ||||||||
| Interest expense | (0.1 | ) | (0.4 | ) | 0.3 | 74.1 | % | |||||||||
| Other income | 0.1 | 0.3 | (0.2 | ) | (76.1 | )% | ||||||||||
| Income tax (provision) benefit | (0.2 | ) | 1.2 | (1.0 | ) | (86.3 | )% | |||||||||
Interest income
Interest income was $0.1 million and $0.0 million for the three months ended September 30, 2024 and 2023, respectively. The increase was due to the balance of our cash deposits being higher on average during the three months ended September 30, 2024.
Interest expense
Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense decreased by $0.3 million for the three months ended September 30, 2024 because of lower average debt during the three months ended September 30, 2024.
Other income
Other income decreased by $0.2 million for the three months ended September 30, 2024, in comparison to the three months ended September 30, 2023. The decrease is due to the recognition of $0.3 million in litigation income in the three months ended September 30, 2023.
Provision for (benefit from) income taxes
The Company had an income tax provision of $0.2 million for the three months ended September 30, 2024 and a benefit of $1.2 million for the three months ended September 30, 2023. Our effective income tax rate was 40% during the three months ended September 30, 2024 and 21% during the three months ended September 30, 2023.
Comparison of the nine months ended September 30, 2024 versus the nine months ended September 30, 2023
Nine months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Revenues, net | $ | 58.3 | $ | 32.3 | $ | 26.0 | 80.2 | % | ||||||||
| Cost of revenues | 39.4 | 29.7 | 9.7 | 32.7 | % | |||||||||||
| Gross profit | 18.9 | 2.6 | 16.3 | 606.7 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 9.0 | 11.9 | (2.9 | ) | (25.1 | )% | ||||||||||
| Research and development | 7.5 | 3.9 | 3.6 | 93.3 | % | |||||||||||
| Advertising and marketing | 1.3 | 0.5 | 0.8 | 172.6 | % | |||||||||||
| Depreciation and amortization | 0.2 | 0.3 | (0.1 | ) | (32.0 | )% | ||||||||||
| Total operating expenses | 18.0 | 16.6 | 1.4 | 8.2 | % | |||||||||||
| Income (loss) from operations | $ | 0.9 | $ | (14.0 | ) | $ | 14.9 | 106.2 | % | |||||||
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Revenues
Net revenues for the nine months ended September 30, 2024 increased by $26.0 million, or 80.2%, compared to the nine months ended September 30, 2023. The increase in net revenues was due to an increase in total Ark sales of $21.0 million, an increase due to the recognition of $1.2 million payment related to the Angela Games settlement and recognized upon satisfaction of performance obligations included in the contract, an increase in sales Bellwright of $4.9 million, an increase in sales of the Company’s other games of $0.5 million, partially offset by a decrease in Ark Mobile sales of $1.2 million and an increase in deferred revenues of $0.4 million related to the Ark franchise.
Cost of revenues
Cost of revenues for the nine months ended September 30, 2024 increased by $9.7 million, or 32.7%, compared to the nine months ended September 30, 2023.
Cost of revenues for the nine months ended September 30, 2024 and 2023 comprised the following:
Nine months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Software license royalties - related parties | $ | 13.3 | $ | 6.9 | $ | 6.4 | 92.7 | % | ||||||||
| Software license royalties | 0.5 | 1.0 | (0.5 | ) | (49.4 | )% | ||||||||||
| License and amortization - related parties | 18.0 | 14.8 | 3.2 | 22.0 | % | |||||||||||
| Merchant fees | 0.7 | 1.0 | (0.3 | ) | (34.9 | )% | ||||||||||
| Engine fees | 3.2 | 1.0 | 2.2 | 212.6 | % | |||||||||||
| Internet, server and data center | 3.7 | 5.0 | (1.3 | ) | (24.2 | )% | ||||||||||
| Total: | $ | 39.4 | $ | 29.7 | $ | 9.7 | 32.7 | % | ||||||||
The increase in cost of revenues for the nine months ended September 30, 2024 was due to an increase of $6.4 million in software license royalties – related parties, a result of increased ARK sales, an increase of $3.2 million in license and amortization – related parties due to the increased license fee paid to SDE partially offset by a lower depreciable base of intangible assets in 2024, an increase in engine fees of $2.2 million, partially offset by decreased internet, server and data center fees of $1.3 million, a decrease in merchant fees of $0.3 million and a decrease in software license royalties of $0.5 million.
General and administrative expenses
General and administrative expenses for the nine months ended September 30, 2024 decreased by $2.9 million, or 25.1%, compared to the nine months ended September 30, 2023. The decrease in general and administrative expenses was due to a decrease in legal and professional expenses of $1.2 million, a decrease in administrative internet and server costs of $0.3 million, a decrease in salaries and wages of $1.4 million due to the reversal of previously expensed stock based compensation, and a decrease in expenses of $0.4 million for SEC filing fees, investor relations, NASDAQ listing fees and compliance expenses; partially offset by an increase in non-income related taxes of $0.3 million.
Research and development expenses
Research and development expenses for the nine months ended September 30, 2024 increased by $3.6 million, or 93.3%, compared to the nine months ended September 30, 2023. The increase in research and development expenses was due to the outsourced development of Hermes and Aether paid through Suzhou Snail and increased internal research and development salaries as we continue to build our internal development team.
Advertising and marketing expenses
Advertising and marketing expenses for the nine months ended September 30, 2024 increased by $0.8 million, or 172.6%, compared to the nine months ended September 30, 2023. The increase in advertising and marketing expenses was due to increased advertising campaigns for the launch of ARK: Survival Ascended, its DLC releases Scorched Earth and Aberration, add-on content Bobs Tall Tales, and Bellwright.
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Other Factors Affecting Net Income (Loss)
Nine months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Interest income | $ | 0.2 | $ | - | $ | 0.2 | 128.9 | % | ||||||||
| Interest expense | (0.6 | ) | (1.0 | ) | 0.4 | (34.0 | )% | |||||||||
| Other income | 0.5 | 0.3 | 0.2 | 70.1 | % | |||||||||||
| Income tax (provision) benefit | (0.3 | ) | 3.0 | (3.3 | ) | (91.1 | )% | |||||||||
Interest income
Interest income was $0.2 million and $0.0 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was due to the balance of the of our cash deposits being higher on average during the nine months ended September 30, 2024.
Interest expense
Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense decreased by $0.4 million for the nine months ended September 30, 2024 because of the Company having a lower average debt balance during the nine months ended September 30, 2024.
Other income
Other income increased by $0.2 million for the nine months ended September 30, 2024, in comparison to the nine months ended September 30, 2023. The increase is due to the recognition of litigation revenues due to a revenue share agreement that was the result of the litigation settlement and revaluation of the Company’s outstanding warrant liabilities.
Provision for (benefit from) income taxes
The Company had an income tax provision of $0.3 million for the nine months ended September 30, 2024 and a benefit of ($3.0) million for the nine months ended September 30, 2023. Our effective income tax rate was 28% and 21% during the nine months ended September 30, 2024 and 2023, 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, that are currently available as unrestricted cash. Our unrestricted cash was $10.6 million and $15.2 million as of September 30, 2024 and December 31, 2023, respectively.
Our restricted cash and cash equivalents were $1.1 million as of September 30, 2024 and December 31, 2023. 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.
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As of September 30, 2024, our 2021 Revolving Loan has a balance of $3.0 million and is due in December 2024. The Company has repaid its Convertible Notes balance of $1.1 million, its $1.5 million financing arrangement, and the remaining $0.8 million of its short term notes balance during the nine months ended September 30, 2024. In concurrence with the registration of the convertible notes shares the Company registered shares for distribution in an equity line of credit. The Company has the right, but not the obligation, to sell up to $5.0 million in Class A common stock to the investor. We intend to renegotiate with the lender to extend the maturity date of the 2021 Revolving Loan and to negotiate a new Short Term Note. However, there is no guarantee that we will be able to renegotiate the terms of the 2021 Revolving Loan or obtain a new short term note with the lender at terms acceptable to us or at all. The Company was in compliance with its debt covenants related to the 2021 Revolving Note and 2021 Promissory note for the trailing twelve months ended September 30, 2024, however it is probable that the Company will fail the covenants within the next 12 months. There is no guarantee that the Company will receive a waiver from the lender if the covenants of the loans are breached in the future. In the event of a future breach of the debt covenants the lender has the right, but not the obligation, to declare all or any part of the debt as due immediately and cease making any advances or extend any further credit to the Company.
The Company has raised capital through the issuance of the convertible notes, equity line of credit, a short term financing arrangement with the Company’s internet and data center (“IDC”) vendor, and the distribution agreement entered into with our retail partner which provided advanced royalties. We may need to raise additional capital and issue registered shares to draw on an equity line of credit if needed. The need for additional capital depends on many factors, including, among other things, whether we can successfully renegotiate the terms of our debt arrangements, the rate at which our business grows, demands for working capital, revenue generated from existing DLCs and game titles and launches of new DLCs and new game titles, and any acquisitions that we may pursue. From time to time, we could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. We cannot provide assurance that we will be able to successfully access any such equity or debt financings, that the required equity or debt financings would be available on terms acceptable to us, if at all, or that any such financings would not be dilutive to our stockholders.
Our current unrestricted cash position of approximately $10.6 million, and our expected revenue receipts will allow the Company to continue operations beyond the next 12 months and service its current debts.
Cash flows
The following tables present a summary of our cash flows for the periods indicated:
Nine months ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net cash flows provided by (used in) operating activities | $ | 2.0 | $ | (10.8 | ) | $ | 12.8 | 118.8 | % | |||||||
| Net cash flows used in financing activities | (6.7 | ) | (2.4 | ) | (4.3 | ) | (178.5 | )% | ||||||||
| Net decrease in cash and cash equivalents and restricted cash and cash equivalents | $ | (4.7 | ) | $ | (13.2 | ) | $ | 8.5 | 64.7 | % | ||||||
Operating activities
Net cash flows provided by (used in) operating activities for the nine months ended September 30, 2024 increased $12.8 million as compared to the nine months ended September 30, 2023, which resulted primarily from an increase in net income of $12.2 million, a decrease in accounts receivable and accounts receivable - related party of $17.4 million, a decrease in prepaids expenses and prepaid expenses – related party of $1.5 million, partially offset by a decrease in accounts payable and accounts payable – related parties of $15.9 million, a decrease in accrued expenses of $0.3 million, an increase in capitalized film costs of $0.4 million and a decrease in deferred revenues of $1.8 million.
The Company had a net income of $0.7 million, and a net loss of $11.5 million, for the nine months ended September 30, 2024 and 2023, respectively, representing an increase of $12.2 million. The increase was primarily due to an increase in net revenue of $26.0 million, decreased general and administrative expenses of $2.9 million, partially offset by increased research and development costs of $3.6 million, increased costs of revenues of $9.7 million, and an increase in advertising and marketing expenses of $0.8 million, and a decrease in income tax benefit of $3.3 million.
Non-cash reconciling items were ($0.4) million and ($0.7) million for the nine months ended September 30, 2024 and 2023, respectively, representing a decrease of $0.3 million. The decrease in the non-cash reconciling items was due to a decrease in amortization of intangible assets of $1.3 million, a decrease in stock based compensation expense of $1.5 million, partially offset by an increase in deferred taxes of $3.0 million, and an increase in accretion expense of $0.2 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”), an affiliated entity, from fiscal year 2018 through 2021. 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, 2024 and December 31, 2023, the net outstanding balances of receivables due from SDE were $9.0 million and $13.5 million, respectively. We expect accounts receivables owed to us by SDE will be repaid within the next two fiscal years and intend to exercise all legally available means of collection. The Company and SDE have entered into an agreement to offset uncollected amounts against monthly payments due to SDE for operating expenses and costs of revenue. See Note 5- Accounts Receivable - Related Party to our unaudited condensed consolidated financial statements included in this Quarterly Report.
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Financing activities
Net cash flows used in financing activities for the nine months ended September 30, 2024 were $6.7 million compared to $2.4 million for the nine months ended September 30, 2023. Financing activities for the nine months ended September 30, 2024 included $6.4 million in debt payments and $0.3 million in payments of capitalized offering costs in accounts payable. Financing activities for the nine months ended September 30, 2023 included debt repayments of $6.8 million, the purchases of treasury stock in the amount of $0.3 million, and $0.3 million in payments of capitalized offering costs partially offset by $2.3 million in borrowings on notes payable, $0.9 million for the issuance of convertible notes and $1.9 million received for refund of a dividend withholding tax overpayment.
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 was held to provide a source of funding for our indemnification obligations to the underwriters. The amount in escrow was released to the Company’s unrestricted cash and cash equivalents in November 2023.
In October 2023, we filed a Form S-1 Registration Statement with the SEC in connection with our issuance of convertible note, equity line of credit and warrants related to each financing as noted below.
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Capital resources
We 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 “2021 Revolving Loan”) to increase our revolving line of credit to $9.0 million. As amended, the 2021 Revolving Loan matured on December 31, 2023 and bore interest at a rate equal to the prime rate less 0.25%. Interest is due and payable under the 2021 Revolving Loan on a monthly basis. The Company amended the revolving loan agreement in December 2023, to extend the 2021 Revolving Loan maturity date to December 31, 2024. As of September 30, 2024, we had borrowings of $3.0 million outstanding under our 2021 Revolving Loan. We intend to extend the 2021 Revolving Loan prior to its maturity date in December 2024. There is no guarantee that we will be able to extend the 2021 Revolving Loan on terms acceptable to us in the future, or at all.
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 was originally set to mature in June 2031, bears interest at a fixed rate of 3.5% for the first 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.
2022 Short Term Note
In January 2022, we amended and restated our 2021 Revolving Loan and we executed a promissory note to obtain an additional long-term loan with a principal balance of $10.0 million which was set to mature on January 26, 2023 (the “2022 Short Term Note”). In November 2022, the maturity date was extended to January 26, 2024. Interest was equal to the higher of 3.75% and the Wall Street Journal prime rate plus 0.50%. The 2022 Short Term Note is secured and collateralized by our existing assets. The Company completed the last payment obligation on the 2022 Short Term Note during the nine months ended September 30, 2024.
Convertible Notes
On August 24, 2023, the Company issued convertible notes at a 7.4% discount and a principal balance of $1,080,000. The notes had an interest rate of 7.5%, were paid in consecutive monthly installments beginning February 24, 2024 and matured on May 24, 2024. In connection with the Convertible Notes the Company issued to the investors warrants to purchase an aggregate of 714,285 shares that were accounted for under the fair value method and allocated a value of $445,754. The difference of $525,754 between the proceeds allocated to the Convertible Notes and the aggregate principal amount were accreted over the life of the notes and accounted for the fair value of the warrants and the stated discount. Additionally, $152,500 of transaction costs incurred by the Company were recorded as a debt discount. The discount was amortized using the effective interest rate of 103.4%. The effective interest rate is based on the principal balance discounted by stated interest, debt issuance costs and fair value allocated to the related warrants. As of September 30, 2024, the Convertible Notes have been repaid. The Company has registered shares for potential issuance on exercise of the warrants, or conversion of the note, on Form S-1 that was declared effective on October 30, 2023. As of September 30, 2024, the note holders have not exercised the warrants. During the nine months ended September 30, 2024, prior to repayment, the noteholders exercised the option to convert $60,000 in principal of the notes to 71,460 shares of the Company’s Class A common stock.
Equity Line Purchase Agreement
On August 24, 2023, the Company entered into a common stock purchase agreement (the “Equity Line Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an investor, pursuant to which the investor has committed to purchase up to $5,000,000 in shares of the Company’s Class A common stock, subject to certain limitations and conditions set forth in the Equity Line Purchase Agreement. The Company shall not issue or sell any shares of common stock under the Equity Line Purchase Agreement which, when aggregated with all other shares of common stock beneficially owned by the investor, would result in beneficial ownership of more than 9.99% of the Company’s outstanding shares of common stock.
Under the terms of the Equity Line Purchase Agreement, the Company has the right, but not the obligation, to sell to the investor, shares of Class A common stock over the period commencing on the execution date of the Equity Line Purchase Agreement and ending on the earlier of (i) December 31, 2025, or (ii) the date on which the investor shall have purchased Securities pursuant to the Equity Line Purchase Agreement for an aggregate purchase price of the $5,000,000, provided that a registration statement covering the resale of shares of Class A common stock that have been and may be issued under the Equity Line Purchase Agreement is declared effective by the SEC. The Company has registered shares for potential issuance on exercise of the warrants, or drawing of the equity line, on Form S-1 that was declared effective on October 30, 2023. As of September 30, 2024 the Company has not sold any Class A common stock under the Equity Line Purchase Agreement.
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2023 Note Payable
In July 2023, the Company entered into a cooperation agreement with its IDC vendor. The Company agreed to make the vendor the official server host of Ark: Survival Evolved and future iterations and sequels of the game for a period of 7 years. In return, the vendor has agreed to provide the Company with funds in cash of up to $3.0 million without discount and free of charges and costs to the Company. The funds were repaid in monthly installments starting in November 2023 and were based on 20% of the gross monthly ARK: Survival Ascended revenues. The Company has imputed interest at 8.0% on draws made. As of September 30, 2024, we had repaid the remaining $1.5 million outstanding under the Note Payable.
Financial covenants
The 2021 Revolving Loan, Term Loan and the 2022 Short Term Note require us to maintain a minimum debt service coverage ratio of 1.5 to 1.0. Additionally, the 2021 Revolving Loan requires us to maintain an outstanding principal balance of no more than $3.0 million for 30 consecutive days during any twelve-month period. For the trailing twelve months ended September 30, 2024, the Company met the minimum debt service coverage ratio required by its debt covenants. The Company repaid the $0.8 million term note that was one of three debt facilities with the lender, in January 2024. The Company’s ability to comply with the covenants, or receive waivers for the covenants, can lead to the acceleration of payments due under the debt facilities with the lender, cause the lender to cease making advances under the revolving agreement, or allow the lender to take possession of collateral. Due to the projected failure to comply with the debt covenant the Company classifies its long term debt as current.
For additional information regarding our indebtedness, see Note 11, Revolving Loan, Short Term Note and Long-Term Debt to our unaudited condensed consolidated financial statements included in this Quarterly Report.
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 condensed consolidated 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 condensed consolidated 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 condensed consolidated financial statements included in this Quarterly Report. We believe that the following critical accounting policies and estimates have the greatest potential impact on our condensed consolidated financial statements.
Deferred Revenue
The Company recognizes, defers, and classifies the timing of deferred revenues from the sale of its products based on estimates of the release date, technical support obligations and timing of its performance obligations. The estimated timing of release dates is dependent on development milestones met by developers and compliance with platform requirements. At any time, platform requirements may change, or the developers may miss milestones. Estimates in technical support obligations will vary by platform and could change from period to period depending on user trends. Changes in estimates of our release schedule may affect the classification of short and long term deferred revenues and the rate at which deferred revenue is recognized, which could have a material impact on the Company’s condensed consolidated financial statements.
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Estimated Service Period
The deferral and subsequent recognition of revenue for the Company’s technical support obligations are estimated based on our estimated service period. 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 estimated service period, such as the estimated service period of other games actively being sold with similar characteristics. We also consider publicly available sources of 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. An increase in estimated service period could result in a reclassification of deferred revenues from short term to long term and extend the period over which we would recognize said revenue resulting in a lower net income in future periods.
For our consumable and durable virtual items, we use a variety of data points in determining consumption and estimated service period. We also consider publicly available 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. The estimated consumption and service periods for virtual goods are approximately 30 to 100 days. 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.
Selling Prices of Performance Obligations
The Company uses the following reasonably available information in developing the standalone selling prices of the performance obligations:
| ● | Reasonably available data points, including third party or industry pricing, and contractually stated prices. | |
| ● | Market conditions such as market demand, competition, market constraints, awareness of the product and market trends. | |
| ● | Entity-specific factors including pricing strategies and objectives, market share and pricing practices for bundled arrangements. |
Deferred Income Taxes
The Company’s deferred income tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Changes in tax laws or the level of future taxable income could affect the realizability of deferred income tax assets. The Company recognizes deferred income taxes based on estimates of future taxable income and the utilization of tax loss carryforwards. In evaluating the realizability of deferred taxes, the Company evaluates all available positive and negative evidence of whether sufficient future taxable income will be generated to realize the deferred tax assets, including the results of recent operations and projections of future taxable income. The weighting of positive and negative evidence and the projection of future taxable income requires significant judgment and estimates. In addition, changes in these estimates may have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, please see Note 2 - Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements included in this Quarterly Report.
Emerging Growth Company and Smaller Reporting Company Status
We are an “emerging growth company,” as defined in the JOBS Act. As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements. We have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
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In addition, 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 certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this provision of the JOBS Act. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies. Therefore, our condensed consolidated financial statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of: (a)(i) the last day of the fiscal year following the fifth anniversary of the closing of our initial public offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion; or (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year and (b) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
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
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including the Co-Chief Executive Officers and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2024. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual and interim financial statements will not be prevented or detected in a timely manner. Based on that evaluation, the Co-Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of such date due to a material weakness in the internal control over financial reporting as described in Management’s Report on Internal Control Over Financial Reporting, in Part II, Item 9A “Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024 (the “2023 Annual Report on Form 10-K”), which includes our failure to properly design and implement controls related to the accounting for income taxes and disclosure controls related to deferred taxes in the consolidated financial statements; failure to properly classify certain operating expenses and games server costs as cost of revenues in the consolidated financial statements; failure to identify and allocate the consideration received from a settlement between the settlement gain and revenues generating activities; failure to properly determine the stand-alone selling prices of each performance obligation for certain digital revenue contracts; and, failure to design and implement information technology general controls related to segregation of duties within an information system relevant to the preparation of our consolidated financial statements. In addition, during the quarter ended June 30, 2024, a disclosure misstatement was identified related to the amount of revenue recognized over time and point in time. The lack of review procedures over this disclosure gives rise to an additional material weakness in our internal control over financial reporting.
Management’s Plan for Remediation
We are taking steps to remediate the material weaknesses, which include enhancing our financial reporting close control procedures by implementing additional review of unusual transactions, improving our review of the over-time revenue disclosures, improving our segregation of duties in the recording and approving of transactions, ensuring the accuracy and completeness of our income tax footnote disclosure and our accounting for income taxes through consultation with income tax professionals, hire experts to assist in preparing our revenue recognition policies, and hire experts in designing and implementing custom approval workflows in our ERP system in order to remediate these material weaknesses. However, our efforts to remediate the material weaknesses may not be effective in preventing a future material weakness or significant deficiency in our internal control over financial reporting.
We are committed to ensuring that our internal controls over financial reporting are designed and operating effectively. Management believes the efforts taken to date and the planned remediation will improve the effectiveness of our internal control over financial reporting. While these remediation efforts are ongoing, the controls must be operating effectively for a sufficient period of time and be tested by management in order to consider them remediated and conclude that the design is effective to address the risks of material misstatement.
We can give no assurance that the measures we have taken or plans to take in the future will remediate the material weaknesses identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2024, we have made changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. These changes include, but are not limited to, hiring qualified experts to assist in preparing internal accounting policies and our assessment of stand-alone selling prices assigned to the performance obligations of certain digital revenue contracts’, working closely with income tax professionals to ensure the accuracy and completeness of our income tax disclosures and enhance our controls over accounting for income taxes, implementation of a workflow in our ERP system that appropriately segregates duties of the users, and additional controls over the detailed review of our operating expenses
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Item 1 of Part I, “Unaudited Condensed Consolidated Financial Statements - Note 14 - Commitments and Contingencies-Litigation.”
Item 1A. Risk Factors.
Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risk factors described below as well as under the “Risk Factors” section in Part I – Item 1A of our 2023 Annual Report on Form 10-K, and any other periodic or current report that we file with the SEC, together with all of the related financial statements and notes thereto. Other than as set forth below, we have not identified any material changes to the risk factors previously disclosed in Part I – Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
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Risks Related to Our Business and Industry
Failure to meet NASDAQ’s continued listing requirements could result in the delisting of our Class A common stock, negatively impact the price of our Class A common stock and negatively impact our ability to raise additional capital.
On June 27, 2024, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying us that, for thirty (30) consecutive business days (from May 10, 2024 to June 26, 2024), the bid price for our Class A common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq rules, we were provided an initial period of 180 calendar days, or until December 24, 2024 (the “Compliance Date”), to regain compliance with the Bid Price Rule. The Staff informed the Company that if, at any time before the Compliance Date, the bid price for the Class A common stock closed at $1.00 or more for a minimum of ten (10) consecutive business days, the Staff would provide written notification to the Company that it complied with the Bid Price Rule and the matter will be closed.
On October 18, 2024, Nasdaq notified the Company that the Staff had determined that for ten (10) consecutive business days, from October 4, 2024, to October 17, 2024, the closing bid price of our Class A common stock has been at $1.00 per share or greater. Accordingly, the Staff informed us that we had regained compliance with Nasdaq Listing Rule 5550(a)(2) and this matter is now closed.
If at any time we do not satisfy the continued listing requirements of the Nasdaq, including compliance with the Bid Price Rule, within the time frame granted by Nasdaq, our Class A common stock will be delisted from the Nasdaq. Any perception that we may not regain compliance or a delisting of our Class A common stock by Nasdaq could adversely affect our ability to attract new investors, decrease the liquidity of the outstanding shares of our Class A common stock, reduce the price at which such shares trade and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholder. In addition, delisting of our Class A common stock from Nasdaq could deter broker-dealers from making a market in or otherwise seeking or generating interest in our Class A common stock, and might deter certain institutions and persons from investing in our Class A common stock. In addition, if our Class A common stock was delisted, our Class A common stock would be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our Class A common stock. This would adversely affect the ability of investors to trade our Class A common stock and would adversely affect the value of our Class A common stock. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our Class A common stock.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our Class A common stock is listed on Nasdaq, our shares of Class A common stock are “covered securities”. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were to be delisted from Nasdaq, our shares of Class A common stock would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.
As mentioned above, in the event of a delisting, we would take actions to restore our compliance with the Nasdaq listing requirements, but we can provide no assurance that any such action taken by us would allow our Class A common stock to become listed again, stabilize the market price or improve the liquidity of our Class A common stock or prevent our Class A common stock from meeting the mandatory Nasdaq listing requirements.
We are dependent on the future success of our ARK franchise, and we must continue to publish “hit” titles or sequels to such “hit” titles in order to compete successfully in our industry.
ARK is a “hit” product and has historically accounted for a substantial portion of our revenue. The ARK franchise contributed 82.0% of our net revenue for the nine months ended September 30, 2024, and our five best-selling franchises (including ARK), which may change year over year, in the aggregate accounted for 92.2% of our net revenue for the nine months ended September 30, 2024. If we fail to continue to develop and sell new commercially successful “hit” titles or sequels to such “hit” titles or experience any delays in product releases or disruptions following the commercial release of our “hit” titles or their sequels, our revenue and profits may decrease substantially, and we may incur losses. In addition, competition in our industry is intense and a relatively small number of hit titles account for a large portion of total revenue in our industry. Hit products offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our products to fall below our expectations. If our competitors develop more successful products or services at lower price points or based on payment models perceived as offering better value, or if we do not continue to develop consistently high-quality and well-received products and services, our revenue and profitability may decline.
We rely on license agreements to publish certain games, including games in our ARK franchise. Failure to renew our existing content licenses on favorable terms or at all or to obtain additional licenses would impair our ability to introduce new games, improvements or enhancements or to continue to offer our current games, which would materially harm our business, results of operations, financial condition and prospects.
We license certain intellectual property rights from third parties, including related parties, and in the future, we may enter into additional agreements that provide us with licenses to valuable intellectual property rights or technology. In particular, we license intellectual property rights related to our ARK franchise from SDE, the parent company of Studio Wildcard, which is also an entity that is owned and controlled by the spouse of our Founder, Co-Chief Executive Officer, Chief Strategy Officer and Chairman, Mr. Shi. We entered into an original exclusive software license agreement with SDE in November 2015, for the rights to ARK: Survival Evolved, and subsequently entered into the amended and restated ARK1 License Agreement. In December 2022 and October 2023, we amended the ARK1 License Agreement. The terms of our license agreements with SDE may differ from those terms which would be negotiated with independent parties. In addition, we may have disputes with SDE that may impact our business, results of operations, financial condition and/or prospects. The ARK franchise contributed 82.0% of our net revenue for the nine months ended September 30, 2024. Even if our games that are dependent on third-party license agreements remain popular, any of our licensors could decide not to renew our existing license agreements or not to license additional intellectual property rights to us and instead license to our competitors or develop and publish its own games or other applications, competing with us in the marketplace. Moreover, many of our licensors develop games for other platforms and may have significant experience and development resources available to them should they decide to compete with us rather than license to us. For additional information concerning our license arrangements, including licensing agreements with affiliated third parties, see Item 1 of Part I, “Business — Intellectual Property,” included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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Failure to maintain or renew our existing material licenses or to obtain additional licenses could impair our ability to introduce new games and new content or to continue to offer our current games, which could materially harm our business, results of operations and financial condition. If we breach our obligations under existing or future licenses, we may be required to pay damages and our licensors may have the right to terminate the license or change an exclusive license to a non-exclusive license. Termination of our license agreements by a material licensor, such as SDE, would cause us to lose valuable rights, such as the rights to our ARK franchise, and would inhibit our ability to commercialize future games, which would harm our business, results of operations and financial condition. In addition, certain intellectual property rights may be licensed to us on a non-exclusive basis. The owners of nonexclusively licensed intellectual property rights would be free to license such rights to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Moreover, our licensors may own or control intellectual property rights that have not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property rights or technology from third parties and related parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology or increase what we believe to be our financial or other obligations under the relevant agreement. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects.
We rely on third-party platforms, such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, My Nintendo Store, the Apple App Store, the Google Play Store, and the Amazon Appstore, to distribute our games and collect revenues generated on such platforms and rely on third-party payment service providers to collect revenues generated on our own platforms.
Our games are primarily purchased, accessed and operated through Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, My Nintendo Store, and in the case of our mobile games, the Apple App Store, the Google Play Store and the Amazon Appstore. Substantially all of the games, DLC and in-game virtual items that we sell are purchased using the payment processing systems of these platforms and, for the nine months ended September 30, 2024, 94.0% of our revenues were generated through Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, My Nintendo Store, the Apple App Store, the Google Play Store, and the Amazon Appstore. Consequently, our expansion and prospects depend on our continued relationships with these providers, and any other emerging platform providers that are widely adopted by our target players. In addition, having such a large portion of our total net revenues concentrated in a few counterparties reduces our negotiating leverage. We are subject to the standard terms and conditions that these platform providers have for game developers, which govern the content, promotion, distribution, operation of games and other applications on their platforms, as well as the terms of the payment processing services provided by the platforms, and which the platform providers can change unilaterally on short notice or without notice. As such, our business would be harmed if:
| ● | the platform providers discontinue or limit our access to their platforms; | |
| ● | governments or private parties, such as internet providers, impose bandwidth restrictions, increase charges or restrict or prohibit access to those platforms; | |
| ● | the platforms increase the fees they charge us; | |
| ● | the platforms modify their algorithms, communication channels available to developers, respective terms of service or other policies; | |
| ● | the platforms decline in popularity; | |
| ● | the platforms adopt changes or updates to their technology that impede integration with other software systems or otherwise require us to modify our technology or update our games in order to ensure players can continue to access our games and content with ease; | |
| ● | the platforms elect or are required to change how they label free-to-play games or take payment for in-game purchases; | |
| ● | the platforms block or limit access to the genres of games that we provide in any jurisdiction; | |
| ● | the platform experiences a bankruptcy or other form of insolvency event; or | |
| ● | we are unable to comply with the platform providers’ terms of service. |
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Moreover, if our platform providers do not perform their obligations in accordance with our platform agreements or otherwise meet our business requirements, we could be adversely impacted. For example, in the past, some of these platform providers have experienced outages for short periods of time, unexpectedly changed their terms or conditions, or experienced issues with their features that permit our players to purchase games or in-game virtual items. In addition, if we do not adhere to the terms and conditions of our platform providers, the platform providers may take actions to limit the operations of, suspend or remove our games from the platform, and/or we may be exposed to liability or litigation. For example, in August 2020, Epic Games, Inc. (“Epic Games”), attempted to bypass Apple and Google’s payment systems for in-game purchases with an update that allowed users to make purchases directly through Epic Games in its game, Fortnite. Apple and Google promptly removed Fortnite from their respective app stores, and Apple filed a lawsuit seeking injunctive relief to block the use of Epic Games’ payment system and sought monetary damages to recover funds made while the updated version of Fortnite was active.
If any such events described above occur on a short-term or long-term basis, or if these third-party platforms and online payment service providers otherwise experience issues that impact the ability of players to download or access our games, access social features, or make in-game purchases, it would have a material adverse effect on our brands and reputation, as well as our business, financial condition and results of operations.
Our business is subject to our ability to develop commercially successful products for the current video game platforms, which may not generate immediate or near-term revenues, and as a result, our business and operating results may be more volatile and difficult to predict during console transitions than during other times.
We derive most of our revenue from publishing video games on third-party platform providers, such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, the Apple App Store, the Google Play Store, My Nintendo Store and the Amazon Appstore, which, in the aggregate, comprised 94.0% of our net revenue by product platform for the nine months ended September 30, 2024. The success of our business is subject to the continued popularity of these platforms and our ability to develop commercially successful products for these platforms.
Historically, when next generation consoles are announced or introduced into the market, consumers have typically reduced their purchases of products for prior-generation consoles in anticipation of purchasing a next-generation console and products for that console. During these periods, sales of the products we publish may decline until new platforms achieve wide consumer acceptance. Console transitions may have a comparable impact on sales of DLC, amplifying the impact on our revenues. This decline may not be offset by increased sales of products for the next-generation consoles. In addition, as console hardware moves through its life cycle, hardware manufacturers typically enact price reductions, and decreasing prices may put downward pressure on software prices. During console transitions, we may simultaneously incur costs both in continuing to develop and market new titles for prior-generation video game platforms, which may not sell at premium prices, and also in developing products for next-generation platforms, which may not generate immediate or near-term revenues. As a result, our business and operating results may be more volatile and difficult to predict during console transitions than during other times.
Tax law or tax rate changes could affect our effective tax rate and future profitability.
Our effective tax rate was 28% and 21% for the nine month periods ended September 30, 2024 and 2023, respectively. In general, changes in applicable U.S. federal and state and foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our tax expense. In addition, taxing authorities in many jurisdictions in which we operate may propose changes to their tax laws and regulations. These potential changes could have a material impact on our effective tax rate, long-term tax planning and financial results.
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The Company has debt obligations with short term durations that are coming due within one year.
We have significant debt obligations coming due within one year. Our current revolving loan has a balance of $3.0 million as of September 30, 2024, and is due for repayment on December 31, 2024. The Company intends to extend the revolving loan and renew our short-term note debt arrangement and faces the risk that we will be unable to. If we are unable to extend the revolving loan or renew the debt arrangement, the Company may have significantly reduced unrestricted cash which could adversely impact our results of operations and ability to invest in the development and acquisition of IP. See Note 11 – Revolving Loan, Short Term Note and Long-Term Debt to our unaudited condensed consolidated financial statements included in this Quarterly Report.
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 (the “Share Repurchase Program”), 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 September 30, 2024, approximately $1.3 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.
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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.
We identified material weaknesses in our internal control over financial reporting and we may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we do not effectively remediate the material weaknesses or if we otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately and timely report our financial results.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Our management identified material weaknesses in our internal control over financial reporting involving the failure to properly design and implement controls related to the accounting for income taxes and disclosure controls related to deferred taxes in the consolidated financial statements; failure to properly classify certain operating expenses and games server costs as cost of revenues in the consolidated financial statements; failure to identify and allocate the consideration received from a settlement between the settlement gain and revenues generating activities; failure to properly determine the stand-alone selling prices of each performance obligation for certain digital revenue contracts; and, failure to design and implement information technology general controls related to segregation of duties within an information system relevant to the preparation of the Company’s consolidated financial statements. Due to the size and nature of our organization and the implementation timing of our new cloud-based ERP system, we had limited personnel and system capabilities for adequate segregation of duties during the nine months ended September 30, 2024. See Part I, Item 4, “Controls and Procedures,” in this Quarterly Report for information regarding the identified material weaknesses and our actions to date to remediate the material weaknesses. In addition, during the quarter ended June 30, 2024, a disclosure misstatement was identified related to the amount of revenue recognized over time and point in time. The lack of review procedures over this disclosure gives rise to a material weakness in our internal control over financial reporting. As a result of the material weaknesses, our management has concluded that our internal control over financial reporting were not effective as of September 30, 2024.
We are taking steps to remediate the material weaknesses, which include to enhancing our financial reporting close control procedures by implementing additional review of unusual transactions, improving our review of the over-time revenue disclosures, improving our segregation of duties in the recording and approving of transactions, ensuring the completeness of our income tax footnote disclosure through consultation with income tax professionals, hire experts to assist in preparing our revenue recognition policies, and hire experts in designing and implementing custom approval workflows in our ERP system in order to remediate these material weaknesses. However, our efforts to remediate the material weaknesses may not be effective in preventing a future material weakness or significant deficiency in our internal control over financial reporting. If we do not effectively remediate the material weaknesses or if we otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately and timely report our financial results, which could cause our reported financial results to be materially misstated, result in the loss of investor confidence and cause the market price of our Class A common stock to decline.
We can give no assurance that the measures we have taken or plans to take in the future will remediate the material weaknesses identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls.
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We depend on our key management and product development personnel.
Our continued success will depend to a significant extent on our senior management team and maintaining positive relationships with our games’ developers, including Studio Wildcard, and the product development personnel responsible for content creation and development of our ARK franchise.
On April 15, 2024, Jim S. Tsai notified the Company of his decision to resign from his position as the Chief Executive Officer of the Company and all of the Company’s subsidiaries, including, Snail Games USA, Inc., with such resignation effective April 15, 2024; however, Mr. Tsai remained with the Company for a 30-day transition period. In conjunction with Mr. Tsai’s resignation as the Company’s Chief Executive Officer, the Company appointed Hai Shi and Xuedong (Tony) Tian to serve as the Company’s new Co-Chief Executive Officers, effective April 15, 2024. We are highly dependent on the expertise, skill and knowledge of Mr. Shi, our Founder, Co-Chief Executive Officer, Chief Strategy Officer and Chairman, Mr. Tian, our other Co-Chief Executive Officer, and Mr. Peter Kang, our Vice President and Director of Business Development and Operations. The loss of the services of any or all of these executive officers, or certain key product development personnel, including those employed by studio partners, such as Studio Wildcard, could significantly harm our business. In addition, if one or more key employees were to join a competitor or form a competing company, we may lose additional personnel, experience material interruptions in product development, delays in bringing products to market and difficulties in our relationships with licensors, suppliers and customers, which would significantly harm our business. Failure to continue to attract and retain qualified management and creative personnel could adversely affect our business and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities.
The Company did not issue any securities that were not registered under the Securities Act during the nine months ended September 30, 2024.
(b) Use of Proceeds
Not applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs | |||||||||||||
| In thousands, except per share amounts | ||||||||||||||||
| Period | ||||||||||||||||
| January 2024 | — | — | — | — | ||||||||||||
| February 2024 | — | — | — | — | ||||||||||||
| March 2024 | — | — | — | — | ||||||||||||
| April 2024 | — | — | — | — | ||||||||||||
| May 2024 | — | — | — | — | ||||||||||||
| June 2024 | — | — | — | — | ||||||||||||
| July 2024 | — | — | — | — | ||||||||||||
| August 2024 | — | — | — | — | ||||||||||||
| September 2024 | — | — | — | — | ||||||||||||
| Total | — | $ | — | — | $ | — | ||||||||||
On November 10, 2022, our board of directors authorized a Share Repurchase Program under which we may repurchase up to $5 million in outstanding shares of our Class A common stock, subject to ongoing compliance with Nasdaq listing rules. The program does not have a fixed expiration date. The share repurchases 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. There were no share repurchases settled in the nine months ended September 30, 2024. As of September 30, 2024, 1,350,275 shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately $3.7 million. The average price paid per share was $2.72 and approximately $1.3 million aggregate amount of shares of Class A common stock remain available for repurchase under the Share Repurchase Program. For more information regarding the Share Repurchase Program refer to Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included in this Quarterly Report.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
During
the quarter ended September 30, 2024, no director or officer of the Company
Item 6. Exhibits
Exhibit Index
| * | Filed herewith. |
| ** | These certifications are being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Snail, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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, in Culver City, California, on November 13, 2024.
| Snail, Inc. | ||
| Date: November 13, 2024 | By: | /s/ Xuedong Tian |
| Xuedong Tian | ||
| Co-Chief Executive Officer | ||
| (Co-Principal Executive Officer) | ||
| Date: November 13, 2024 | By: | /s/ Heidy Chow |
| Heidy Chow | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
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